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Ideal Savings lowers ALL rates
April 23, 2019
8:28 am
Top It Up
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April 23, 2019
8:49 am
Doug
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This does make sense and, even with this drop, they're still market leading among the Manitoba credit unions with virtual banking operations in terms of GIC rates and tied or close to tied in HISA rates. I have been reviewing balance sheet and profitability data for the various Manitoba CUs and mid-sized banks and, looking at their 2018 annual report, they had $474,496,996 in deposits outstanding. Dividing the interest paid amount to members of $8,808,611, I get an effective average interest rate of approximately 1.85%. Taking their interest received on loans and mortgages of $16,110,053 and dividing that by their loans receivable amount of $452,812,996, I get an effective average interest rate of approximately 3.55%. Subtracting former from the latter, you get an effective net interest margin of 1.70%, which is significantly below the 2.1-2.5% that the major banks and comparable credit unions strive to achieve. sf-cool

In sum, I think they can still maintain their existing deposit base at Ideal Savings and grow it modestly. This should just help them from a profitability perspective (I noted they had a small net loss for 2018).

(Note that the above amounts reflect the balance sheet data for and the total interest paid to both branch-based Carpathia and virtual Ideal Savings members. Interestingly, they were actually profitable before taking a non-cash charge for loan loss provisions, which equated to slightly more than their gross operating, pre-tax income.)

Source: Carpathia Credit Union, Ltd, 2018 annual report, https://www.carpathiacu.mb.ca/SharedContent/documents/AnnualReports/2018AnnualReport.pdf

Cheers,
Doug

April 23, 2019
11:34 am
Loonie
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Thanks for your work on this, Doug.
I presume that their operating costs have to come out of that 1.7% margin. I would think though that their costs would be lower per dollar of business than that of the Big Banks.

April 23, 2019
11:47 am
Doug
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Loonie said
Thanks for your work on this, Doug.
I presume that their operating costs have to come out of that 1.7% margin. I would think though that their costs would be lower per dollar of business than that of the Big Banks.  

No problem, Loonie. Thank you, too, for your thoughtful and insightful replies to so many threads (including many I've created or otherwise replied to). sf-cool

Yeah, their operating expenses would definitely be deducted from their gross operating margin. They don't seem to disclose an "efficiency ratio" that the "Big 5" banks do, but if that's what you mean by "costs per dollar of business," actually CUs' costs per dollar of business is almost always higher than the major banks. The mid-sized direct, retail-oriented banks like Home Capital Group and Equitable Group generally have the lowest efficiency ratio (lower = better), at or below 40%. I haven't calculated Tangerine's recently, but would like between the lowest of the "Big 5" and Home Capital/Equitable. Looking at "Big 5" efficiency ratios, they can be into the low 60s, but you really have to look at their domestic operations and exclude their international and investment banking operations for a better comparison. On that basis, Scotia and BMO are usually the lowest (high 40s to low 50s), followed next by TDCT, and then RBC and CIBC in the low to high 50s. Roughly comparable efficiency ratios for the CUs range from the high 60s to low 80s, but there are outliers, I'd imagine.

Laurentian Bank is a bit of an exception, with efficiency ratios comparable to the CUs in the low to high 70s, but they're trying to bring that down with branch closures, a new core banking system, planned new Internet banking system, and other technology upgrades and streamlined processes. For comparison, Canadian Western Bank probably has the lowest efficiency ratio of the bricks-and-mortar domestic banks. HSBC, despite their aggressive cost cutting and streamlining, remains stuck in the mid to high 50s and even the low 60s, in part due to their having to add numerous Financial Crime Compliance staff.

Still, if Carpathia can grow their NIM a bit, ultimately that should help their bottom line. Their loan loss provisions in 2018 were higher (~$2.8 million) than even Sunova Credit Union, which is roughly 4-4.2 times Carpathia's size as measured in assets. So, either they need to beef up their credit decisioning and risk processes or their significant Ukrainian clientele has significantly higher default rates.

Cheers,
Doug

April 23, 2019
3:52 pm
AltaRed
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Per Doug's analysis, volume matters. A good reason for small CUs to amalgamate. Go big or go home....

April 23, 2019
4:09 pm
Top It Up
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AltaRed said
A good reason for small CUs to amalgamate. Go big or go home....  

https://cu2019.ca

April 23, 2019
5:24 pm
Doug
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Top It Up said

https://cu2019.ca  

Thanks, Top It Up, for mentioning that. I was going to start a thread about that, but yes, that's a good, small step they've taken. While it grows their asset base by about 15%, it still only adds ~$100 million in assets and 1 additional branch (North Winnipeg Credit Union wasn't even in the top 100 Canadian credit unions), to 6 physical branches, all in Winnipeg, plus the virtual Ideal Savings branch. They'll still be at about $600 million in assets and will be quite a small credit union. Hopefully, they'll start branching outside of Winnipeg by reaching out to other independent credit unions in other Manitoba municipalities and Manitoba can start combining their credit unions such that there ends being only between 6-10 credit unions (plus the Caisses Financial Group).

Cheers,
Doug

April 24, 2019
10:14 pm
Loonie
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Thanks for all the interesting info in #4, Doug. This is something I don't know anything about. I find bank annual reports daunting and often unintelligible.
Would the ratios you are citing include dividends paid out to shareholders? They are technically optional expenses but in fact the banks couldn't survive without them; and they are not an expense that CUs must incur. If they are additional, would that change the ratios significantly?

Of course, when you consider the crappy interest rates offered bythe most efficient banks, the low ratios are not really surprising.

All banks and credit unions started quite small. We must ensure that new ones can still be created or else we will develop a monopoly system with little competition.

April 25, 2019
7:47 am
Doug
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Loonie said
Thanks for all the interesting info in #4, Doug. This is something I don't know anything about. I find bank annual reports daunting and often unintelligible.
Would the ratios you are citing include dividends paid out to shareholders? They are technically optional expenses but in fact the banks couldn't survive without them; and they are not an expense that CUs must incur. If they are additional, would that change the ratios significantly?

Of course, when you consider the crappy interest rates offered bythe most efficient banks, the low ratios are not really surprising.

All banks and credit unions started quite small. We must ensure that new ones can still be created or else we will develop a monopoly system with little competition.  

Hi Loonie,

On dividends paid out to shareholders, no that doesn't affect their efficiency ratio as that's paid out of after-tax income and cash flows. The "Big 5" banks have target dividend payout ratios of between 40-50% of their net income. Some, like Scotia and CIBC, are at the upper end of that range. Others are closer to the low 40s. Canadian Western Bank pays out about 30-40% of its net income and Equitable Group is even lower than that. HSBC Bank Canada has only one common shareholder (their annual reports even reflect that, with wording like, "earnings attributable to the common shareholder") in HSBC Holdings plc and pays out most of its net income to its London shareholder. sf-cool

Looking at Scotiabank's efficiency ratio, which they refer to as a productivity ratio, and define in their glossary on page 238 as "a measure of the bank's efficiency. This ratio represents operating expenses as a percentage of total revenue. A lower ratio indicates improved productivity." Essentially, it's a ratio, expressed as a percentage of total revenue, that shows what it costs the bank to make a dollar in sales. You can manually calculate this, but the "Big 5" banks seem to live in simple ratios (probably because management looks at them religiously in determining their business direction), so they provide them near the front of the Management's Discussion and Analysis portion of the report. They'll usually even provide productivity, or efficiency, ratios by business unit so you can analyze which business unit has the lower costs. For instance, in 2018, under the "T3 - Financial highlights" sub-section/table (pg. 23), it had a group productivity ratio of 52.3% and an adjusted productivity ratio (you'll need to refer to their calculation of non-GAAP/non-IFRS adjusted results section at the beginning of the MD&A to see what adjusted results take into account, but generally exclude one-time income or expenses related to acquisitions, disposals, and severance costs) of 51.7%. That means that it basically costs them, excluding things like loan loss provisions and income taxes, $0.523 to earn $1.00 in global revenue.
You can also see the non-adjusted productivity ratio at pg. 31 of the T-13 Non-Interest Expenses and Productivity table for the group (for Scotiabank). Under "Business Line Overview," we can look at the tables by business unit and see that Canadian Banking had a productivity ratio of 49.8%, with a footnote to refer to the calculation of non-GAAP/non-IFRS results, so it's unclear if this is the reported or adjusted productivity ratio or if that's just a general note. It doesn't say "adjusted productivity ratio". Nevertheless, we should assume it's the adjusted productivity ratio and, if it's the reported productivity ratio, the adjusted ratio would be about 1-1.5% lower. sf-cool

By comparison, with the same footnote so we'll assume adjusted productivity ratio (with the reported ratio slightly higher), International Banking was 53.5%. Global Banking & Markets was 49.3%.

Scotiabank usually has the lowest productivity/efficiency ratio as they are the most laser-focused and ruthless on cost cutting. They're in another phase of their "structural cost transformation," which they're probably more than half way through, to further automate processes and eliminate non-sales-related jobs from their branches. (My mom was probably one of the few people to get a severance representing about 1 year of her part-time wages - $20,000 - on January 1, 2012, when they wanted to eliminate her position as a Customer Support Representative working in the branch's mid-office and doing non-customer facing tasks that included loan and investment paperwork for the Financial Advisors & Personal Banking Officers, answering the branch's general phone line for all calls from customers who called the contact centre and wanted to speak to someone at the branch, etc. If they'd waited 6 months, though, to July 1, 2012 when she would've been eligible to early retire with a reduced pension, she would've been eligible to receive retiree health and dental benefits. So, you can bet they took that into consideration. As far as I know, no mid-office exists in a Scotiabank branch anymore and their paperwork processing as been simplified to the extent that it's all done automatically by computer systems, by the Financial Advisors/Personal Banking Officers themselves, and by their Centralized Mortgage Unit and Centralized Accounting Unit.)

Basically, I like to look at all the key metrics at the front of annual reports, sometimes read the CEO's letter (or skim it) for important items of the year (i.e., acquisitions, dispositions, new technology enhancements, and new products and services), read the top-line highlights from the "Group Financial Performance" and then read the highlights from the "Business Line Overview". I skip all the "Risk" stuff, or most of it, especially when they talk about quantitative "Value-at-Risk" models that I don't understand. I do look at the detailed balance sheet information from the "Risk" section in terms of their loan maturities, drawn versus undrawn credit facilities, and deposit (GIC) maturity profile and what percentage is held in GICs versus chequing/savings accounts (if you're curious, most of the banks' deposit balances are held in non-interest bearing, or very low interest bearing, chequing accounts, meaning that's a good source of their profitability). sf-cool

Cheers,
Doug

April 25, 2019
7:57 am
Doug
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Loonie said
All banks and credit unions started quite small. We must ensure that new ones can still be created or else we will develop a monopoly system with little competition.  

Yes, exactly. I don't have any statistics on new credit union creation, but would suspect it's been many, many years since a credit union was created by incorporation from a group of like-minded citizens/residents. While I agree, in principle, with credit unions amalgamating to gain scale and help to allow them to afford the required technology improvements and offer better products and services, I do worry that if they get too big, they'll "forget their roots" and close their very small, less-performing branches in isolated communities and "chase the wealth" like the banks instead of realizing that by "being the last bank in town" in a lot of small comunities, they've essentially got the market cornered as many people will always appreciate face-to-face service if not for counter service, for financial advice and product counselling. sf-cool

I'd be curious to know how responsive Desjardins is to meeting the needs of its most rural branch members as that could be potentially telling for what the future holds for the English language credit unions as they grow through amalgamation.

Interestingly, I was just reading recently about Affinity Credit Union closing 8-10 branches in small, rural Saskatchewan communities (they're the biggest credit union in Saskatchewan by branches). What communities were those and how many active members did each branch have? Were they the "last bank in town"? And, how far is it to the nearest town?

I would be fine with Canada Post getting back into postal banking by contracting, on a fee-for-service basis with the banks, to allow transaction service to banks' customers and also to offer their own banking products and services, but I worry that might accelerate bank and even credit union branch closures in small and rural towns, as it seems to have done in the UK. Also, it may help to insulate Canada Post's structurally high labour costs instead of restructuring their pension plan and wage rates to bring them in line with the market.

Cheers,
Doug

April 25, 2019
8:45 pm
Loonie
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it's my understanding that credit unions usually are founded because their members couldn't get service from traditional banks due to discrimination, not understanding their culture, etc.
To the extent that this problem has been solved, there will be less motivation to start new ones.
I can think of a couple that started in Toronto within my lifetime. I think one of them still exists but not sure what happened to the other one. I believe that the one that still exists (I cant remember the name) serves the artistic community, people with irregular incomes who are not looked upon kindly by banks.
Small business people are another group that are frequently given a hard time by banks, but, as far as I know, they have not formed a CU.
Farmers have often had trouble too This may explain why there are so many CUs in MB, combined with immigration of non-English-speakers.
My father used to belong to one that was related to his employment, largely because they had better mortgage rates, but that was in the 1950s.

April 26, 2019
6:15 am
Doug
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Loonie said
it's my understanding that credit unions usually are founded because their members couldn't get service from traditional banks due to discrimination, not understanding their culture, etc.
To the extent that this problem has been solved, there will be less motivation to start new ones.
I can think of a couple that started in Toronto within my lifetime. I think one of them still exists but not sure what happened to the other one. I believe that the one that still exists (I cant remember the name) serves the artistic community, people with irregular incomes who are not looked upon kindly by banks.
Small business people are another group that are frequently given a hard time by banks, but, as far as I know, they have not formed a CU.
Farmers have often had trouble too This may explain why there are so many CUs in MB, combined with immigration of non-English-speakers.
My father used to belong to one that was related to his employment, largely because they had better mortgage rates, but that was in the 1950s.  

Yeah, that's all true, Loonie, but, like you I think, I do worry that because it's also not as easy as it once was (new capital requirements and legal hurdles) to form a new credit union, that the large credit unions may start being less responsive to their members' interests and wants and then people essentially have a choice between a large bank that doesn't listen to them or a large credit union that might listen to them, some of the time.

Cheers,
Doug

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