Pressure still on credit unions to form viable business model – Central Bank

Pressure remains on the credit union business model, a new report from the Central Bank has suggested, as branches around the country continue to struggle with a decline in outstanding loans and low interest rates .

However, the regulator also noted that new lending is on the rise, while arrears continue to slow, as it said it is generally “supportive” of credit unions engaging in longer-term lending such as mortgages.

In its second report on the financial condition of credit unions in Ireland, the Central Bank has outlined the relative strength of the sector.

Registrar of credit unions Patrick Casey said the report "reinforces the challenges", which continue to face the business models of credit unions in Ireland.

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“While some modest improvements are noted, at a sectoral level work remains to be done to ensure a sustainable credit union sector into the future,” he said, adding that credit unions need to “exploit their uniqueness, the cherished nature of their brand, their local advantages and footprint and their high personal interface with their members”.

According to the report, the number of active credit unions has decreased to from 399 to 269, while the Central Bank found that assets in the sector rose by €3.1 billion between 2012 and 2017 to a record high of €16.8 billion, with savings advancing by €2.3 billion.

The average savings amount per member in credit unions was €4,200 in September 2017. On the loan to asset ratio, a key measure of financial health, the regulator found that it fell by 37 per cent in 2012 to 27 per cent since 2015, evidence of “stabilisation”.

Lending is also on the rise, with loans of more than five years up by € 216 million from € 452 million in 2015 to € 668 million in 2017, and ten-year loans up by € 59 million from € 87 million to € 146 million in the same period.

However, on an outstanding basis, lending has fallen, with gross loans down from € 5 billion in 2012 to € 4.4 billion in 2017. This is putting pressure on credit unions’ income, which has reduced across the sector from 2012 to 2017.

Credit unions have also been hit by the low interest rate environment, with the overall return on assets ratio for the sector falling from 2.3 per cent in 2012 to 1.0 per cent in 2017. It also means that the return for credit union members is down, with the average dividend falling from a peak of 0.8 per cent in 2012 to 0.3 per cent in 2016.

“However, there is a significant variance in dividends across the various credit union asset sizes,” the report added.

Loan arrears continue to slow, the study shows, falling from 19.6 per cent to 7.4 per cent in 2017, while the average liquidity ratio in 2017 stood at 36 per cent.

Mortgage lending

In a separate report, the Central Bank asserted that while it is generally “supportive” of credit unions engaging in longer term lending, such as mortgages, they must be clear that it presents additional risks for credit unions, and as such, must be “ prudently undertaken, well-managed and in line with credit union strategy and capabilities”.

Mr Casey said: “The Central Bank is supportive of credit unions prudently engaging in an increased level of long term lending. However, this lending must form part of a balanced loan portfolio and a prudently managed balance sheet, and must also be consistent with a credit union’s strategy and capabilities.”