Lending growth constrained for credit unions

The short- to medium-term outlook for credit quality in the credit union sector is somewhat sour, with those reliant on securitisation suffering pressure on profits. This will, in turn, accelerate consolidation in the industry according to the Moody's report published last week, Australian Credit Unions: 2008 Outlook.

The findings highlight that the negative outlook principally applies to credit unions with a structural reliance on wholesale funding, in particular securitisation, with the report considering the term RMBS market essentially closed.

Louise Petschler, chief executive officer Abacus  (the industry association for Australia's 144 credit unions and mutuals) considers the Moody's findings on securitisation as "overstated".

"On average our members' use of securitisation is about twenty per cent, which is quite a modest amount.

"Primarily our members have used securitisation as a tool to manage capital and risk management, and to help growth due to capital constraints.

"In Abacus's view, Moody's is overstating our exposure to the now frozen securitisation market."

In regards to increased merger activity due to financial constraints, Petschler said Abacus is not forecasting a radical shake-up in the sector.

"When you do see mergers they will probably be driven, as they have been over the last decade, by a range of factors including a chase for scale for the capacity to invest in new systems for their membership, to look for growth markets and where there is a natural alignment between institutions."

Consolidation is a long running theme in the credit union sector, which has seen at best one or two new entities formed since regulation of the smaller, deposit taking sector tightened in the early 1990s.

This week's example of the trend is the merger agreement between Savings & Loans with Austral Credit Union. The latter has $90 million on balance sheet mortgages compared to $330 million off.

Under the proposed merger, the Austral name will no longer exist with the 15,000 members having their four branches, six agencies and 14 automated teller machines rebranded to Savings & Loans.

Austral Credit Union had securitised over three quarters of its residential mortgages, but Petschler considers this a rare example and not a true reflection of credit union funding as a whole.

"Over fifty of our members use no securitisation at all. Of the roughly ninety that do, eighty per cent of them securitise less than twenty per cent, and over half have less than five per cent.

"Securitisation for credit unions is largely done through the Cuscal program, Integra or Trinity, so they are quite standard warehouse facilities."
Petschler does agree factors for seeking merger partners by some of the smaller credit unions will include their percentage levels of securitisation, and ability to source funds.

"There are a small number of credit unions and mutual building societies that have been more aggressive users of securitisation as part of their business strategy, and they will either need to adapt their business strategy, or, particularly if they are at the smaller end, are more likely to look for a larger merger partner.

"The Austral example is an interesting one, because Austral is a much smaller institution (than Savings & Loans). So we will see a few of those."

Petschler puts the number of Abacus members with securitisation levels above fifty per cent at five.

With the securitisation markets virtually closed, retail deposits become even more important to fund credit union loan books, but Petschler points to increased competition as an obstacle.

"Our listed colleagues who have been much more aggressive users of capital markets for funding have now discovered in these challenging times the great attraction of having retail deposits.

"We recognise we are going to face a lot of very aggressive competition.

"Our deposit growth is still tracking at about ten per cent, so that's fairly consistent."

Petschler highlights that deposit growth is still outpacing that of the loan book, with deposit growth now set to match funding targets.

Mutual building societies and credit unions together are the second largest gatherer of household deposits after the Commonwealth Bank.