Coast Capital Savings and Meridian Credit Union lead Canadian credit unions planning to take advantage of regulations allowing them to expand across the country, challenging bigger competitors such as Royal Bank of Canada. (RY)
Credit unions, financial institutions owned by their customers and overseen by provincial regulators, are awaiting changes promised in the 2010 federal budget giving them the option to become federally-regulated entities. Canadian Finance Minister Jim Flaherty released draft rules this month.
“We’re going to be reviewing the regulations and legislative framework carefully to see if it presents opportunities to partner with another credit union in another province,” Sean Jackson, chief executive officer of Meridian, the largest credit union in Ontario, said in an interview.
Expanding beyond their home provinces will let the cooperatives compete with Royal Bank of Canada, Toronto-Dominion Bank (TD) and other lenders that are part of what the World Economic Forum has ranked the soundest banking system for four straight years. Credit unions had C$280.8 billion ($276.9 billion) of assets at the end of March, more than double a decade earlier, according to Credit Union Central of Canada, an association for credit unions.
“While their asset base is relatively small overall, for what it’s worth they have some fairly high penetration rates in terms of customers in some markets,” Jason Bilodeau, an analyst at TD Securities, wrote in a note to clients today.
Need to Expand
Canadians had C$234 billion in savings and deposits with 788 credit unions and caisses populaires as of March 31, according to Credit Union Central of Canada. The combined assets of the credit unions are about a third the size of assets at Royal Bank, the country’s largest lender. Canadian banks held C$1.28 trillion in deposits at the end of April, according to Bank of Canada statistics.
“There are some larger credit unions out there that are finding they’ve done pretty well in their own markets, but they need to expand to keep efficient,” Gary Rogers, vice president of financial policy at Credit Union Central, said in a July 6 interview. “They might find a friendly credit union of a similar size in another province that might be thinking the same thing, and they could merge.”
This expansion will pose a longer-term challenge for Canada’s banks, though there’s little for them to immediately worry about, National Bank Financial analyst Peter Routledge said in an interview.
“If the credit union movement in B.C. and the Prairie provinces amalgamated, there could be more price competition than there already is,” Routledge said. “They would have more scale and probably would be able to compete on price in a more threatening way.”
Choosing to Convert
The S&P/TSX Composite Commercial Banks Industry Index, which consists of the country’s eight publicly traded banks, has increased 1.8 percent this year, compared with a 4 percent decline for the broader S&P/TSX Composite Index.
Credit unions choosing to convert would fall under the oversight of Canada’s banking regulator, the Office of the Superintendent of Financial Institutions or OSFI, giving them the ability to operate nationally instead of being limited to their home provinces. Federal oversight would require them to adopt OSFI mortgage rules, including new guidelines that limit the size of loans secured by equity stakes in homes.
Credit unions have already undergone “significant” consolidation, with the 10 largest now representing 41 percent of all assets held by credit unions, according to the federal finance department.
Meridian has done two takeovers in the past seven years, including last year’s purchase of 19 branches from Desjardins Credit Union to add C$1.4 billion in assets.
“We’ll likely see some new entrants from credit unions in other provinces because Ontario happens to be one of the provinces where the market share of credit unions is relatively low,” said Jackson, who will join other cooperative officials this week at the World Credit Union Conference in Gdansk, Poland.
Coast Capital, the country’s second-biggest credit union with C$11.8 billion in assets and 475,000 members, may look beyond its home province for growth.
“We’ve always been interested in national expansion,” Tracy Redies, CEO of the Surrey, British Columbia-based lender, said in a July 11 interview. “There’s 10 provinces in Canada and there are opportunities probably in most of them. We just need to look at what makes the most sense.”
Acquisitions are only one option to expand for Coast Capital, according to Redies, who said the credit union has gained by wooing customers away from the banks. In the past five years, Redies said, 70 percent of Coast Capital’s new customers have come from the five-biggest banks.
“It’s important that the credit union industry as a whole has more flexibility in terms of growth options, because this is a scale business and growth is important,” Redies, 50, said.
Tamara Vrooman, CEO of Vancouver City Savings Credit Union, the country’s largest with C$16.1 billion of assets and 479,500 members, said the regulations offer “lots of options” including the opportunity to partner with other credit unions across the country. Vancity would consider such alliances, she said.
Product of Mergers
“We’re founded in 1946 and at last count we are the product of 54 mergers, so we definitely have a tradition of working with other credit unions over our history,” Vrooman, 44, said in a July 11 interview. “I would expect that if a credit union approached us and was interested in partnering with us, we’d obviously want to support the credit-union model any way we can, and we’d be open to having those discussions.”
Not all are interested in converting into a federal credit union, such as Desjardins Group, Canada’s largest cooperative financial group with 5.6 million members and 422 affiliated caisses.
“We are quite satisfied with our present status, that of a provincially regulated financial institution, which does not prevent us from being present and active in the rest of Canada mainly through our two insurance companies,” Andre Chapleau, a spokesman for the Levis, Quebec-based group, said in an e-mail.
First West Credit Union, Canada’s fifth-biggest, said it’s unlikely to look to get bigger by turning to the new rules.
“Our preference is to see credit unions retain their local identity and local decision-making through a partnership model, rather than through large scale mergers or aggressive national expansion exercises,” Shawn Neumann, chairman of the Langley, British Columbia-based credit union, said in a July 6 statement.
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