On 17 December 2020, the Central Bank of Ireland published its latest update on the financial position of the credit union sector in Ireland.1
Nearly nine years on from the publication of the Report of the Commission on Credit Unions (the "Commission"), the sector continues to mature, consolidate and strengthen and while certain challenges remain (in particular rising cost income ratios, higher savings and lower levels of lending), the strengthened financial position of credit unions since 2012 has made the sector more resilient to deal with the current challenges. However, the Central Bank of Ireland warns that the economic outlook is uncertain with COVID-19 and Brexit impacts potentially yet to be fully realised. Good governance will be key to overcoming the challenges and credit unions will need to continue to monitor adverse trends while assessing the suitability and sustainability of its business model and strategic objectives.
In this insight we look at the development of the sector since the publication of the Commission and assess the future challenges for the sector.
Report of the Commission on Credit Unions2
The Commission was established after the financial crash to "review the future of the credit union movement and make recommendations in relation to the most effective regulatory structure for credit unions, taking into account their not-for-profit mandate, their volunteer ethos and community focus, while paying due regard to the need to fully protect depositors savings and financial stability."3
The Report resulted in an overhaul of the legislative and regulatory framework governing credit unions. A tiered approach to regulation of credit unions was recommended where different rules were to be applied depending on the nature, scale and complexity of the credit union and their respective operations and business models. Ultimately the Credit Union and Co-operation with Overseas Regulators Act 2012 provided the Central Bank of Ireland with powers to make regulations on regulatory requirements for credit unions.
The Report also made a number of recommendations including in relation to the voluntary restructuring of a sector in need of consolidation. At the time of the Report, there were 404 credit unions in Ireland with total assets of c. €13 billion. The Report called for the establishing the Credit Union Restructuring Board with the aim of achieving a lower number of larger credit unions through voluntary amalgamations and transfers of engagements4.
While some consolidation has been achieved, there is scope in the sector to move to a mature stage of development through diversification of business models and, if necessary further amalgamations.
The 2020 Central Bank update
At 30 September 2020 there were 229 trading credit unions; down from 243 at 30 September 2019 and 343 at 30 September 2015 and 409 in 2011. Meanwhile the number of larger credit unions (with assets over €100 million) has increased to 62 with smaller credit unions reducing to 10% of the total sector assets. This trend is set out in the table below:
| 2011 | 2015 | 2020 | |
| Number of credit unions | 409 | 343 | 229 |
| Total assets | €13.78 bn | €14.96 bn | €19.42 bn |
Number of credit unions with assets less than €40m |
295 | 227 | 88 |
| Number of credit unions with assets greater than €100m | 29 | 37 | 62 |
| Cost income ratios | 88.7% | 69% | 87% |
The sector has shown to be resilient and the sector continued to grow during 2020 with total assets amounting to €19.42 billion as at September 2020 with good reserves, liquidity and loan provisioning.
However, while there have been positive developments in the last five years in terms of the maturation of the sector, the sector will not be immune from the challenges posed by the Covid-19 pandemic. Lending decreased in 2020 slightly down from €5.11 billion in 2019 to €5.09 billion and there was a marginal increase in arrears. The return on assets also decreased during 2020 from 0.7% at 30 September 2019 to 0.4% at 30 September 2020 with 28 credit unions reporting negative ROA at 30 September 2020.5
The adverse cost to income ratio has also continued to trend in the wrong direction. A sustained decreased income from €626 million at 30 September 2015 to €573 million at 30 September 2020 is a further cause for concern in particular if loan book values and quality decline as a result of the pandemic restrictions in place.
The short to medium term outlook for the credit union sector
The financial strength of the sector overall will assist in protecting the sector from the challenges it will face but the growing gap between savings and lending will be a source of concern to credit unions boards and management.
The challenge now will be to reduce costs while at the same time increasing income through growing lending and closely monitoring its arrears position. Although new lending had been increasing year on year to 2019, 2020 saw a decline in new lending. The difficulty has been compounded somewhat by diminishing returns on investments despite an increased level of investment across a range of counterparties.
The nature and pace of recovery of the economy will dictate how credit unions will respond. A K-shaped recovery may impact certain credit unions more than others and may result in further consolidation of the credit unions while larger credit unions will rely on increased diversification of its product offerings and targeting membership growth.
The Central Bank of Ireland has warned that although the sector has shown resilience in 2020 due to strong reserves and liquidity positions, a continuation of the trends identified in the report "could see individual credit unions facing sustainability challenges over the medium term." Good governance will be key to ensuring credit unions remain resilient in the face of the economic outlook with the Central Bank identifying some concerns in respect of governance, credit, operational risk and business model risk in many credit unions in its PRISM Supervisory Commentary 2020.6
It will be important therefore for credit union boards to monitor the situation both from an operational perspective in the short term but also look to the medium terms strategic challenges that the credit unions will face in the near future to ensure ongoing ability to comply with Central Bank regulatory requirements.
Footnotes
2. Available here: https://assets.gov.ie/6252/060219170706-1c5116c9c54d49ad9dfed3de66d32f0c.pdf
3. The terms of reference of the Commission are set out at Appendix 1 of the Report.
4. Chapter 9 of the Report. By the time the Credit Union Restructuring Board ceased operations on 31 March, 2017, it had supported a total of 117 merger projects involving 212 credit unions.
5. Page 6 of the Report of the Central Bank of Ireland.
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