April2017
In This Issue
- Summary Results….Page 1
- Sector Financial
- Sector Financial Statements………..Page 7
- Selected Performance
The 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.
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Throughout this document, unless specifically indicated otherwise, credit union refers to both credit unions and caisses populaires.
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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 February 1, 2017. / Summary Results
Selected Aggregate Sector Performance Indicators / As at December 31
2016 / 2015
Total Sector Assets (millions) / $51,852 / $46,621
Credit Unions(% of Total Sector Assets) / 86.86 / 86.0
Caisses Populaires(% of Total Sector Assets) / 13.14 / 14.0
Total Number of Credit Unions and Caisses Populaires / 99 / 110
Number of Credit Unions / 74 / 85
Number of Caisses Populaires / 25 / 26
Avg. Asset Size of Credit Unions and Caisses Populaires ($millions) / $524 / $420
Number of Members (000’s) / 1,610 / 1,594
Regulatory Capital (Aggregate Leverage Ratio) / 6.97% / 7.34%
Credit Unions (Leverage) / 6.66% / 7.10%
Caisses Populaires (Leverage) / 9.00% / 8.80%
Regulatory Risk Weighted Capital Ratio (Class 2 only) / 13.60% / 14.25%
Credit Unions / 13.04% / 13.85%
Caisses Populaires / 17.18% / 16.63%
Number not meeting minimum regulatory capital level / 0 / 0
Liquidity / 11.26% / 11.20%
Credit Unions / 11.83% / 11.74%
Caisses Populaires / 7.44% / 7.79%
Asset Growth / 11.2% / 9.88%
Total Loan Delinquency (greater than 30 days) / 0.68% / 0.91%
Credit Unions / 0.66% / 0.91%
Caisses Populaires / 0.80% / 0.91%
Commercial Loan Delinquency (greater than 30 days) / 1.07% / 1.50%
Credit Unions / 1.06% / 1.56%
Caisses Populaires / 1.13% / 1.12%
Year to Date (annualized)
Net Interest Income (Financial Margin) / 1.98% / 2.05%
Other Income / 0.58% / 0.58%
ROAA / 0.33% / 0.27%
Return on Regulatory Capital / 4.59% / 3.73%
Efficiency Ratio (before dividends & interest rebates) / 81.0% / 84.1%
Credit Unions / 83.4% / 86.8%
Caisses Populaires / 67.8% / 69.7%
Unless stated otherwise, all figures reported are as at 4Q16.
Economic Overview
The Bank of Canada’s January Monetary Policy Report expects Canada’s economy to grow at 2.1% in 2017. After the downturn in oil and commodity prices, the economy in Alberta struggled to recover. The BOC expects the US President’s election promises to cancel or renegotiate NAFTA, cut taxes, and boost infrastructure spending, could have a negative impact on Canadian exports. In 2016, the Canadian housing market set new records in terms of prices and sales especially in the Greater Toronto Area. With house prices rising faster than incomes, Canadians have increased borrowing to purchase homes resulting in a rapid increase in household debt. CMHC issued a red flag in the fall due to evidence of problematic conditions in the housing market. The federal government was concerned that the continued sharp increases in house prices in the large urban centres like Toronto could increase the risk of default in the future should the mortgage rates rise. In an attempt to curb this activity, the federal government announced changes in October 2016 to tighten eligibility rules on prospective mortgage borrowers with the following potential impacts:
- Higher eligibility standards may cause a major constraint to mortgage lending and restrain the ability to sell these loans into securitization vehicles.
- Credit unions may experience a decline in residential mortgage loans being issued because home buyers will qualify for less than their desired amount.
- The proposed income tax measures may reduce the demand for houses from foreign and domestic real estate speculators, which may stabilize house prices.
- The proposed concept of “Lender Risk Sharing”, where lenders take on additional risk for insured mortgages, could be detrimental to borrowers as lenders may increase interest rates to pass on this risk as an additional cost to the borrowers, which will reduce the amount the prospective home buyer can borrow.
Capital
Aggregate regulatory capital for the sectorincreased to $3.57 billion (6.97% of assets) from $3.38 billion (7.34%) year over year and consisted of:
- Retained earnings$2.23 B (62.3%);
- Investment and patronage shares $1.29B (36.08%); and
- Membership shares $65 million (1.8%).
Growth
Sector consolidation continued over the last twelve months with the number of credit unions decreasingby 11 to 99, resulting in an increase in average asset sizeto$524 million. The number of credit unions declined by 10to 74withanaverageasset size of $609 millioncompared to caisses populaires which decreased by one to 25 with an average assetsize of $273 million.
Total assetsgrew by11.2%to $51.9 billion,largely due togrowth in residential mortgage loansand (12.1%) and commercial loans (13.2%). Personal loans continue to represent a declining proportion of the total loan portfolio.Over the past five years,as a percentage of the total loan portfolio, residential mortgages have increased from 58.4% to 60.0% and commercial loans from 27.8% to 29.7%.
The following table providesadditional detail on lending activity in the sector.
Sector Lending Activity
Total deposits grew by10.1%, the highest year over year growth ratein the last 10 years and materially higher than the five-year average deposit growth trend of 7.0%. Demand deposit growth led the way with anincrease by12.1%while term deposits increased by 10.0% and registered deposits increased by 7.1% year over year.
The funding gap(difference between total loans and total deposits) continues to grow and has increased to 8% in 4Q16from 6.9% in 4Q15 as credit unions aggressively grow their loan portfolios to increase revenue. There are currently 7 credit unions with a funding gap greater than 10%, including 11 credit unions with funding gaps greater than 20%.
Insured deposits are estimated to be $28.6 billion or 69.2% of total depositsin contrast to the banking sector with insured deposits of 27% (source: CDIC, Sept. 2016). The level of insured deposits at credit unions has decreased steadilyat an average of 1% per year over the last decade from 81% in 2006.
Efficiency Ratio
Credit Unions / Caisses Populaires / Banks
83.4% / 67.8% / 63.7%
The overall efficiency ratio (before dividends and interest rebates) strengthenedslightly to 83.4% from 86.4% in 4Q15 however,it remains significantly higher than large Canadian banksat 63.7% (3Q16). Collectively, caisses populairescontinue to reportan efficiency ratio(67.8%) that is closer to bank results. Caisses populaires benefit from increased economies of scale through an integrated model where most back office functions (including credit underwriting and adjudication) are shared.
Profitability: Decreasing Over Time
Return on average assets (ROAA) increased to 33 bps in 4Q16 from 27 bps in 4Q15. The following table provides the income and expensebreakdown for the sectorover the last 4 years.
There has been a 48 bps decrease in interest and investment income (12.4%) over the last four years as a result of low interest rates driving down rates charged on loans. “Other income” has decreased by 3 bps over the same period to 58 bps. Credit unions continue to seek alternative sources to increase income from non-interest earning related sources to increase revenues.
Total expenses decreased by 50 bps over the period (12% decrease) led by lower interest expenses - down 29 bps (or 21%) and non-interest expenses - down 21 bps (or 4.7%). All categories of non-interest expenses decreased over the last five years, led by salaries and benefits that dropped by 14 bps (10.8%). Credit unions have focused efforts on lowering expenses, which they have been able to substantially offset the decrease in gross income. Credit unions are beginning to explore new avenues to drive operating expenses down further through economies of scaleachieved bypooling resources through shared services.
Credit Risk
Gross loan delinquency greater than 30 days was 0.68% of total loans, down 23 bps from 0.91% in 4Q15. This was due mainly to lower delinquencies in commercial loans (1.07% vs. 1.50%),and residential mortgages (0.44% vs. 0.62%).
In dollar terms, total commercial loan delinquencies decreased to $135 million in 4Q16 from $176.0 million in 4Q15due mainly to the resolution of twolarge delinquent loans at one credit union. Residential Mortgage delinquencies decreased to $118.3 million from $147.7 million year over year with $29.4 million of the change due to accounts moving from 30 - 89 days delinquent to 0 - 30 days delinquent. Total agricultural delinquencies increased to $17.3 million from $13.3 million year over year.
The following chart shows fluctuations in delinquencies greater than 30 days over the past five years for different loan types. Commercial loan and residential mortgage delinquencies continue to trend down from the highs experienced in 2009 and are now at the lowest level seen in over 10 years. Similarly, loan costs decreased from 0.06% to 0.09% year over year. The decrease in delinquencies coincides with the findings from the Examinations group that, overall, credit unions have improved their loan management processes.
Loan Mix and Yields
Total loans grew by 11.3%due to growth in all loan categories with the exception of personal loans.Personal loansdecreasedby $44 million(1.6%) year over yearto$2.71 billionand continue to represent a declining portion of the total loan portfolio mixat6.1% from 6.7% in 2015.
Competition in the residential mortgage market and low yields in the bond markets have resulted in floating and fixed rates that are near historical lows leading to continued strong demand for new mortgages. Mortgage loan rates are beginning to increase which should begin to have a positive impact on loan interest income in the near future.
The following chart illustrates the current loan portfolio mix and yields versus the values from 4Q15 and their notional impacts on gross interest revenues.
Liquidity and Borrowings
Year over year borrowings increased34.5%due largely to securitization of residential mortgages in order to make up the funding gap between the growth in assets and deposits. Securitization programs have increased by 31.5% in 4Q16while all other borrowings decreased. There are currently 17independent credit unions and 13 caisses populaires affiliated with La Fédération involved in securitization programs.DICO is monitoring the use of securitization programs due to the heavy reliance of this as a liquidity funding source by a few credit unions.
Liquid asset holdings increasedby $569 million to $5.32 billion improving the liquidity ratio to 11.26%from 11.20% in 4Q16. This ismostly attributableto increases in deposits at the leagues/centrals held for liquidity, commercial paper, banker’s acceptances and similar instruments.Liquidity at caisses populaires affiliated with Desjardins(5.13%) remains much lower than atcredit unions (11.83%)and the caisses populairesaffiliated with L’Alliance (15.65%).
The following chart provides a breakdown of liquidity sources. The bulk of liquidity isheld in “Deposits in a League or Central” (73.8%), followed by “Deposits in deposit taking institutions” (11.9%).
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 rectifypotential liquidity shortages.Credit unions are also encouraged to monitor and stress test their dependence on a single source of liquidity such as securitization in their models.
4Q16 SECTOR OUTLOOK, April 2017 1
Sector Financial Highlights 4Q 2016
4Q16 SECTOR OUTLOOK, April 2017 1
Sector Financial Statements 4Q 2016
Balance Sheet
4Q16 SECTOR OUTLOOK, March 2017 1
Sector Financial Statements 4Q 2016
Income Statement
4Q16 SECTOR OUTLOOK, March 2017 1
Selected Financial Trends
4Q16 SECTOR OUTLOOK, March 2017 1