What's behind the rise of credit unions in Canada?

Loan originations by those lenders posted a noted increase this summer

What's behind the rise of credit unions in Canada?

Credit unions and private lenders accounted for just 3.7% of Canada’s mortgage origination activity in 2021 – but the popularity of the former appears to be on the up.

Those lender types saw their market share rise to 6.7% by May, RATESDOTCA data showed, with originations by credit unions posting a marked increase over the summer (4.1%) between March 31 and June 30, according to Canadian Credit Union Association data.

That trend is developing as borrowers face greater challenges qualifying for a mortgage at the bank thanks to higher interest rates – and credit unions have demonstrated their ability to continue cutting into larger lenders’ market domination while maintaining a low level of risk, according to an author of a recent study on the challenges facing credit unions.

Marc-André Pigeon, director and strategic research fellow at the University of Saskatchewan’s Canadian Centre for the Study of Co-operatives, co-authored the C.D. Howe Institute’s recent report on how to build resiliency for Canada’s large credit unions alongside Murray Fulton, professor emeritus at the same university’s Johnson Shoyama Graduate School of Public Policy.

Pigeon told Canadian Mortgage Professional that larger credit unions’ aptitude for loan underwriting meant their loan loss ratios were usually better than banks in the small business lending space.

“Credit unions have shot their lights out,” he said. “They’ve grown their market share and they’ve done it without taking on a lot of risk. If you look at big empirical studies of credit unions – also elsewhere, but especially in Canada – their members tend to pay back their loans even if they’re struggling, and it’s partly because they have an attachment to the credit union.”

Read next: Credit unions, private lenders on the rise amid rate increases

That’s also because credit unions tend to have more of a local focus than major banks in Canada, with closer proximity to decision-making and better knowledge and information of the local region as a result.

“Decisions get made [locally], not in Toronto,” he said. “If the loan’s being made in Saskatoon… they don’t have to send it up the line – they’re not constrained by what Toronto does. They have better on-the-ground intelligence, and there’s a huge literature that backs this up.”

In fact, CFIB (Canadian Federation of Independent Business) member surveys commonly show that credit unions are able to manage lower loan losses as they grow their market share, Pigeon added.

In RATESDOTCA’s May analysis, Toronto-based mortgage broker Sung Lee noted that credit unions can offer more favourable conditions than traditional lenders. “With credit unions, they offer more flexibility, where you could qualify at just your five-year contract rate or in some cases, if it’s a variable, like a contract [rate] plus 1%.”

By the end of 2021, Canadian credit unions held nearly $280 billion in assets outside of Quebec, according to the C.D. Howe survey, which reviewed the practices of board composition at several of the country’s largest credit unions and made recommendations for improvements and better practice.

Read next: Could mortgage delinquencies increase as rates rise?

That said, despite a recent uptick in origination activity by credit unions, it’s important not to get carried away with their growth, Pigeon cautioned. While their loan volume has indeed increased, seasonal variation could be at play – and the figures may also be skewed somewhat by credit unions’ disproportionate popularity and market shares in Manitoba and Saskatchewan, and to a lesser extent Alberta, compared with other provinces.

“These are commodity play provinces that are not suffering like Toronto and Vancouver,” Pigeon said. “They’re not seeing the same price dynamics in housing. It’s a different economy, and they have big market shares here. And so those aggregate numbers may be a reflection of that.”

Credit unions may also have compared favourably to banks in recent months because the latter have taken something of a beating on the investment banking side, with the cash infusion that usually generates good bottom-line results for ROA (return on assets), efficiency, and capital somewhat weaker than it has been historically.

“So I’d say this is more of a pattern that I think is consistent with dynamic long-term perspectives,” Pigeon said. “Credit unions’ market share has been very stable – [but] I’d be surprised if it was changing dramatically, notwithstanding what we saw last quarter. I think it’s really dangerous to make too much of that.”