'Economic headwinds' likely to impact credit union assets with majority of loans unsecured
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Irish credit unions have €1.06bn of unused capacity for home and business lending, with the Central Bank noting that this figure could rise to €2.1bn if all credit unions with assets exceeding €100m applied for leeway to raise loan concentration limits.
New findings from the Central Bank of Ireland found that Irish credit unions continue to face sustainability issues with the Central Bank of Ireland calling on institutions to address ongoing structural challenges within the sector.
New findings from the Central Bank reveal that economic headwinds and uncertainty "will likely challenge asset quality in the year ahead," with the vast majority of credit union loans unsecured.
The report found that despite the average rate of arrears falling to a seven-year low of 3%, credit unions still need to be cognisant of deteriorating macro conditions which could impact asset quality in the year ahead.
While outstanding loans reflected continued recovery since the pandemic, climbing up to €5.6bn in 2022, the overall loan-to-asset ratio fell to an almost historically low 28.4%, notably less than the widely viewed optimal ratio of 50%.
"The low loan to asset ratios, increases in costs, and falling return on assets, if not addressed by credit unions will continue to impact on sustainability,” warned Registrar of Credit Unions, Elaine Byrne.
“The maintenance of strong reserves is key to underpinning member confidence particularly in the challenging macro-financial environment and where sustainability challenges continue.”
Credit union reserves increased just marginally from 16% in September 2021 to 16.1% in September 2022, with no individual institution reporting a regulatory reserves position below the required minimum of 10% of assets.
The vast majority of viability challenges being felt by a portion of the sector was reflected in a declining return on assets, down to 0.3% in 2022 from 0.6% in the previous year.
Furthermore, a significant 51 credit unions reported a negative ROA in 2022, up dramatically from just 12 in 2021.
Savings continued to increase in 2022 despite inflationary pressure, with money saved among Ireland's 3.6m credit union members rising 1.4% to €17bn at the end of the reporting period. In the same time frame, total loans increased by 1.6% €5.6bn.
"Notwithstanding some continued positive trends in credit union sector data as referenced above, the challenges arising from the sectoral lending/savings imbalance and cost/income ratio trends will continue to impact on sustainability, if not addressed by credit unions," said Ms Byrne.
With a falling number of credit unions in Ireland, largely attributed to the effects of the global financial crisis and a rapid growth in customers going online to do their day to day banking, Ms Byrne praised the sectors increased co-operation, with just over 200 institutions remaining in the sector.
“Sectoral collaborative efforts to provide services are welcome, and forthcoming legislative changes should provide further opportunities for credit unions to expand their service offerings to members."
Speaking on the report, chief executive of the Irish League of Credit Unions, David Malone said that ILCU branches remain "well capitalised," and "arrears have been well managed."