Credit unions struggle to secure reasonable return on assets

The low level of loans being issued by the credit union movement was identified as a key point at a recent conference in Dublin held to discuss the sector.

Credit unions are putting a lot more money into investments, including bank deposits, than they are directing towards new loans. And the low returns on money not being loaned out to members is a problem.

Yet any move to increase the return from investments will inevitably carry with it a heightened level of risk.

Lack of expertise
Many credit unions do not have the expertise necessary for entering into such waters and so the sector is faced with the possibility of an extended period of low returns.

The issue feeds into the overall debate about the restructuring of the sector and the change that is coming down the tracks. New forms of control could allow some credit unions look at different categories of loans and services that they could offer.

Asked about the loans issue, Irish League of Credit Unions chief executive Kieron Brennan is anxious to put it in perspective.

“Better to be in our position than the one the banks are in. At least we didn’t lend out multiples of our deposits.”

And if the banks were lending out at the sort of ratio to assets the credit union sector is, he adds, the economy as a whole would be a lot better off. Point made, Brennan is prepared to accept that the ratio of the credit union loans to total assets is not as healthy as it needs be.

At the end of 2012, the league’s member credit unions in the Republic had assets of €12.23 billion, essentially the same as at the end of 2011.

The figure for total loans was €4.25 billion, 2.6 per cent down on the figure for the end of the previous year.

At the Dublin conference, economist Alan Ahearne produced figures showing that, for credit unions overall, the loan to asset ratio had fallen to 36.6 per cent last year from 52 per cent in 2008.

The reasons behind it are easily identified. A lot of people are overburdened with debt, and many are finding it hard to get by in an environment of increased unemployment, reduced incomes and higher taxes. Concern about how the economy will perform over the coming years is persuading people to hold off taking out sizeable loans.

“It is the size of the average loan that is down, rather than the number of loans overall,” says Brennan. The fall in the ratio has been steady, and steep for the sector overall since 2008, according to Ahearne’s figures, though Brennan says that, for league members, the fall has eased somewhat in more recent times.

On the other side of the equation, credit unions are placing their money in safe homes. The sector is famously risk-averse and has most of its money in short-term deposit accounts. The Central Bank requires that these deposits are spread across a range of institutions.

“We were getting more acceptable returns but, more recently, the rates have been going to the floor,” says Brennan, with the fall due not just to the interest rate policy of the European Central Bank but also to the banks’ desire to increase profit margins.

While deposits were earning between 2 and 3 per cent, they are now earning 2 per cent or less. “There is scope for getting better returns, but the risk appetite is not there, either from the credit unions or the Central Bank.”

The movement is particularly sore about the €16 million that was lost to approximately 16 credit unions when the Irish Bank Resolution Corporation was put into liquidation by the Government, “though we would like to point out that no credit union was pushed into insolvency as a result”, says Brennan.

While increasing the level of lending would serve the dual purpose of adding to the return on the money credit unions hold and bringing credit unions back to their core role as savings and loans institutions, that is a difficult trick in the current environment.

Given the still fragile circumstances of the economy, and the likelihood that that jittery sentiment is going to persist, upping your level of loans in a prudent manner is a tall order.

Also, whole swathes of people are actually more focused on paying down loans than taking out new ones. "People are paying down loans at a rate of knots," says Brennan.

Attracting younger members
At the conference, organised by CUNA Mutual, which provides insurance to credit unions, there was a lot of talk about attracting younger members to the credit union movement.

The logic was that older people don’t take out so many loans, and that the middle-aged are the ones who were burned during the bubble years and are now struggling to pay off their massive debts. This leaves the young.

Brennan says the figures for younger people are not so bad when you look at the demographics of the credit unions’ memberships.

Somewhat out-of-date figures – due to be updated in the coming weeks – show 25 per cent of league members were aged between 25 and 34 years three years ago, and 12 per cent were aged between 18 and 24 years. More than half of all members (57 per cent) were below 44 years of age.

But, for Brennan, the proposition of concentrating on younger members is complicated. Emigration affects younger people more than older people, and the level of unemployment among this cohort is “frightening”. Furthermore, even those younger people in what used to be considered attractive employment, such as teaching, are being hit by the introduction of lower starting pay rates.

“At the moment, given the way things are, it is very difficult to increase the loan rates. There is even talk of further bank bailouts. People are listening to this and it makes them nervous. They think: ‘no, we won’t borrow for that extension’.”

The situation in regard to dividends has improved over recent times, but Brennan believes the main reason people are sticking with credit unions, and joining them in greater numbers, is that the banks have withdrawn from the market for loans for such personal items as holidays and communions.

“People are staying for that reason, even if they aren’t borrowing or getting much of a dividend. They know that the credit unions are there, and that the banks can’t be relied upon.”

What the credit union sector needs most of all, he says, is the return of some local economic confidence. With the constant talk of the broken nature of the State’s finances as well as those of the banks, and the likelihood of continuing austerity, it comes as no surprise that people have taken all this talk to heart, and shied away from new borrowings.

For Kevin Johnson, chief executive of the Credit Union Development Association, the challenge for credit unions is to adopt the necessary process of change while retaining what it is that makes the sector unique in the financial services sector. And at the same time running a viable business model.

He believes the changes coming down the tracks include opportunities for providing “additional services the higher up the scale a credit union is positioned”.