DICO - SOAD



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|[pic] |Ontario Credit Unions and Caisses Populaires SECTOR OUTLOOK 2Q15 |

| August 2015 |

|In This Issue |Summary Results |

|Summary Results….Page 1 |Selected Aggregate Sector Performance Indicators |

|Sector Financial |As at June 30 |

|Highlights… ……….Page 5 | |

|Sector Financial Statements…… …..Page | |

|6 |2015 |

|Selected Performance |2014 |

|Trends …… ……...Page 8 | |

| |Total Assets Class 1 Credit Unions (millions) |

|The information presented in this |$363 |

|report has been prepared using a |$441 |

|variety of sources, including | |

|unaudited reports submitted to DICO by|Class 1 as a % of Total Sector Assets |

|Ontario’s credit unions and caisses |0.8 |

|populaires. While DICO believes that |1.1 |

|the information contained in this | |

|report would be useful to readers, and|Total Assets Class 2 Credit Unions (millions) |

|considers the financial statements to |$44,310 |

|be reliable, their accuracy and |$40,173 |

|completeness cannot be guaranteed. | |

|Ce document est également disponible |Class 2 as a % of Total Sector Assets |

|en français. |99.2 |

|Contact Us: |98.9 |

|info@ | |

| |Total Sector Assets (millions) |

| |$44,673 |

| |$40,614 |

| | |

| |Number of Class 1 Credit Unions |

|ELECTRONIC PUBLICATION: |19 |

|The Sector Outlook is available in PDF|23 |

|format (readable using Adobe Acrobat | |

|Reader) and can be downloaded from the|Class 1 as a % of Total Credit Unions |

|Credit Union section on DICO’s website|16.8 |

|at . |19.2 |

| | |

| |Number of Class 2 Credit Unions |

| |94 |

| |97 |

| | |

|NOTE : |Class 2 as a % of Total Credit Unions |

|Income Statement results are based on |83.2 |

|aggregate year to date annualized |80.8 |

|information for each credit union. | |

|Comparative results may not always |Total Number of Credit Unions |

|agree with previously reported |113 |

|information for the same period as a |120 |

|result of additional information | |

|received after the reporting date. |Number of Members (000’s) |

| |1,552 |

| |1,553 |

| | |

| |Regulatory Capital (Aggregate Leverage Ratio) |

| |6.82% |

|Results are based on the latest |7.17% |

|available information as at August 4, | |

|2015. |Number not meeting minimum regulatory capital level |

| |0 |

| |0 |

| | |

| |Class 1 Credit Unions (Leverage) |

| |8.95% |

| |8.55% |

| | |

| |Class 2 Credit Unions (Leverage) |

| |6.79% |

| |7.16% |

| | |

| |Class 2 Credit Unions (BIS) |

| |13.08% |

| |13.70% |

| | |

| |Liquidity |

| |10.49% |

| |10.71% |

| | |

| |Asset Growth |

| |10.0% |

| |8.06% |

| | |

| |Total Loan Delinquency (greater than 30 days) |

| |0.90% |

| |0.84% |

| | |

| |Commercial Loan Delinquency (greater than 30 days) |

| |1.51% |

| |1.37% |

| | |

| | |

| | |

| | |

| | |

| | |

| |Year to Date (annualized) |

| | |

| |Net Interest Income (Financial Margin) |

| |2.08% |

| |2.19% |

| | |

| |Other Income |

| |0.55% |

| |0.61% |

| | |

| |Return on Average Assets (ROAA) Class 1 Credit Unions |

| |0.42% |

| |0.38% |

| | |

| |ROAA Class 2 Credit Unions |

| |0.32% |

| |0.41% |

| | |

| |Total Sector ROAA |

| |0.32% |

| |0.41% |

| | |

| |Return on Regulatory Capital |

| |4.67% |

| |5.69% |

| | |

| |Efficiency Ratio (before dividends & interest rebates) |

| |81.7% |

| |78.9% |

| | |

| |Unless stated otherwise, all figures reported are as at 2Q15. |

| | |

| |Capital |

| |Aggregate regulatory sector capital increased from $2.89 billion to $3.01 billion year over year but decreased as a |

| |percentage of assets to 6.82% from 7.17% as asset growth continues to outstrip earnings in this low interest rate |

| |environment. While no credit unions were below the minimum regulatory capital level, one credit union reported capital at |

| |0.22% above the threshold. Retained earnings represented 66.5% ($2.0 B) of regulatory capital, investment and patronage |

| |shares accounted for 31.0% ($0.94 B) with membership shares making up the remaining 2.5% ($73 million). Retained earnings |

| |grew by 11.5% year over year (4.5% as a percentage of total assets). |

| | |

| |Crude oil prices reached their 52 week low in late July 2015 at $46 USD per barrel down from $110 USD per barrel last July, |

| |the Canadian dollar has weakened to the lowest level in 10 years and interest rates will remain low for the foreseeable |

| |future. Lower oil prices have resulted in lower government revenues and have slowed the rate of growth of the economy as a |

| |whole. Canada is in a technical recession as a result of negative growth in GDP for the first two quarters of 2015 and the |

| |pace of growth for the remainder of the year is forecast to be lower than expected earlier this year. Credit unions need to |

| |perform stress tests to determine whether these economic factors will require the infusion of additional capital to remain |

| |viable. |

| | |

| |Growth |

| |Sector consolidation continued over the last twelve months, with the number of credit unions decreasing by seven to 113, |

| |resulting in the average size increasing to approximately $395 million. The number of Class 1 credit unions declined by four |

| |to 19 with the average asset size remaining at $17 million. Class 2 credit unions consolidated by three to 94 resulting in an|

| |aggregate asset growth of approximately 10.3% with average total assets of $471 million. |

| |Total sector assets grew by almost 10% to $44.7 billion, largely due to growth in commercial loans (13.9%), residential |

| |mortgage loans (11.5%) and agricultural loans (9.9%). The following table outlines the changes in the number and average size|

| |of loans from 2012 to 2015. The average size of agricultural loans has increased by 34.8% over the past three years, |

| |commercial loans by 27.0% and residential loans by 15.0%. As the size of loans increases, credit unions are reminded that |

| |prudent underwriting practices should be adhered to when pricing loans, including testing the impact of increases in interest|

| |rates on the borrower’s ability to pay. |

| | |

| |[pic] |

| | |

| |Year over year, total deposits grew by 7.2%, higher than the five year historical deposit growth trend of 6.0% and the |

| |highest year over year growth rate since 2009. The annual growth rate in demand deposits increased to 9.2% from 6.7% last |

| |year while the growth rate in term deposits increased to 6.0% from 3.2% last year. |

| | |

| |The funding gap, the difference between total assets and total deposits, continues to grow and has increased from 16.6% in |

| |2Q14 to 18.7% in 2Q15. The increasing reliance on borrowings and especially securitization could become a challenge for some|

| |credit unions if the economy suffers additional negative impacts. |

| |Insured deposits were estimated at $25.8 billion or 71.0% of total deposits in contrast to the banking sector with insured |

| |deposits of 31% ($665 billion) as reported by CDIC. |

| | |

| |Profitability |

| |In early July, Bank of Canada lowered the key interest rate by 25 bps for the second time this year to 0.5% driven mainly by:|

| |decreased long term outlook for global oil prices; forecasted growth in GDP was reduced to 1.1% from the 1.9% value stated in|

| |April’s monetary policy report; and China’s slower growing economy leading to lower exports. This interest rate decrease |

| |will put even greater pressure on interest rate margins for Ontario credit unions going forward. |

| | |

| |Interest and investment income decreased by 7 bps on a year over year basis and income from other sources decreased by 6 bps.|

| |Dividend expenses increased by 8 bps for the total sector while operating expenses decreased by 9 bps and taxes by 2 bps. As |

| |a result, ROAA for the sector decreased by 9 bps to 32 bps. |

| |The overall efficiency ratio (before dividends and interest rebates) deteriorated to 81.7% from 78.9% in 2Q14 and remains |

| |significantly higher than the large Canadian banks at 60% (fiscal 2014). As a group, caisses populaires at 69.6% continue to|

| |report efficiency ratios that are closer to the big banks than credit unions at 84.1%. Part of the reason for lower |

| |efficiency ratios at caisses populaires is the economies of scale realized through the federated model where many back office|

| |functions and systems are shared, thus reducing operating expenses. |

| | |

| |Credit Risk |

| |Loan costs increased to 7 bps from 5 bps as at 2Q14. The loan costs from 2Q14 were lower in part due to reversal of loan loss|

| |provisions taken by a number of credit unions in the first half of 2014. Gross loan delinquency greater than 30 days was |

| |0.90% of total loans, up 6 bps from 0.84% in 2Q14. Delinquencies were higher in agricultural loans (1.34% vs. 0.82%), |

| |personal loans (1.06% versus 0.87%) and commercial loans (1.51% vs. 1.37%), partially offset by lower residential loan |

| |delinquencies (0.57% vs. 0.60%). The reported total amount of impaired commercial loans has remained relatively flat at $191 |

| |million in 2Q15 versus $187 million in 2Q14 but, due to the growth in the commercial loan portfolio, the impaired percentage |

| |has decreased from 1.89% to 1.70%. Agricultural loan delinquency increased by $12 million to $21 million in 2Q15 due to |

| |increases at 14 credit unions. |

| | |

| |The interest rate decrease has made floating rate loans even cheaper for consumers. Although the Bank of Canada has urged |

| |Canadians to take this opportunity to reduce their debt loads, there is the temptation to increase borrowing at these |

| |historically low levels. Lower variable mortgage rates could help to spur house purchases and increase the demand for new |

| |mortgages, resulting in further liquidity demand for some institutions. |

| |Credit unions need to ensure their capital and liquidity management models ensure the effect of interest rate changes is |

| |appropriately reflected in their capital and liquidity holdings. |

| | |

| |Loan Mix and Yields |

| |Personal loans decreased by $325 million year over year (an 11.0% drop), to $2.62 billion and continue to represent a |

| |declining portion of the loan mix (down from 8.4% to 6.8% of the total loan portfolio). In contrast, commercial loans grew at|

| |13.9%, residential mortgage loans at 11.5% and agricultural loans at 9.9% year over year. |

| |Demand for new mortgages remains strong and is expected to continue in the near future as a result of the low Bank of Canada |

| |prime rate. However, yields will remain under pressure with increased competition in the mortgage lending space. Credit |

| |unions should determine the impact of interest rate and housing price changes (both negative and positive) on the loan |

| |performance and earnings. |

| | |

| |Liquidity and Borrowings |

| |Year over year borrowings increased 40.8% due largely to securitization of residential mortgages in order to make up the |

| |funding gap between the growth in assets and deposits. Securitizations have increased by 51.0% since 2Q14 to $3.38 billion. |

| |Holdings of liquid assets increased by $312 million to $4.29 billion, but the liquidity ratio decreased to 10.49% from 10.71%|

| |in 2Q14. Liquidity at Class 1 credit unions, (22.81%, a total of $75 million in liquid assets) remains much higher than at |

| |Class 2 credit unions (10.40%, a total of $4.21 billion in liquid assets). In comparison, liquidity of Canada’s banks was |

| |estimated to be approximately 11%. The liquidity level for 2Q 2015 is the lowest value for a second quarter in the ten years |

| |that the metric has been tracked and only slightly higher than the lowest quarterly value of 10.35% in 3Q14. |

| | |

| |Institution by Total Assets |

| |Liquid Assets ($M) |

| |Liquidity (%) |

| | |

| | |

| |2Q |

| |2015 |

| |2Q |

| |2014 |

| |2Q |

| |2015 |

| |2Q |

| |2014 |

| | |

| |Less than $50 million |

| |$191 |

| |$227 |

| |22.33 |

| |24.69 |

| | |

| |$50 million to $100 million |

| |$138 |

| |$267 |

| |16.08 |

| |18.32 |

| | |

| |$100 million to $250 million |

| |$655 |

| |$679 |

| |13.19 |

| |12.40 |

| | |

| |$250 million to $500 million |

| |$305 |

| |$302 |

| |9.66 |

| |11.16 |

| | |

| |$500 million to $1 billion |

| |$741 |

| |$664 |

| |9.22 |

| |9.09 |

| | |

| |Greater than $1 billion |

| |$2,260 |

| |$1,839 |

| |9.82 |

| |9.54 |

| | |

| | |

| |Total Sector |

| | |

| |$4,290 |

| | |

| |$3,978 |

| | |

| |10.49% |

| | |

| |10.71% |

| | |

| | |

| | |

| | |

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| | |

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*Funding Gap calculated as (Total Assets – Total Deposits) / Total Assets

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NOTE: L refers to the Left Axis and R refers to the Right Axis

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