Restructuring looms for community-based lenders

Two years ago the biggest credit union in Ireland, St Raphael’s – which serves gardaí and their families across the State – announced it was placing a cap on the loans it issued to its members.

The credit union had growing “doubtful debts” of €13 million and was pursuing almost 20 cases to recover assets from its members through the High Court.

Since then numerous other credit unions across Ireland have run into trouble. Questions have been raised about the solvency of Newbridge credit union, which has had an Ernst & Young executive installed at the helm by the Central Bank.

Ireland has one of the biggest networks of credit unions in the European Union, with more than 400 branches controlling billions of euro for almost three million members.

However, 58 per cent of institutions are under lending restrictions.

In a statement to the Dáil this month, Minister for Finance Michael Noonan said: "It has been necessary to put lending restrictions in place in credit unions where there are regulatory concerns about the operation . . . and the resultant risk to members' savings."

The future and reform
Restrictions on the size of loans credit unions can give members come from the Central Bank, which will manage a number of big reforms planned for the sector.

Guidelines brought in last December under the Credit Unions and Co-operation with Overseas Regulators Act will mean the sector has increased capital requirements, management will be under more scrutiny and many credit unions could face restructuring.

Deposits of up to €100,000 at credit unions are covered under the Deposit Guarantee Scheme.

Credit unions have been forced to keep 0.2 per cent of investors’ assets on deposit at the Central Bank since December 2012.

The bank is also in the process of drawing up a fitness and probity code for the industry, which should be in place in the second half of the year.

However, proposed restructuring could cause the biggest changes in the sector. The Credit Union Restructuring Board, or ReBo, was set up last September and will assist credit unions that need or want to merge.

The regulator is pulling no punches in how it will deal with under-capitalised or struggling community lenders.

Addressing the heads of Irish credit unions this month, the Central Bank's recently appointed registrar of credit unions, Sharon Donnery, said: "We will require credit unions which we find to be below the minimum regulatory capital of 10 per cent to either recapitalise or seek a restructuring solution.

"The time allowed for recapitalisation to happen will be dependent upon the level of capital in the credit union requiring intervention. Our policy also provides for the winding up of insolvent credit unions where necessary."

Restructuring in the sector
So just how widespread could the changes be?

More than 80 per cent of credit unions reported at least 10 per cent of assets as total realised reserves at the end of 2011, but Tim Scanlon, head of the financial institutions group at Matheson Ormsby Prentice, says restructuring could be more common than expected.

“There’s a significant number of credit unions which are under-capitalised and I think that you could deduce from that that there are a significant number of credit unions, which, in the interests of their own financial stability, should certainly be looking to restructuring or merge into a larger, more financially stable credit union.

“It’s going to become increasingly difficult for many in the sector, certainly smaller credit unions, to maintain competitiveness . . . simply because of their scale. And it may be the case that they would be in a better position to grow their business and provide an expanded range of products and services for their members if they merged,” adds Mr Scanlon.

Industry representatives say the 10 per cent targets set for them are unfair and remain above what is required from banks.

"We think they're a bit too high. Credit unions have managed to deal with them and provide reserves to required capital levels. We object to it but it's being dealt with," says Irish League of Credit Unions chief executive Kieron Brennan.

However, Mr Brennan says the restructuring of credit unions will ultimately be a positive thing.

"Restructuring is not just about capital requirements. Many credit unions look at it in a more positive way. They can come together in order to provide additional services to their members which they couldn't do as smaller credit unions," he continues.

Assets safe
If credit unions do undergo restructuring, investors shouldn't be concerned about their assets.

“Essentially all of the assets and liabilities of that smaller union are merged into the larger credit union so there’s no impact on those underlying assets,” says Mr Scanlon.

“It’s not akin to a liquidation scenario or an examination: there’s no impairment of the assets.”

Perhaps more importantly for most investors, the face of community services won’t change, according to Brennan. “The important thing is that the footprint remains the same. In the main the local offices will remain where they are, [and] back-office functions will be merged to allow them to do the same for their members,” he says.

*This article was edited on May 21st.