Spaghetti Westerns and Shakespeare:Outlook and Opportunities for
Ontario Credit Unions
A. Michael [email protected]
A. MICHAEL ANDREWS AND ASSOCIATES LIMITED Specialists in Financial Sector Policy, Strategy, Regulation and Supervision
Central 12009 Spring Conference
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Outlook and Opportunities
The economic forecast and financial system risks pose significant challenges
The impact will not be uniform across the financial sector, or across the credit union system
Opportunities exist, even though “true it is, we have seen better days”
William ShakespeareAs You Like It, Act 1 Scene 7
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Financial System Outlook and Risks Five main risks to
the financial sector1. Funding and
liquidity2. Capital adequacy3. Household balance
sheets4. Global economic
downturn5. Global imbalances
and currency volatility
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Five main risks to the financial sector
1. Funding and liquidity
2. Capital adequacy3. Household balance
sheets4. Global economic
downturn5. Global imbalances
and currency volatility
Financial System Outlook and Risks
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The (Relatively) GoodFunding and
liquidlyHousehold
balance sheets
Global imbalances and currency volatility
6
Funding and LiquidityEvents since mid-2007 have overturned many
assumptions about liquidity managementTriggered a rediscovery of the joys of retail
funding and boring retail bankingWholesale financing dried upIncreased competition for depositsFalling rates are compressing margins
Most credit unions continue to rely on traditional deposit mobilization—a strength relative to many financial institutions
7
Loan to Deposit Ratios
60
70
80
90
100
110
BC NB AB ON
L'Allia
nce MB NL SK PEINS
System averages, end-2007
Source: Calculated from Credit Union Central of Canada data.
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Ontario CU-CP Net Liquidity
101112131415
Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08
Cash+investments-borrowing (percent of assets)
Source: Calculated from DICO data.
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Household Balance Sheets
80
100
120
140
160
180
1990 1994 1998 2002 2006
United States
Canada
Household debt(percent of personal disposable income)
Source: Bank of Canada Financial Stability Review, Dec 2008.
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Household Balance Sheets
60
80
100
120
140
1990 1994 1998 2002 20066
8
10
12
14
Debt-to-income ratio (left scale) Debt-service ratio (right scale)
Indebtedness Indicators
Source: Bank of Canada Financial Stability Review, Dec 2008.
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Global Imbalances and Volatility
Credit unions have less direct exposure than many other financial institutionsFew trading assetsLittle currency exposureLittle direct country-risk
exposureIndirect risks from the impact on
investor and consumer sentiment
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The Bad
Capital Adequacy
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Capital Adequacy
So far so good, but it will get worse before it gets better
Trend in delinquency and non-performing loan coverage is a concern
Credit unions are limited in their ability to deal with losses—can’t go to the market with a new issue, so retained earnings is the only real buffer
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Ontario CU and CP Asset Quality
050
100150200250300
$ m
illio
ns
Q4-06
Q1-07
Q2-07
Q3-07
Q4-07
Q1-08
Q2-08
Q3-08
Delinquent loans 30-90 days Delinquent loans > 90 days
Total loan loss allowance
Source: Calculated from DICO data.
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Capital Levels and Asset Quality
Source: Calculated from DICO data.
6.97.07.17.27.37.4
Q4-06 Q1-07Q2-07Q3-07 Q4-07Q1-08Q2-08 Q3-088090100110120130
Regulatory capital/total assets (left scale)Loan allowance/>90 day delinquent (right scale)
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And the UglyGlobal Economic
Downturn
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Global Economic Downturn
0400800
1200
98 99 00 01 02 03 04 05 06 07 08
Manufacturing Jobs in Ontario (000s)
Global decline in demand is hitting Ontario manufacturing, but
The loss of manufacturing jobs is part of a long term trend that began before the cyclical downturn started
Source: Statistics Canada Table 282-0088.
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Strength In Hard-Hit Regions
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Strength In Hard-Hit Regions
05
1015202530354045
Northern Southwestern Central GTA Eastern
perc
ent o
f pro
vinc
ial t
otal
s
Population Credit Union Assets
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Strength in Hard Hit RegionsCU-CP market share in Ontario is about 5
percent overall, but only 2 percent in GTA35 percent of the population of Northern
Ontario are CU-CP members
Sources: DICO, CPA, Statistics Canada.
020406080
GTA Outside GTA
Population Bank Branches CU-CP Locations
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Strength in Hard-Hit SectorsDespite ongoing consolidation, still
some closed-bond industrial-based credit unions
Many of the largest community credit unions have strong roots in the auto and steel sectors
Plunging commodity prices are another blow to Northern Ontario, already reeling from a long decline in the forestry sector
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Opportunities in Challenging Times
“Ill blows the wind that profits nobody”William Shakespeare
Henry the Sixth, Part III, Act 2 Scene 5
Credit unions able to withstand the tempest can build on their strengths
Supporting local businesses Strengthening ties to the communityIncreasing market share
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Prospering in Tough TimesThe population of Sault Ste. Marie declined
by 5.6 percent from 1996 to 2001Thousands of jobs were lost in a small
communityUnemployment peaked at over 12
percent, more than twice the provincial average
Community First (formerly ASCU) grew by more than one-third, significantly increasing its market share as the banks cut back
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Prospering in Tough Times“People know that we are not going
to pull out or cut back because of the latest doom and gloom report in the newspaper. These business owners know they can count on us, and have become our best salespeople.”
Aldo Greco, quoted in A. Michael Andrews and Associates, Strengthening Ontario Communities:
The Contribution of Credit Unions and Caisses Populaires
http://www.ontariocreditunions.com/andrews/
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5% Market Share—25% SME
$15 billion
South-western
NorthernGTA
Eastern
Central
Banks 75%
CU-CP 25%
Business Credit OutstandingAuthorizations under $1 million, end 2006
Source: Statistics Canada Table 176-0045 and DICO.
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5% Market Share—16% AgAgricultural Credit Outstanding, end 2006
Source: Statistics Canada Table 176-0045 and DICO.
$4.8 billion
Banks84%
NorthernGTA
EasternCentral
Southwestern 12.5 %
CU-CP 16%
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Good Jobs in Smaller Communities
Credit unions and caisses populaires employ over 7,000 people in Ontario
Two-thirds of all financial sector jobs are in the GTA, but 80 percent of credit union and caisse populaire jobs are outside the GTA
Credit unions bring head office jobs to smaller communities
Average credit union wages are above the provincial average
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Community SupportMany credit unions dedicate two,
three or even five percent of pre-tax profits to community initiatives, compared to the one percent average among larger financial institutions
Especially important as other businesses and individuals cut back
Opportunity for credit unions to differentiate themselves and capitalize on community support
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In the Midst of the Tempest
What’s done can’t be undoneWilliam Shakespeare
Macbeth, Act 5 Scene 1
Just as the rising tide of fifteen years of unprecedented growth lifted all boats, the swirling eddies of the global economic downturn will test the soundness of all hulls and crew
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Drawing On Inherent Strength
Our remedies oft in ourselves do lieWilliam Shakespeare
All’s Well That Ends Well, Act 1 Scene 1
Credit unions that built a strong buffer of excess capital during the good times are well placed to weather the storm
Credit unions have a remarkable opportunity to differentiate themselves from the competition
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Seizing the OpportunityRequires a sound prudential base—capital
and liquidityToo late now to wish we had done things
differently in the good timesBuilding market share and brand
awareness Supporting businesses when the banks
are cutting backAvoiding layoffs and cutbacks in
community supportGetting the story out about credit unions
supporting their community
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Looking Ahead
They say, best men are moulded out of faults, and, for the most, become much more the better for being a little bad.
William ShakespeareMeasure for Measure, Act V Scene 1
So lets hope that your credit union, and the system as a whole, proves to be only a little bad, and emerges much stronger from the tempest
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