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Co-operative Banking Bulks Up

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Issue: 67 Section: Business Geography: Ontario Toronto Topics: banks, credit unions, cooperatives

March 10, 2010

Co-operative Banking Bulks Up

Ontario credit unions weather the economic crisis

by Gwalgen Geordie Dent

St. Mary's Credit Union, now part of the Buduchnist Credit Union, was one of many credit unions to have been bought up, closed down, or mergied as the financial crisis continues. Photo: Enid Godtree

TORONTO—Two months ago, members of the Hamilton-based Nasco Employees' Credit Union stopped being members of the Nasco Employees' CU.

On January 6, Nasco Employees' CU was purchased by another Hamilton-based credit union: Prime Financial Savings.

It was a fate that a number of credit unions in Toronto and across Ontario have suffered since 2007 thanks to the global economic crisis. Although business pages in Canada mostly focus on the Big Five banks—Toronto-Dominion, Royal Bank, CIBC, Bank of Montreal and the Bank of Nova Scotia—credit unions have faced their own series of challenges and adjustments.

In August of 2009, I went to close my account at a small, local credit union on Bloor St. But something had happened to St. Mary’s Credit Union since the last time I used the branch: it was no longer St. Mary’s. St. Mary’s had been purchased by Ottawa-based Buduchnist Credit Union two months earlier.

Sources inside the credit union suggested that it had withstood a series of shocks due to the financial crisis. Fearing one more shock could have put them out of business, the bank began talks about being purchased by Buduchnist Credit Union.

When asked if this was the case, Buduchnist Credit Union CEO Oksana Prociuk said she did not wish to comment.

Statistics from the Deposit Insurance Corporation of Ontario website paint a rough picture of how credit unions in the province have fared during the credit crisis. Ontario currently has slightly under 200 credit unions and/or caisse-populaires. Nine Ontario credit unions were liquidated in 2006 (liquidation also includes dissolved, purchased or amalgamated credit unions). In 2007 and 2008, when the credit crisis was in full swing, that figure jumped to 17 per year before falling to eight in 2009.

Statistics from Credit Union Central of Canada’s third quarter results show a similar pattern: while credit union membership is up 0.5 per cent Canada-wide since the end of 2008, Ontario has seen a 1.4 per cent drop over the same period. The number of credit unions and their branches has also gone down more than the national average.

Art Chamberlain, Media Relations Manager for Central 1 Credit Union, said the downturn hit a variety of Ontario credit unions in a much different way than Canada’s major banks. Employment and growth have gone down sharply in Ontario, so instead of losing money on derivatives and bad investments, some credit unions lost money on the major casualty of the recession: people.

“The core of our business is straightforward: taking in deposits and putting out mortgages and personal lending (and a growing amount of small business lending). When there was a downturn, people lost their jobs and the low interest rate environment has not been very great for a number of years, so the spread on lending money has not been great. It’s been a challenging time for small credit units. Our operating costs have been a lot higher (than banks) and our fees have been a lot lower,” he said.

Ron Hodges, Vice President of Finance for the Toronto-based Italian Canadian Savings and Credit Union Ltd., said small-town credit unions suffered considerably because of their members' job losses. “Some of the credit unions are small and are set up to be a credit union for a specific plant. [When] that plant closes, it makes it difficult for the credit union not to close down,” he said.

Hodges' credit union, Italian Canadian Savings, took over some staff, deposits and the lease of the Portuguese Canadian Credit Union (PCCU), which was liquidated in 2009. According to Hodges, “The PCCU ran into financial difficulties; we tried to ensure that the Portuguese community continued to be served.”

Sources from St. Mary’s suggested the PCCU ran into trouble from the credit crisis, but Hodges was unaware of the reason for the PCCU liquidation, and the Deposit Insurance Corporation of Ontario said they could not comment because the matter was before the courts.

Credit unions in Toronto face a number of challenges trying to compete with Canada’s dominating financial institutions.

“We don’t have a huge visual presence,” lamented Chamberlain. “Market penetration is not great. We’re stronger in smaller towns around Ontario. The big banks are located here. The other challenge we face is trying to get our message around in an expensive media market.”

In addition to the slew of ads, Chamberlain said banks also generate advertising through branches and ATMs in full view around Toronto. While credit unions do have access to a number of ATM machines, they are not necessarily branded as such. “We don’t get the subliminal advertising around branches on street corners.”

The relationship with suffering Ontario workers may have hurt deposits, but it also forms the backbone of credit union lending.

“Our decisions around how we treat people and the loans we give are based on a relationship basis. A lot of credit unions are aware and active on community economic development, helping community groups, etc,” said Chamberlain. “We didn’t get caught up in the huge issues that caused problems with the US and big banks here because we weren’t involved in sub-prime mortgages here. Credit unions are a stabilizing force in the economy. There’s a committee working together; we’ve had a media campaign. Behind the scenes there’s been a network of credit unions to help out small businesses. Especially when times are tough."

By focusing on so-called boring, community-based lending, credit unions have managed to avoid the worst of the economic crisis that affected thousands of financial institutions worldwide. “They are less exposed than the banks. They are not international, which is both protective and risky in a more difficult area,” said Jim Maxwell, Chief Administrator and Financial Officer for the Deposit Insurance Corporation of Ontario (DICO).

According to Maxwell, overall, credit unions have been able to turn to methods such as amalgamation, fusing and buying each other out to protect themselves.

“If you look at the system as a whole there is a consolidation of the system and growth. The system has grown at 5 per cent over the last 5 years. You can't look at the number of institutions; because of mergers branches are staying the same.”

Statistics from Credit Union Central of Canada show that the number of credit unions and branches has decreased Canada-wide since 2007. Ontario has seen both unions and branches decrease since the end of 2008, although assets, savings and loans have increased in both Ontario and Canada.

Several Ontario credit unions have fused together in the last few years. Amalgamation also produced Central 1 Credit Union in 2008. Central 1 was the fusion between Ontario and BC "central" credit unions. Central credit unions act as umbrella organizations for their regions, promoting the interests of their member Credit Unions and offering overall services and liquidity (cash to maintain operations). Similar fusions are planned for central credit unions in the Maritime Provinces.

Meanwhile, however, Prime Financial Savings, the Hamilton credit union that purchased Nasco Employees' CU, has already experienced the difficulties of amalgamation and the credit crisis first-hand.

In their 2008 annual report, CEO William Clark explained why Prime Financial Savings suffered a major loss: “This is attributable to costs associated with the merger of Credit Union Central of Ontario and British Columbia Central into a new organization called Central 1. This merger is the culmination of years of effort to rationalize the internal structures of the Credit Union System across the country.

“To facilitate this merger, Ontario Credit Unions purchased certain investments from Credit Union Central of Ontario. These investments have been impacted by the general deterioration of markets across North America,” he wrote.

According to Jim Maxwell, the trend toward larger institutions increases the ability to hire good staff and use more efficient and cheaper systems. At the same time Maxwell acknowledges that bigger unions face the challenge of maintaining their base in the communities they serve.

Gwalgen Geordie Dent is a journalist with the Toronto Media Co-op. This piece was originally published by the Toronto Media Co-op.

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