Credit unions make impressive debut

Although pleased, credit unions are taking the survey in stride. “I’m not the least bit surprised about those results,” says Wayne Nygren, president and CEO of Credit Union Central B.C., the primary banker and trade association for British Columbia’s 66 independent credit unions. “The structure of the credit union system in each province allows credit unions to understand and know their members [clients] better than other financial institutions.”

According to Nygren and others in the national system, which, outside Quebec, serves about 4.6 million members in more than 1,800 branches, credit unions make money to serve their members, while the big banks serve clients to make money for their shareholders. There’s nothing wrong with either motive, credit unions acknowledge; they’re simply different.

Some differences were illustrated in the Investment Executive survey, which polled a total of 262 account managers, 63 from credit unions across Canada and about 30 from each of the seven national banks.
Credit unions ranked first in two categories — strategic focus and ethics — while placing second in seven others for an overall second-place finish behind Royal Bank of Canada.

“Because credit unions are regional organizations and not national like the banks, it’s easier for us to implement and focus on strategies that are more tailored to specific needs in our communities,” says Paul Duncan, chief executive of British Columbia-based Coast Capital Savings.
Credit unions have always been strong when discussions turn to ethics, and they share first place with Royal Bank. “We’ve always prided ourselves on being ethical,” Duncan adds. “That’s not to say other financial institutions are not ethical.” For example, credit unions broke new ground 10 years ago in Canada by introducing the Ethical Mutual Funds group.

However, credit unions ranked poorly in several other categories, including research, although that’s not surprising, they say, because research effectiveness is tied to size.

Size, in particular, is a problem for them.
As Surrey Metro Savings chief executive officer Lloyd Craig said recently, “While Canadian credit unions in total have $125 billion in assets, that’s only 35% of Royal Bank’s assets.” An Ontario credit union AM put it more succinctly: “Small is sometimes too small.”

In a nutshell, credit unions face a dilemma: how do they grow to keep pace with Canadians’ increasingly sophisticated financial service needs, meet increasing competition from the much larger chartered banks and, at the same time, hang onto their local, neighbourhood roots? After all, credit unions pride themselves in being like the bar in Cheers, where everybody knows your name.

The dilemma is being resolved on several fronts. Individual credit unions are consolidating and merging to enhance economies of scale at the administrative level, while expanding their branch distribution networks. Consolidation is also happening at the provincial credit union central level, at which many back-office functions are housed.

A significant amount of the consolidation and restructuring is taking place in B.C., the province with the highest concentration of members outside Quebec. Four of 10 British Columbians belong to the province’s credit union system, which holds almost half the $62 billion in credit union assets held by Canadians outside Quebec.

In 1991, there were 108 credit unions in B.C., holding about $12 billion in assets for 1.1 million members. Ten years later, that number has been reduced to 66 credit unions but assets have more than doubled to more than $25 billion, while membership approaches 1.5 million and the number of branches has increased by 50.

There aren’t any signs that consolidation will slow. In May, for example, members approved the merger of Coast Capital Savings and Surrey Metro, a union that creates the second-largest credit union in Canada outside Quebec, with more than $6 billion in assets and almost 300,000 members.

The new credit union — still called Coast Capital Savings — will reach 90% of B.C.’s Lower Mainland and southern Vancouver Island. There will be no branch closures as a result of the merger.

Coast Capital itself is the product of the merger of Richmond Savings and Victoria-based Pacific Coast Savings in 2000.

“We work in an industry in which bigger is better, because bigger provides the scale,” Craig says. “What used to be the strength of credit unions — their small, grassroots character — has today become a weakness in an industry that is oversupplied, highly competitive and dominated by giants.”
Dave Mowat, chief executive officer of Vancouver City Savings, English-speaking Canada’s largest credit union, welcomes the latest merger. “From our perspective, a rising tide lifts all boats,” he says. “As the new Coast Capital strengthens, it’ll help the entire credit union sector.”

On the interprovincial level, Credit Union Central B.C. and Credit Union Central of Ontario endorsed the business case this spring for merging their operations. Member credit unions in the two provinces will be asked to approve the merger agreement in November.

The idea is to create a national, federally regulated organization to serve the provincially regulated independent credit unions in areas such as liquidity management, wholesale lending and settlement of both cheques and electronic payment systems. “By combining the two centrals into a $5-billion organization, we’ll be able to provide credit unions with even better tools to take direct aim at the competition,” says Jonathan Guss, president and CEO of the Ontario CUC.
B.C.’s Nygren says the Maritime provinces probably will be next to join, and the goal is to have all provincial centrals under the national organization within a few years. B.C. now has a formal affiliation with U.S. Central Credit Union, which streamlines links to the U.S. market and expands access to U.S. dollars, liquidity, credit and higher-yielding investment products for members. The U.S. link also helps credit unions in their major thrust for meeting bank competition — namely, playing catch-up in wealth-management services.

“We’re concentrating on building our wealth-management business because credit unions are perceived as not having a lot of experience in this sector,” Mowat says. “Banks have done an excellent job here. They’ve captured the retail investor by buying the entire brokerage channel, while credit unions are having to build wealth management from the ground up.”

Larger credit unions now offer discount brokerage services and have investment specialists on staff to help members, many of whom still do their traditional banking with a credit union but keep their investment accounts with a bank. Credit unions are also concentrating on building their small and medium-sized business clientele.
But are credit unions winning their battle with the banks?

Mowat says there are no hard numbers but anecdotal evidence suggests they are. However, it’s a tough fight — one that will only become tougher. As one Saskatchewan credit union account manager told IE: “It’s very competitive and there are lots of different people chasing the same dollars.”
A manager from Ontario says credit unions need to work harder at getting their message out: “People don’t understand the difference between us and chartered banks, and opt for the size and scope of a major bank before learning what we can do.”Another adds: “We’re the best-kept secret out there.” IE