DICO - SOAD



DICO Observations Q1-2019Profitability this quarter at 27 bps is down by a significant 13 bps year over year (from 40 bps) and 8 bps quarter over quarter (from 35 bps); thematic within the sector, increased loan interest and improved non-interest expenses were more than offset by higher interest expense on deposits and lower other income.Mortgage loan delinquency over 30 days increased by 2 bps year over year and 5 bps quarter over quarter; increases are noteworthy because of the continued high rate of growth in mortgage loan assets which represent 54.9% of total assets, the effects of higher interest rates on new and existing mortgages when renewed and high household debt levels. However, total loan delinquency over 30 days has improved year over year to 62 bps reflecting slightly improved commercial loan performance.Asset growth (12.1% year over year) continues to be fueled by residential mortgages (15.0%), perhaps impacted by tightened lending rules at banks; it appears increasing interest rates and slowing sales volumes and/or reduced prices in some markets have not had a negative impact on sector growth. Although the trend is slowing, historic loan growth has outpaced deposit growth leading to reliance on securitization transactions (up 18.6% year over year) as a source of funding. Liquidity increased by 70 bps year over year to 11.0% as growth in liquid assets outpaced growth in deposits, borrowings and securitization transactions.Capital and capital ratios remain under pressure as growth in loans outpaces growth in retained earnings. Economic OverviewThe Bank of Canada (the “Bank”) maintained its overnight rate at 1.75% on April 24th, 2019 after three 25 bps increases in 2018 and a total of five 25 bps increases since it began raising rates in July 2017. In its report, the Bank stated that growth in Canada during the first half of 2019 is now expected to be slower than was previously anticipated. In the energy sector, last year’s oil price decline and ongoing transportation constraints have curbed both investment and exports. In other sectors, trade policy and uncertainty and global slowdowns have also negatively impacted investment and exports. Additionally, the Bank cited weaker than anticipated housing and consumption as contributors to slow growth. The Bank does expect growth to pick-up in the second half of 2019 reflecting stabilized housing activity, improved global financial conditions, strong growth in employment income and, outside of the oil sector, investment supported by high rates of capacity utilization and expanded exports as global demand strengthens. This expectation is tempered by downward revisions in government spending in light of Ontario’s new budget. Overall, the Bank projects real GDP growth of 1.2 percent in 2019 and about 2 percent in each of the next two years. CPI and other measures of core inflation are now close to 2 percent. The expectation is that CPI will dip in the third quarter, largely because of gasoline price dynamics, before returning to 2 percent where it is expected to remain through 2021. The Bank has therefore determined that an accommodative interest rate policy continues to be warranted as it monitors developments in household spending, oil markets and global trade and their impacts on growth and inflation.In March 2019, Statistics Canada reported the ratio of household debt to income increased to 178.5% in the fourth quarter of 2018, up from a revised reading of 178.3% in the third quarter. It also said the amount Canadians owed relative to their income ticked higher in the fourth quarter as the growth in debt slightly outpaced income growth.Housing MarketsThe Bank’s April Monetary Report states the effects on growth of the revised B-20 guideline are expected to dissipate in many markets, although they could persist longer in areas with elevated house prices and that have been subject to other changes to housing policies. The Bank says stabilization of expectations for house prices in British Columbia and Ontario may indicate a forthcoming stabilization and subsequent increase in resale activity. It comments that the First-Time Home Buyer Incentive introduced in the 2019 federal budget is expected to support housing demand and may also lead to improving sentiment, but home-buyers who want to take advantage of the new measure could influence the timing of resale activity in 2019.The Toronto Real Estate Board reports that in the GTA, March 2019 year to date sales were flat and average prices increased a nominal 0.5%, each compared to the year earlier period. The Board considers the OSFI stress test and general mortgage lending conditions impact buyers’ abilities to qualify for mortgages and should be reviewed.Credit Union Sector ConsolidationThere has been continued consolidation within the Ontario sector over the last twelve months with the number of institutions decreasing by 3 to 78; average asset size increased to $838 million. The number of credit unions declined by three to 66 with average assets of $891 million; caisse populaires remained at 12 with average assets of $596 million. Consolidations should result in larger, more stable entities capable of achieving economies of scale.Profitability1Q-2019 vs 1Q-2018As shown in Tables 2 and 3 on page 2, return on average assets for the sector decreased to 27 bps (down 13 bps or 33%) from the same quarter a year earlier mainly reflecting higher interest and dividend expense (up 35 bps to 1.75%) and lower other income (down 11 bps to 42 bps), offsetting higher interest and investment income (up 15 bps to 3.52%) and improved non-interest expenses (down 12 bps to 1.81%).Within the sector, return on average assets for credit unions decreased to 22 bps (down 15 bps or 41%) mainly due to higher interest and dividend expense (up 36 bps to 1.78%) and lower other income (down 10 bps to 40 bps), offsetting higher interest and investment income (up 18 bps to 3.56%) and improved non-interest expenses (down 12 bps to 1.82%).Caisses profitability increased to 63 bps (up 5 bps or 9%) mainly reflecting improvements in loan costs (down 14 bps to a recovery of 5 bps), improved non-interest expenses (down 13 bps to 1.71%) and lower taxes (down 21 bps to 2 bps), offset by decreased interest and investment income (down 3 bps to 3.24%) and higher interest and dividend expense (up 26 bps to 1.51%). Out of 78 credit unions, nine had negative returns on assets. DICO closely monitors credit unions that are unprofitable, identifies core challenges and works with the credit unions to develop strategies to resolve the situation with the intention of returning them to profitability.4Q 2018 Ontario Sector vs Canadian Sector**Most recent report by Canadian Credit Union Association; including Ontario sectorOntario sector profitability of 35 bps was below that of the Canadian sector of 42 bps. Although net interest income of 1.77% (vs 1.98%) and other income of 0.42% (vs 0.54%) were lower, non-interest expenses of 1.81% (vs 1.93%) were better and loan costs of 0.06% (vs 0.09%) were lower. Capital 1Q-2019 vs 1Q-2018Sector capital increased to $4.4 billion (up $269 million or 6.5%) from the year earlier quarter comprised of:Retained earnings of $2.6 billion (up $200 million or 8.1%); Investment and patronage shares of $1.7 billion (up $73 million or 4.5%); and Membership shares of $65 million (up $2 million or 3.2%). Within the sector, credit union capital increased to $3.7 billion (up $217 million or 6.2%) and consisted of: Retained earnings of $2.0 billion (up $124 million or 6.7%); Investment and patronage shares of $1.6 billion (up $87 million or 5.6%); and Membership shares of $63 million (up $2 million or 3.2%). Caisses capital increased to $732 million (up $52 million or 7.8%) comprised of:Retained earnings of $655 million (up $75 million or 12.9%); Investment and patronage shares of $73 million (down $14 million or 15.4%); and Membership shares of $2 million (up $0.1 million or 3.8%).As a percent of risk weighted assets, sector capital was 13.17%, down 79 bps from the year earlier quarter, as growth in risk weighted assets outpaced growth in capital. Credit union capital was 12.60% (down 67 bps) and caisses capital was 16.90% (down 193 bps). Leverage for the sector was 6.71% (down 44 bps) reflecting credit union leverage of 6.39% (down 46 bps) and caisses leverage of 8.90% (down 30 bps).Growth in retained earnings has not been keeping pace with the growth in assets. To maintain minimum capital requirements and provide for future growth, credit unions have an increasing dependency on the issuance of investment shares which remain a significant portion of their capital composition (38.6% in 1Q19 versus 39.3% in 1Q18). 1Q-2019 vs 4Q-2018Sector capital increased by $47 million (1.1% from $4.4 billion) from last quarter, primarily from an increase in retained earnings of $28 million (1.1% from $2.6 billion) and investment shares of $21 million (1.3% from $1.7 billion); membership shares were largely unchanged. Sector capital as a percent of risk weighted assets decreased 17 bps (from 13.34%) in the previous quarter. Credit union capital decreased 24 bps (from 12.84%) offset by caisses’ capital that increased 33 bps (from 16.57%). Leverage for the sector decreased 13 bps (from 6.84%) reflecting decreases at credit unions of 15 bps (from 6.54%) and at caisses of 1 bp (from 8.91%). Liquidity (including Securitization)1Q-2019 vs 1Q-2018As shown in Tables 7 and 8, sector deposits increased by $6.5 billion (up 14.1% to $52.6 billion), securitizations increased by $1.2 billion (up 18.6% to $7.4 billion) and borrowings decreased by $621 million (down 78.6% to $169 million), a net increase of $7.1 billion (up 13.2% to $60.2 billion) from the year earlier. However, liquid assets increased $1.2 billion (up 21.3% to $6.7 billion) resulting in an increase in liquidity to 11.0% (up 70 bps from 10.3% in 1Q18). Deposits at credit unions increased by $5.2 billion (up 12.7% to $45.8 billion), securitizations increased by $1.0 billion (up 17.0% to $6.9 billion) and borrowings decreased by $301 million (down 90.2% to $33 million), a net increase of $5.9 billion (up 12.5% to $52.7 billion). However, liquid assets increased $1.2 billion (up 24.8% to $6.2 billion) resulting in an increase in liquidity to 11.7% (up 1.1% from 10.6%). Deposits at caisses increased by $1.3 billion (up 24.3% to $6.9 billion), securitizations increased by $155 million (up 46.8% to $485 million) and borrowings decreased $320 million (down 70.2% to $136 million), a net increase of $1.2 billion (up 18.6% to $7.5 billion). Liquid assets decreased by $84 million (down 15.5% to $459 million) resulting in a decrease in liquidity to 6.2% (down 2.0% from 8.2%).In 1Q19, there were 33 credit unions (21 credit unions, 12 caisse populaires) with combined total assets of $57.9 billion (89% of sector assets) participating in securitization programs. On September 1, 2018, the Securitization Guidance Note outlining prudent risk management measures came into effect and securitization reporting to DICO has now begun. DICO continues to monitor the extent to which securitization programs are used by credit unions.1Q-2019 vs 4Q-2018Sector deposits increased by $1.7 billion (up 3.3% from $52.6 billion), securitizations increased by $382 million (up 5.5% from $7.0 billion) and borrowings decreased by $119 million (down 41.3% from $288 million), a net increase of $2.0 billion (up 3.4% from $58.2 billion) from last quarter. Liquid assets increased by $939 million (up 16.5% from $5.7 billion) and due to their faster rate of growth, liquidity increased 1.2% (from 9.8%). Efficiency Ratio (before dividends/interest rebates)1Q-2019 vs 1Q-2018As shown in Table 3, sector efficiency ratio deteriorated to 82.2% (up 510 bps from 77.1%) from the year earlier quarter. Credit unions worsened to 84.2% (up 550 bps from 78.7%) and caisses to 70.4% (up 290 bps from 67.5%).1Q-2019 vs 4Q-2018Compared to last quarter, sector efficiency worsened by 360 bps (from 78.6%) reflecting increases at credit unions of 400 bps (from 80.2%) and caisses of 250 bps (from 70.0%).4Q-2018 Ontario Sector vs. Canadian SectorAlthough non-interest expense as a percent of average assets for the Ontario sector (1.89%) was 4 bps better than the Canadian sector (1.93%), the efficiency ratio (78.6%) was 520 bps worse than the Canadian sector (73.4%). The gap is wider than in 4Q-2017 when the spread was 428 bps with Ontario at 79.2% and the Canadian Sector at 74.9%.Credit Quality (delinquency greater than 30 days)1Q-2019 vs 1Q-2018As shown in Table 5, total loan delinquency decreased to 62 bps (down 2 bps from 64 bps) from the year earlier quarter. Credit unions reflected an increase to 62 bps (up 1 bp from 61 bps) and caisses decreased to 61 bps (down 20 bps from 81 bps).Residential mortgage loan delinquency increased to 46 bps (up 2 bp from 44 bps) in the year earlier quarter. Credit unions reflected an increase to 46 bps (up 1 bp from 45 bps) and caisses increased to 46 bps (up 5 bps from 41 bps). Commercial loan delinquency decreased to 96 bps (down 1 bp from 97 bps) from the year earlier. Within the sector, commercial loan delinquency increased at credit unions to 94 bps (up 1 bp from 93 bps) and decreased at caisses to 106 bps (down 23 bps from 129 bps). 1Q-2019 vs 4Q-2018Compared to last quarter, total delinquency for the sector decreased by 4 bp (from 66 bps) reflecting decreases at credit unions of 4 bps (from 66 bps) and at caisses by 5 bps (from 66 bps). Residential mortgage loan delinquency for the sector increased by 5 bps (from 41 bps) reflecting increases at credit unions of 4 bps (from 42 bps) and at caisses of 6 bp (from 40 bps).Commercial loan delinquency for the sector decreased by 6 bps (from 102 bps) from the previous quarter reflecting decreases at credit unions of 11 bps (from 105 bps) offset by increases at caisses of 26 bps (from 80 bps). GrowthNote: It appears that approximately $400MM of commercial loan balances have been reclassified as residential mortgages within the caisses populaires sector. This is under review by DICO and the effects on sector results if the reclassification were reversed cannot now be ascertained.1Q-2019 vs 1Q-2018Compared to the previous year, total sector assets increased to $65.4 billion (up $7.0 billion or 12.1%). This was largely due to growth in residential mortgage loans to $36.0 billion (up $4.7 billion or 15.0%), growth in commercial loans to $16.1 billion (up $0.9 billion or 5.7%) and increased cash/equivalents of $7.7 billion (up $1.1 billion or 16.0%). As shown in Table 4, the annual growth of residential mortgage loans represents the highest year over year growth rate of the last ten years. Within the sector, credit unions increased total assets to $57.0 billion (up $6.2 billion or 12.3%) reflecting growth in residential mortgage loans to $31.2 billion (up $3.7 billion or 13.6%), growth in commercial loans to $14.5 billion (up $1.1 billion or 8.0%) and increased cash/equivalents of $6.8 billion (up $1.1 billion or 18.4%). Caisses total assets increased to $8.3 billion (up $802 million or 10.6%) mainly attributed to growth in residential mortgage loans to $4.8 billion (up $948 million or 24.9%) offset by a decrease in commercial loans to $1.6 billion (down $216 million or 12.0%). 1Q-2019 vs 4Q-2018Total assets for the sector increased by $2.1 billion (3.2% from $63.3 billion) from last quarter reflecting growth of $1.0 billion (2.8% from $34.9 billion) in residential mortgage loans, decreases in commercial loans of $187 million (1.1% from $16.1 billion) and increased cash/equivalent balances by $1.0 billion (14.6% from $6.7 billion). Within the sector, total assets in credit unions increased by $1.9 billion (3.4% from $55.2 billion) reflecting increases of $446 million (1.5% from $30.7 billion) in residential mortgage loans, $259 million (1.8% from $14.3 billion) in commercial loans and $930 million (15.9% from $5.7 billion) in cash/equivalents. Caisses total assets increased by $184 million (2.3% from $8.2 billion) reflecting growth of $533 million (12.6% from $4.2 billion) in residential mortgage loans offset by commercial loans which fell $445 million (21.9% from $2.0 billion).4Q-2018 Ontario Sector vs. Canadian SectorOntario sector total assets growth rate of 11.0% was above the Canadian sector’s (7.5%) attributable to growth in residential mortgages loans of 14.8% (vs 7.8%), commercial loans of 9.3% (vs 6.2%) and agricultural loans of 8.6% (vs 9.6%). ................
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