Credit union savings slow as households loosen purse strings, report finds

Households slowed their rate of savings with Irish credit unions in the year to September – and even dipped in the final month of the period – as the sector tightened limits on customer deposits and individuals, and families loosened their purse strings as Covid restrictions eased.

Savings across the sector rose by 2.8 per cent over the year, after accounting for a 0.7 per cent dip in September, to €16.8 billion, according to the Central Bank’s latest annual report on financial conditions of credit unions, published on Tuesday. It followed a 7 per cent rise in savings over the previous 12 months, which added to the challenges in a sector where customer deposits have long far outweighed loans.

Savings

“This slowdown in [savings] growth may reflect steps taken by many credit unions to manage savings inflows and also some reversal of adverse Covid-19 effects,” the report said.

“Asset and liability management remains a key priority given balance-sheet imbalances which have been growing across the sector in recent years.”

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Many credit unions have imposed limits in recent years – as low as €10,000 in some cases – on the amount of savings they will accept from customers, as banks impose negative rates on short-term deposits accepted from the sector. The European Central Bank (ECB) is currently charging a rate of minus 0.5 per cent on the excess cash it takes from banks.

While credit unions participated in a wider recovery in credit demand in Ireland amid a phased reopening of the economy over the 12 months, the average player in the sector had just €27.10 out on loan for every €100 of assets as of September, close to historically low levels, according to the report.

The ratio is down from 49 per cent in 2007, and ranks among the lowest across credit union movements worldwide. The optimal loan-to-assets ratio is widely viewed to be about 50 per cent.

Even though the regulator has eased lending restrictions for the sector in recent years to give additional capacity for house and business lending, “credit union remains heavily dependent on unsecured personal lending”, the report said.

Total loans across the sector rose by 3.1 per cent in the year, to €5.25 billion. While the average level of loans in arrears rose from 4.6 per cent in September 2019 to 4.8 per cent a year later, at the height of the coronavirus shock, the ratio had fallen to a six-year low of 3.4 per cent as of the end of the latest reporting period.

Consolidation across the movement continued, with the number of credit unions in the State declining from 229 to 214 over the 12 months of the report. By comparison, there were 428 credit unions at the end of 2006.

Total surplus income reported by the sector rose by almost 68 per cent to €122.2 million, driven by releases of bad loan provisions.

"Notwithstanding some positive trends in the data, credit unions need to ensure that, to the extent that reported surpluses may have been impacted by one-off gains, this does not distract them from addressing the underlying sustainability challenge arising from the long-term divergence between lending and savings," said Patrick Casey, the registrar of credit unions.

“Addressing sustainability through business model change, including by availing of the capacity and scope within the existing regulatory framework, requires effective leadership, strategic thinking and sectoral collaboration, supported by strong governance and embedded risk management at a credit union level.”

Reacting to the report, Kevin Johnson, chief executive of the Credit Union Development Association, which has more than 50 credit union members, said the movement could double its total loans to €10.5 billion over time with an "appropriate legislative and regulatory framework".

A Government review of the policy framework around the sector, which started last year, is now at an advanced stage, Minister for Finance Paschal Donohoe said last month.

“The credit union movement could play a more active role, within their respective communities, in supporting housing association ownership, home ownership and retrofitting through sustainable and prudent lending, particularly as banks continue to reduce their presence in local towns and villages across the country,” Mr Johnson said.