Canadian credit unions and Desjardins Group have relatively low-risk profiles but they aren’t immune from the fallout of a downturn, suggests Toronto-based DBRS Ltd. in a new report.
Compared with the big banks, credit unions typically have lower gross impaired loan ratios, and they write off a lower proportion of their impaired loans, the report says.
“This lower-risk profile reflects the co-operative nature of these institutions and their relatively low-risk community banking business model. It also reflects their typically solid underwriting practices, low-risk appetites and mostly collateralized exposures, particularly residential mortgages,” it says.
Despite their lower-risk businesses, credit unions are not completely sheltered from the impact of an economic downturn, or turmoil in the housing markets, the report adds.
For instance, a significant portion of the commercial lending by credit unions is to sectors that collateralize their loans with real estate. “This becomes a vulnerability … if there is a significant slowdown in housing and real estate markets and a correction in property prices,” the report says. “An overreliance on collateral creates the risk that credit problems in an economic downturn could be exacerbated by a downturn in property markets and a decline in collateral values.”
That said, credit unions and Desjardins have performed “relatively well” in stressed markets, the report says, demonstrating “they can readily absorb credit costs out of current earnings, even during times stress, including the last financial crisis.”
“Their relatively low-risk profile suggests that they are reasonably well positioned to weather another sizable downturn,” it says.
It’s important for co-operatives to maintain a lower-risk profile, the report says, given their weaker ability to generate earnings than the big banks.
“By strengthening their earnings capacity through improved efficiency and other measures, the credit unions would enhance their ability to withstand adverse environments. However, maintaining a lower-risk profile remains critical for the continued success of the credit union and Desjardins co-operative models,” it says.