Canada’s big banks could face a strategic challenge from credit unions, according to a new report from Moody’s Investors Service.

Moody’s reports that credit unions currently account for a 16% share of domestic deposits and a 19% share of residential mortgages, and it predicts that both are likely to rise over the long term.

The rating agency notes that the federal government’s plans to allow credit unions to incorporate federally will allow them to build a national branch networks, which, along with consolidation and operational improvements, will improve their ability to compete with the banks.

The government indicated in the latest federal budget that it will introduce legislation to allow credit unions to incorporate as federal entities, enabling them to create nationwide branch networks. According to Moody’s, this development could further enhance the credit unions’ franchises.

“The traditional banks can offer their customers nationwide banking and access to ATMs from coast to coast,” said Ali Mozaffari, Moody’s analyst, and author of the report. “This development could lead to credit unions having a stronger national presence.”

Another major factor in further growth will be the credit unions’ ability to improve their risk management capabilities as their operating models become more complex, Moody’s adds.

“Canadian credit unions offer their customers access to many traditional banking services — comparable to the big retail banks. In addition, credit unions tend to pay out dividends to their customers if they generate a profit, which is very appealing to many customers,” said noted Mozaffari.

Moody’s notes that credit unions have made strides to centralize activities, and that they are increasingly utilizing the support of credit unions centrals. “The credit union centrals provide the necessary framework for these organizations to grow over time,” said Mozaffari.

Ultimately, he said, a smaller number of centralized credit unions could pose a longer-term strategic challenge for the Canadian banks. “To the extent that this segment consolidates, streamlines its operations, creates nationwide branch networks, and broadens its offerings, it could expand its share of the Canadian retail financial services market,” Moody’s concludes.

IE