The Canadian credit union industry continues to merge and amalgamate at an accelerated pace, as the sector modernizes to become a more attractive and competitive option for consumers in financial services.

The trend toward co-operation or consolidation is happening at all three “tiers” of the industry — among individual provincially regulated credit unions; at the provincial “central” level; and among the national financial services firms, such as Vancouver-based Credential Financial Inc. and Saskatoon-based Concentra Financial Services Association, which provide support services to the provincial credit unions and which are owned by them either directly or indirectly via the centrals.

On top of that, the trade, investment and labour mobility agreement (TILMA) signed by both the British Columbia and Alberta governments, which is scheduled to come into force next year, should harmonize the regulatory playing field for credit unions in the two provinces, presumably increasing the chance of interprovincial partnership or consolidation.

This trend toward getting bigger, however, is causing some tension in the industry, particularly among smaller credit unions, which tend to be strongly independent and locally minded. They also are looking for ways to provide better services to their customers, but without necessarily allowing themselves to fall into a merger.

And there is concern among some that a credit union industry that becomes preoccupied with getting bigger will forget the core principles — democratic membership, community values, people before profits — that made credit unions appealing to consumers/members in the first place.

Industry leaders insist that there will always be a place for small, fiercely local credit unions.

“Small and medium-sized credit unions want to be able to serve their market and their members, their community — and to be seen as doing that,” says Don Rolfe, president and CEO of the Credit Union Central of B.C. in Vancouver. “So, I don’t see it as a situation in which they’re just going to fold their tent.”

But it is also likely that smaller credit unions will have to find ways to co-operate and build alliances to stay relevant to their members, industry executives says. Merged credit union entities at the provincial and national level will help smaller credit unions access capital more easily and help the entire credit union sector retain that community focus.

“Preserving local autonomy is key,” says Myrna Bentley, president and CEO of Concentra, which provides corporate financial services, corporate banking and trust services to credit unions across the country. “[The credit union industry] can be both that big and that local presence.”

The move toward consolidation in the credit union industry is being fuelled by several factors, including the need to access capital more cheaply and readily, to provide members with a wide variety of quality products and services, to leverage capabilities and expertise across the industry, to attract and retain talent, and to build a stronger and more unified credit union brand.

One of the most significant moves will be the merger of the B.C. and Ontario credit union centrals into a new entity, Central 1 Credit Union, which will be headed by Rolfe. The new entity, which is slated to launch on July 1, will allow credit unions in both provinces to access capital at better terms, among other things.

Central 1 is intended to be the first step in the eventual amalgamation of all provincial centrals outside Quebec, Rolfe says, but any moves to incorporate other centrals will probably have to wait until Central 1 is a going concern.

“The other centrals will take a wait-and-see attitude,” Rolfe says. “More discussions will prevail in the fourth quarter of this year, as opposed to right now.”

In Atlantic Canada, merger discussions are ongoing between the centrals of New Brunswick, Nova Scotia and Prince Edward Island, an idea that has been bandied about for years but has never been put into action. (Newfoundland and Labrador doesn’t have a central.)

While Rolfe expects that the merger of all centrals into one entity will occur over the next three to five years, any type of arrangement that pulls together Central 1 and Lévis, Que.-based Desjardins Group is much further off. “That would be a monumental achievement,” he says. “But I don’t see that in short order.”

TWICE DELAYED

The intended merger of the B.C. and Ontario centrals, which was announced in 2007, has already been delayed twice due to problems related to the fact that the Ontario central held some $161 million of asset-backed commercial paper. A deal has been struck that will see the paper moved off the Ontario central’s books and placed into a special-purpose vehicle whose assets under administration will be held by Ontario credit unions on a pro-rated basis.

@page_break@“Their intention is to hold the paper,” Rolfe says, “and sell it sometime down the line when valuations increase.”

Regarding the third tier of the credit union system, Rolfe sees an eventual amalgamation of national-level credit union support entities such as Burlington, Ont.-based insurance provider Cumis Group Ltd., wealth-management firm Credential Financial, Concentra and others.

“That would require them determining how best to structure themselves,” he says. “I believe the third tier will come together as well.”

A streamlined credit union infrastructure, with one central and a consolidated support structure, better suits an industry that has amalgamated over the years from thousands of credit unions to several hundred, says Bentley. That is especially true when one considers that a relatively small number of credit unions hold the great majority of system AUA.

“If you have that consolidation and strength at the grassroots level of the credit union system,” she says, “then it should follow that the infrastructure built to support it, both the second tier and the third tier, should also have a similar review of the infrastructure or support function they provide.”

There’s continued hope that Desjardins and the credit union system outside of Quebec can find ways to collaborate to both groups’ benefit. In September 2007, Northwest Mutual Funds Inc., owned by Desjardins, and Ethical Funds Co., owned by the provincial credit union centrals, announced they would create a new fund firm, Northwest & Ethical Investments LP, to leverage the strengths of both parent companies. Canadian credit union executives have targeted wealth-management products and services as an area in which credit unions need to improve to drive profitability and sustainability.

“That partnership will go a long way to ensuring success in wealth management,” Rolfe says.

As well, individual credit unions are continuing to merge across the country. The most significant recent combination is the merger of three of the four largest credit unions in Alberta — Servus Credit Union of Edmonton, Community Savings Credit Union of Red Deer and Common Wealth Credit Union of Lloydminster. The combination will create a dominant player with some $8.6 billion in AUA and a branch network that stretches right across the province.

HIGHER PROFILE

“The merger gives the Alberta credit union system a big advantage, in terms of profile provincially and for the retention of business,” says Graham Wetter, the president and CEO of Credit Union Central Alberta. “It positions us in a much stronger way against our competitors, [Edmonton-based] ATB Financial and the banks. We start to look much more like a provincial force.”

In the backdrop to the merger are the continuing negotiations between the B.C. and Alberta finance departments, as well as the two provinces’ credit union systems, on how to harmonize regulations regarding credit unions in both provinces.

While there appears to be good dialogue between the two provinces and their credit union systems, a number of key issues have emerged that need to be resolved if the deal is to go through, insiders say — issues that may delay the implementation of TILMA past its target date of April 2009.

The first issue is whether the deal is even constitutional. “There is a constitutional issue related to whether provinces can legislate in the banking field interprovincially,” says Wetter, who has been involved in the negotiations. “There’s a difference of opinion between B.C and Alberta.”

Another key item is deposit insurance. In B.C., deposit insurance is limited to $100,000, while Alberta has unlimited deposit insurance. “There’s no way Alberta is going to give that up,” says Rolfe, who also has been a part of the negotiations. “B.C. would have to adopt that type of policy, and [the two sides] will have to agree who manages the deposit insurance — whether it’s one province or jointly.”

In fact, there are a number of complex issues that need to be ironed out before the deal goes through. And the fact that B.C. has a fixed election date of May 2009 could be another factor in whether the deal is implemented on time.

“There wasn’t a lot of consideration given to the logistics to getting all this done by April 2009,” Wetter says. “But it’s by no means not doable. The B.C. and Alberta governments are committed to TILMA.” IE