Summary Results - DICO



Credit Unions and Caisses Populaires SECTOR OUTLOOK 3Q17November 2017In This IssueSummary Results….Page 1Sector Financial Highlights… ……….Page 6Sector Financial Statements…… …...Page 7Selected Performance Trends …… ……...Page 9The information presented in this report has been prepared using a variety of sources, including unaudited reports submitted to DICO by credit unions and caisses populaires. While DICO believes that the information contained in this report would be useful to readers, and considers the financial statements to be reliable, their accuracy and completeness cannot be guaranteed. Ce document est également disponible en fran?ais.Contact Us:info@ Throughout this document, unless specifically indicated otherwise, credit union refers to both credit unions and caisses populaires.ELECTRONIC PUBLICATION: The Sector Outlook is available in PDF format (readable using Adobe Acrobat Reader) and can be downloaded from the Publications section on DICO’s website at . NOTE?: Income Statement results are based on aggregate year to date annualized information for each credit union. Comparative results may not always agree with previously reported information for the same period as a result of additional information received after the reporting date.Results are based on the latest available information as at October 23, 2017.Summary Results Selected Aggregate Sector Performance IndicatorsAs at September 3020172016Total Sector Assets (millions)$56,252$50,595Credit Unions (% of Total Sector Assets)87.186.6Caisses Populaires (% of Total Sector Assets)12.913.4Total Number of Credit Unions and Caisses Populaires96101Number of Credit Unions 7276Number of Caisses Populaires2425Avg. Asset Size of Credit Unions and Caisses Populaires ($millions)$586$501Number of Members (000’s)1,6221,612Regulatory Capital (Aggregate Leverage Ratio)7.14%7.00%Credit Unions (Leverage)6.83%6.72%Caisses Populaires (Leverage)9.21%8.82%Regulatory Risk Weighted Capital Ratio (Class 2 only)13.74%13.80%Credit Unions 13.29%13.29%Caisses Populaires 16.46%17.03%Number not meeting minimum regulatory capital level00Liquidity 10.98%11.21%Credit Unions 11.45%11.65%Caisses Populaires 7.70%8.29%Asset Growth11.2%10.8%Total Loan Delinquency (greater than 30 days)0.62%0.71%Credit Unions 0.60%0.70%Caisses Populaires 0.81%0.82%Commercial Loan Delinquency (greater than 30 days)1.02%1.17%Credit Unions 1.03%1.18%Caisses Populaires 0.92%1.11%Year to Date (annualized)Net Interest Income (Financial Margin)1.95%1.97%Other Income0.53%0.58%ROAA 0.37%0.33%Return on Regulatory Capital5.23%4.67%Efficiency Ratio (before dividends & interest rebates)79.0%81.2%Credit Unions81.8%83.5%Caisses Populaires64.0%68.5%Unless stated otherwise, all figures reported are as at 3Q17.Economic OverviewThe Bank of Canada (BOC) adopted a tighter monetary policy during the third quarter by raising the overnight rate by 25 bps to 1%. BOC’s decision to increase the interest rate was based on stronger than expected economic growth over the first half of 2017, an increase in the employment rate resulting in a modest rise in income, and the above-target inflation expectation for 2018. In addition, BOC is concerned about the household debt level, which is already at record levels as another reason for the rate hike. Increasing interest rates should have a cooling effect on growth and help keep inflation near the 2% target. Over the last 12 months, the Ontario government introduced new measures to reduce the pace of house prices increases and lessen the chance of a housing crash which has resulted in a decline in listings and sales. According to the Toronto Real Estate Board, year-over-year sales volumes fell 40% in July and 35% in August. The number listings fell 6.8% in August to the lowest level since 2010. The average Toronto sale price in September 2017 was up 6% from August but still 15% less than high water mark set in April 2017. In October 2017 the Office of the Superintendent of Financial Institutions (OSFI), published a revised version of the Guideline B-20: Residential Mortgage Underwriting Practices and Procedures (B20). Credit unions are encouraged to become familiar with B20 as the practices outlined represent mortgage lending best practices in place in the Canadian marketplace. CapitalAggregate regulatory capital for the sector increased to $4.01 billion from $3.51 billion year-over-year. The leverage ratio (as a percent of total assets) also increased to 7.14% from 7.00% and risk weighted capital, as measured through the BIS ratio, decreased to 13.74% from 13.80% year-over-year as growth in assets outpaced earnings. The “Big 6” Canadian Banks reported 3Q17 regulatory capital ratios as measured by Basel III standards of between 13.7% and 15.6%. While all credit unions are above the minimum requirements, they are encouraged to continually review their capital requirements to ensure sustainable growth. Capital consisted of:Retained earnings $2.37 B (59.1%) up $183 million year over year;Investment and patronage shares $1.6B (39.9%) up $300 million year over year; and Membership shares $65.4 million (1%). During 2017, five capital offering statements have closed raising $263 million and there are two more open offering statements targeting to raise an additional $46 million. While all credit unions are above the minimum requirements, they are encouraged to continually review their capital requirements to ensure sustainable growth. Credit unions should ensure their capital management stress testing models appropriately reflect any additional increases in interest rates. GrowthSector consolidation continued over the last twelve months with the number of credit unions decreasing by five to 96 resulting in an increase in the average asset size to $586 million. The number of credit unions declined by four to 72 with an average asset size of $681 million compared to caisses populaires which decreased by one to 24 with an average asset size of $302 million. Over the next six months, there are another 16 mergers anticipated in the credit union sector. These mergers should result in larger, more stable credit unions able to achieve greater economies of scale and provide a larger variety of products and services to their members.While asset growth for Canadian banks grew at 6.8%, total assets for Ontario credit unions grew at a faster rate of 11.2% to $56.3 billion, largely due to growth in residential mortgage loans of 13.3% followed by commercial loans at 10.4%. The proportion of residential mortgages have increased to 60.5% from 57.9% and commercial loans have increased to 29.6% from 27.9% over the past five years while personal loans have decreased to 5.8% from 9.8%. The disproportionate growth in credit unions’ assets versus banks’ assets is largely due to credit unions having a much higher percentage of residential mortgages (60% at credit unions versus 25% to 30% at banks) along with the strong growth in average mortgage size due to the rising housing prices. Please refer to the following table for more information on lending activity. Sector Lending ActivityTotal deposits grew by 10.6%, materially higher than the five-year average deposit growth trend of 7.9% and higher than the Canadian banks’ growth rate of 8.5%. Term deposit growth led the way with year-over-year growth of 13.1% (up from 7.5% in 3Q16), demand deposits decreased to 12.2% (down from 13.6% in 3Q16), and registered deposits decreased to 4.7% (down from 5.3% in 3Q16). The gap between total loans and total deposits has increased to 8.7% from 8.0% in 3Q16 ($3.90 billion from $3.21 billion) with the gap being filled through the use of securitizations. DICO will be issuing guidance on Securitizations for consultation in November. While there are benefits to obtaining funding through securitizations, there are also risks that need to be addressed and caution in placing an overreliance on one source of funding for growth. Credit unions are expected to take a prudent, balanced and diversified approach to funding growth to ensure overreliance is not placed on a single source of funding.Insured deposits are estimated to be $30 billion or 67.1% of total deposits in contrast to the banking sector with insured deposits of 31% (source: CDIC). The increase in deposit insurance to $250,000 is expected to increase the level of insured deposits to approximately $39 billion, or 82% of total deposits, by the end of 2018.Efficiency RatioCredit UnionsCaisses PopulairesBanks81.8%64.0%55.2%The overall efficiency ratio (before dividends and interest rebates) for the credit union sector strengthened to 79.0% from 81.2% in 3Q16 due to improvements in many areas, led by salaries and benefits, occupancy costs and administration. However, it remains significantly higher than large Canadian banks at 55.2% (2Q17). Collectively, caisses populaires continue to report efficiency ratios (64.0%) that are closer to bank results and more favourable than ratios reported by the credit unions (81.8%). Caisses populaires benefit from increased economies of scale through an integrated model where most back-office functions (including credit underwriting and adjudication) are centralized. This is illustrated by the fact that salaries and benefits for caisses populaires were 25 bps lower than credit unions (89 bps vs. 114 bps) in 3Q17. In comparison, salaries and benefits for the Canadian banks for 2Q17 was 24 bps and total non-interest expenses were 44 bps.Profitability: Increasing MarginallyReturn on average assets (ROAA) increased to 37 bps in 3Q17 from 33 bps in 3Q16. The following table provides the income and expense breakdown for the sector over the last 5 years. There has been a 69 bps decrease in interest and investment income (17.3% decrease) over the last five years because of low interest rates driving down rates charged on loans. Total loan yields have decreased from 4.63% in 3Q12 to 4.09% in 3Q17 led by residential mortgage yields decreasing from 3.97% to 3.64% during this time period. Although the BOC has raised the interest rates by 50 bps over the last 3 months, it has not yet led to higher loan yields for credit unions.“Other income” has decreased by 10 bps over the same period to 53 bps. Credit unions continue to seek alternative sources to increase income from non-interest earning related sources to bolster total income. Rising interest rates will allow credit unions to increase the spreads between interest income and interest expenses. While most credit unions have remained profitable in this low interest rate environment by reducing non-interest expenses, there are currently eight credit unions with a negative return on assets. All categories of non-interest expenses (1.97% in 3Q17) decreased over the last five years but remain higher than the banks (1.73% in 2Q17), while total expenses decreased by 79 bps over the same time period. Although the BOC left the overnight rate at 1% at its October meeting, additional increases in 2018 are forecast which is anticipated to have a positive effect on the credit unions net income. Credit RiskGross loan delinquency greater than 30 days continues to improve and represented 0.62% of total loans, down 9 bps from 0.71% in 3Q16. The improvement was due to lower delinquencies in commercial loans (1.02% vs.1.18%), residential mortgages (0.37% vs. 0.46%) and agricultural loans (0.74% vs. 0.96%). Delinquencies in the personal loan book increased to 0.92% from 0.84%.The following chart shows fluctuations in delinquencies greater than 30 days over the past ten years for different loan types. Commercial loan and residential mortgage delinquencies have steadily trended downward since the peak levels seen in the years directly after the 2007-2008 recession and are now at the lowest level seen in over 10 years. Loan costs remained constant at 0.06% year over year.Should the BOC decide to further increase interest rates, the sector could potentially experience an increase in delinquencies and loan costs as borrowers may begin to have trouble servicing their debt loads. Credit unions need to review their portfolios and perform stress testing to understand how rising interest rates will affect all aspects of their operations.Liquidity and BorrowingsSecuritization programs (on-balance sheet) have increased by $243 million (4.7%) year over year to $5.37 billion while borrowings from non-securitization sources increased by $512 million to $1.05 billion. There are currently 18 credit unions and 12 caisses populaires that are involved in securitization programs. The following chart summarizes the level of securitizations as a percentage to a few key metrics. There are currently 9 credit unions where more than 20% of residential mortgages are securitized (largest percentage is 39.1%), five credit unions where securitizations are greater than 20% of deposits and regulatory capital (largest is 34.0%) and three credit unions where securitizations are greater than 20% of total assets (largest is 24.5%). DICO is closely watching the growth in the use of securitization programs by credit unions due to the concentration of this funding source at a few credit unions. In early November, DICO issued a draft of the Securitization Guidance Note to the sector for consultation. Liquid asset holdings increased by $453 million year-over-year to $5.62 billion while the liquidity ratio decreased to 10.98% from 11.21% in 3Q17 due to growth in total assets outpacing growth in liquid assets. Liquidity ratios ranged from 3.96% to 62.72%. Liquidity at caisses populaires (7.70%) remains much lower than at credit unions (11.45%). This lower level of liquidity is due mainly to the ability of some caisses to access the Fédération des caisses Desjardins du Québec for funding should it be required. In comparison, liquidity of Canada’s banks was approximately 11%.The following chart provides a breakdown of liquidity sources. The largest source of liquidity is “Deposits in a League or Central” (75.1%), followed by “Deposits in deposit taking institutions” (8.4%), “Cash held for liquidity” (4.3%) and “Securities secured by mortgages and guaranteed by CMHC” (4.1%) and “Commercial paper, banker’s acceptances and similar instruments” (3.9%).Credit unions are encouraged to stress test their liquidity requirements sufficiently to challenge the level of liquidity to which they have access and develop alternative contingency strategies to rectify potential liquidity shortages. 08270875NOTE: L refers to the Left Axis and R refers to the Right Axis020000NOTE: L refers to the Left Axis and R refers to the Right Axis ................
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