Credit unions could pose challenge to banks
Credit unions are continuing to grow in the Canadian retail banking landscape and could present a competitive challenge to the nation’s banks in the domestic market over time, says Moody’s Investors Service in a new report.
Credit unions currently account for a 16% share of domestic deposits and a 19% share of residential mortgages , and both statistics are likely to rise over the long term . The rating agency also notes that the a major factor in further growth will be the credit unions’ ability to improve risk management capabilities as their operating models become more complex.
"Canadian credit unions offer their customers access to many traditional banking services – comparable to the big retail banks," according to the author of the report, Analyst Ali Mozaffari. "In addition, credit unions tend to pay out dividends to their customers if they generate a profit, which is very appealing to many customers."
As part of this industry’s evolution, individual credit unions have made strides to centralize activities, and are increasingly utilizing the support of credit unions centrals. These provide member credit unions with vital supports, such as access to technology, funding, liquidity, and payment- clearing. The industry’s trend to centralize is driven by funding requirements of individual credit unions, coupled with the demand from customers for more services.
"The credit union centrals provide the necessary framework for these organizations to grow over time," said Mozaffari. In March 2010, the Canadian federal government indicated that it will introduce legislation to allow credit unions to incorporate as federal entities, enabling them to create nationwide branch networks. According to Moody’s, this development could further enhance the credit unions’ franchises because credit unions can currently only incorporate as provincial entities.
"The traditional banks can offer their customers nationwide banking and access to ATMs from coast to coast," noted Mr. Mozaffari. "This development could lead to credit unions having a stronger national presence."
Ultimately, he said, a smaller number of centralized credit unions could pose a longer-term strategic challenge for the Canadian banks. To the extent that this segment consolidates, streamlines its operations, creates nationwide branch networks, and broadens its offerings, it could expand its share of the Canadian retail financial services market.
