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News from and about Ukraine & Ukrainians: Ukrainian Community Press Releases
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BRAMA, September 28, 2000, 10:00am EDT
Ukrainian Credit Unions in Canada (and the U.S.)
by Bohdan Leshchyshen, MBA, CFA
Strong Economic Growth
In 1999, the Canadian economy experienced strong growth of real gross
domestic product (GDP) (growth of 6.0% compared to 2.5% in 1998). The economic
growth expanded due to higher growth in consumer expenditures on durables
(6.4% compared to 5.4% in 1998) and semi-durables and non-durables ( 4.6%
compared to 2.7% in 1998), partially offset by slower growth of expenditures
on services (3.8% compared to 4.0% in 1998) and slower growth of investments
in machinery & equipment (6.6% compared to 8.0%). This improved economic
environment led to stronger growth in consumer credit (9.5% compared to
7.8%) and 8.2% increase in housing starts compared to a decline of 6.7%
in 1998. Strong new housing market and an improvement in the unemployment
rate to 7.6% from 8.3% resulted in a continued healthy growth in residential
mortgages (5.8% in 1999 compared to 5.6% a year ago. The strong economic
growth has resulted in the Bank of Canada increasing interest rates. The
long term GIC deposit rates (5 yr) have increased by 150 basis points to
5.48% as December 31, 1999 and long term mortgage rates have increased
to 8.25% (an increase of 165 basis points). This has resulted in a 15 basis
point increase in the 5-year mortgage spread to 2.77%. The impact of demographics
has had the greatest effect on the Ukrainian credit unions because (on
average) over 35% of the their membership is over 50 years of age. This
group held in excess of 50% of the deposits in these credit unions. As
the baby boom generation ages, credit union members are shifting from consumption
to saving and investment. The boomers and their parents need fewer credit
products such as consumer loans and mortgages, and more investment products
like mutual funds and equities. The Ukrainian credit unions have responded
to these challenges by selling mutual funds, providing financial planning
services and trying to attract much younger members through their web sites
on the internet.
The financial services industry in Canada has continued its consolidation phase -TD Bank has acquired CT Financial Services – the last large publicly traded trust company. The large financial institutions are providing more competition each year, especially in the areas were the credit unions have been the strongest in the past - residential mortgages. The Ukrainian credit unions have responded by completing their own merger: St. Demetrius Credit Union has agreed to merge with with Ukrainian CU (Toronto. We will probably see a further consolidation of the Ukrainian credit union system over the next few years in order to allow the Ukrainian credit union to remain competitive and to allow the larger credit unions to introduce new mutual fund and wealth management services.
Financial Overview
The fundamentals of the Ukrainian credit union in Canada continue to
be powerful: asset quality is good, capital levels are strong and return
on capital is good.
Performance. Return on equity was 10.5% compared to 11.5% in 1998 and was below the Canadian banking average of 13.7%, but this level is satisfactory given the lower risk profile of credit union assets. Due to a lower inflationary environment in Canada and poor loan demand for residential mortgages by the members of Ukrainian credit unions primarily due to the demographic makeup of the membership, Ukrainian credit unions’ assets grew by 4.0% compared to 3.3% last year. Canadian banks assets declined slight by 0.4%. The Ukrainian credit union’s net income before dividend and patronage payments decreased slightly to $5.4 million from $5.5 million, due to a decline in net interest margin which was partially offset by a decrease in operating expenses and loan loss provisions. [This does not include any extraordinary items]. The credit unions paid 34% of their net income to their members by way of a dividend or a patronage refund totalling $1.836 million compared to 33% last year or $1.815 million. These patronage dividends helped increase the capital of the credit unions by 13.7% to $57.8 million representing 6.92% of the assets.
The return on assets decreased to 0.66% in 1999 from 0.70% in 1998, which is comparable to the average level of the large Canadian banks (0.53%). While, the net interest margin as a % of average assets decreased to 3.03% from 3.14% in 1998, comparable to average level of the large Canadian banks at 1.83%.
Ukrainian credit unions continue to largely rely on the traditional intermediary function or the net interest margin for their revenue source. Expansion into other sources of income is slowly progressing and now represents10.4% of total revenue compared 49.7% for the large Canadian banks. The higher ratio of other income experienced by the large Canadian banks is due to the significant fees generated from their brokerage, mutual funds and investment management activities, not to mention fees for bank services, which credit unions generally do not charge.
Ukrainian credit unions have a higher cost structure. The operating expense ratio as a % of average assets decreased slightly to 2.53% compared to 2.55%, which is higher than the large Canadian banks at 2.45%. However, the operating expense to revenue (productivity ratio) increased to 74.8% from 72.6% last year. The expense ratio is higher than the large Canadian banks at 67.1%.
Asset Quality. Overall the asset quality is currently strong. The loan loss provision as a % of average assets decreased slightly to 0.05% from 0.11% in 1998, which compares favourably to the large Canadian banks at 0.38%. The loan delinquency decreased from 0.53% of total loans to 0.44% in 1999, which compares favourably to the large Canadian banks at 0.58%.
Loan portfolio. The Ukrainian credit unions have strong concentration in lower risk residential mortgage lending which represents 63.6% of the loan portfolio compared to 65.5% last year. Commercial loans represent 27.0% of the loan portfolio compared to 25.5% last year and we believe should continue to increase over the next few years as new regulations are implemented allowing higher levels of commercial lending. The future of Ukrainian credit unions will be secured by providing secured loans to small businesses and self employed individuals.
Brief overview of the five largest Ukrainian credit unions
Ukrainian Credit Union is the largest Ukrainian credit union in Canada, 9th largest credit union in Ontario and 44th largest in Canada based on asset size. The credit union had increased its asset base significantly and expanded its branch network in previous years through amalgamations with smaller Ukrainian credit unions. On June 1, 1999, Ukrainian (Sudbury) Credit Union merged with Ukrainian Credit union adding 348 new members. On December 17, 1999, Ukrainian CU entered into a merger agreement with St. Demetrius Parish Credit Union, which added approximately $13.5 million in assets and 1,200 new members. Profitability in 1999 declined by 6.8% due to a lower net interest margin, lower level of other income and partially offset by a lower level of loan losses. The credit union experienced deposit growth of 18.7% in 1999 compared to 5.4% in 1998. Net loans increase 6.1% in 1999 compared to an increase of 2.3% in 1998. The capital and retained earnings stood at $12.9 million representing 5.93% of assets. Ukrainian CU has opened a Call Centre to offer lending and investment services, e-mail service and web site at www.ukrainiancu.com. Ukrainian CU advanced 133 residential mortgages in 1999 for a total value of $18.6 million and 30 commercial loans for a total value of $6.8 million and 526 lines of credit and personal loans totalling $9.2 million. Ukrainian CU had a return on assets of 0.51% and return on equity of 8.5%. Ukrainian CU has 7 Toronto area-branches and 5 branches outside of Toronto, 4 ATM locations, together with a Call Centre, a web site, e-mail, Internet and telephone banking services.
Buduchnist Credit Union is the second largest Ukrainian credit union in Canada, 10th largest credit union in Ontario and 47th largest in Canada based on asset size. Buduchnist CU's loan portfolio increased by 24.9% in 1999 compared to 6.7% in the previous year and the total deposits increased by 14.6% in 1999 compared to 8.3% in 1998. The membership grew by 5.1% in 1999 compared to 8.5% in 1998. The profitability decreased by 21.2% to $1.4 million in 1999 due to higher operating costs. The capital and retained earnings stood at $15.8 million representing 7.73% of assets. Buduchnist CU sold its land at Dixie and Rathburn Roads in Mississauga realizing a significant capital gain of $1.35 million and installed a new computer system with a cost of over $700,000. Buduchnist introduced a patronage share program in 1997, in which each member was paid $1.75 per $1,000 of business that was completed with the credit union and resulted in a payment of approximately $518,000 in 1999. Buduchnist CU advanced 212 residential mortgages in 1999 for a total value of $26.3 million, 32 commercial mortgages for a total value of $12.5 million and 589 personal and commercial loans for a total value of $7.9 million. Buduchnist CU had a return on assets of 0.71% and return on equity of 9.7%. Buduchnist has 5 branches, 2 ATM location, together with a web site, mutual funds sales operation, Internet and telephone banking services.
Carpathia Credit Union is the one of the oldest Ukrainian credit union in Canada. The credit union is the 3rd largest Ukrainian credit union in Canada, 11th largest Manitoba credit union and 81st largest credit union in Canada. The profitability in 1999 increased by 9.3% to $902,000, due to a decline in operating expenses in conjunction with strong loan growth of 14.0%. The credit union, which was the first Ukrainian credit union to introduce tax efficient patronage refunds, paid its third patronage refund and an additional dividend totalling $500,000 compared to $535,000 in 1998. Members' equity stood at $8.8 million representing 6.74%. Carpathia has entered into strategic alliances with Credential Securities Inc. and Ethical Funds Inc. to expand its offering of mutual funds. Carpathia CU now has $13 million of mutual funds under administration. On August 9, 1999, the Board of Directors hired a new CEO, Mr.Harold Chornoboy. Carpathia CU has 3 branches, 2 ATMs, a web site, telephone banking, Internet banking, and a full service brokerage firm.
So-Use Credit Union is fourth largest Ukrainian credit union in Canada based on asset size. So-Use experienced a decline in assets of 6.6% in 1999 compared to a decline of 3.9% in 1998 primarily due to decline in deposits. However, So-Use has continued to significantly improve its net interest margin, which increased to 3.02% from 2.85% in 1998 and closely monitored its operating expenses. These actions have resulted in So-Use showing an increase of 16.1% in net income to $564,700 in 1999 and a respectable return on equity of 14.0%. Due to losses experienced in the previous years, So-Use raised $2.4 million in capital by issuing Class A Special Shares and the members' equity now stands at $5.1 million or 7.05% of assets. In 1999, So-Use CU advanced 63 residential mortgages for a total value of $6.3 million and 167 personal loans for a total value of $1.4 million. So-Use has one branch, one ATM, telephone banking and PC Home banking
La Caisse Populaire Ukrainienne de Montreal is the 5th largest Ukrainian credit Union in Canada. The profitability in 1999 decreased by 8.5% primarily due to a decrease in the net interest margin (3.05% vs 3.13%). The allowance for loan losses has decreased significantly from 3.05% to 1.59% of the outstanding loans. The Caisse made its first tax efficient patronage refund payment of $300,000 to its members in 1999, which represents a return of 54% of its earnings. However, the Caisse is the best capitalized of the Ukrainian credit unions, with members equity of $4.2 million representing 8.81% of assets. The Caisse had a respectable return on assets of 1.14% and return on equity of 14.5%. The Caisse operates out of two branches located in Montreal.
Future Challenges
The financial services industry in Canada has been evolving quickly. The independent trust companies have all but disappeared with the recent acquisition of Canada Trust by Toronto Dominion Bank. Chartered banks have become much more competitive in the areas of consumer deposits and residential mortgage loans the domain primarily occupied by the credit unions. The chartered banks’ market share of residential mortgages has increased to 57.6% in 1999 compared to 42.5% in 1990, but has decreased in the last two years. While the credit unions market share has remained in the 13% range and increased slightly in 1999 to 13.4% from 13.2% in 1998.
The changing environment has required Ukrainian credit unions to be more flexible in the services and products that they have been providing to their memberships. Many credit unions reviewed in this paper have introduced new credit cards and have expanded their wealth management product offerings – for example, mutual funds and insurance. Have begun to aggressively introduce Internet and PC Banking. Due to the significantly older membership, the Ukrainian credit unions have been focusing on attracting younger members with specifically targeted marketing programs and products.
Most of Ukrainian credit unions have worked through their Council of Ukrainian Credit Unions of Canada to continue to play a major role in the development of the credit union system in Ukraine.
Ukrainian credit unions have begun to develop special loan packages for young professionals entering the field of medicine, law and dentistry. With the expected increase in educational costs and the recent changes in the RESP regulations, the credit unions have set up educational savings plans to assist their children and grandchildren. Other products that are being developed are self-administered RRSP and RRIF plans, mutual funds and financial planning services. With their involvement in Ukraine, the credit unions should enter into more strategic alliances with individual banks in Ukraine to provide services for Ukrainians and others doing business in Ukraine.
The major challenge in the future for the Ukrainian credit unions is to seek opportunities where they can work together to provide a more comprehensive list of services and products for their members. By doing so, I believe that they will be able to attract more new and younger members and ensure their survival for future generations.
Bohdan Leshchyshen received his Masters in Business Administration (MBA) from the University of Toronto in 1975, subsequently was made a Fellow of the Institute of Canadian Bankers (FICB) in 1978. In 1990, he completed the requirements of the Institute of Chartered Financial Analysts and received a CFA designation. He is a member of the Toronto Society of Financial Analysts.
He is a director of Buduchnist Credit Union Limited in Toronto, a director of Council of Ukrainian Credit Unions of Canada, a President and director of World Council of Ukrainian Co-operatives.
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