Credit Union introduces charges for deposits and withdrawals from share account

Pinoy adventure

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They've 185m in cash / investments. An average negative rate of just 0.1% is 185,000

They'll have increased bad debts this year due to Covid, but a negative return on cash definitely doesn't help.

So they €1 fee per transaction might off set the loss or a very small return on any investments they hold.
If they set a smaller account balance and returned some of the cash it may reduce the loss making on negative returns
 

24601

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So they €1 fee per transaction might off set the loss or a very small return on any investments they hold.
If they set a smaller account balance and returned some of the cash it may reduce the loss making on negative returns

That's what is bizarre about this place. Rather than hand back excess member funds as they should have done years ago they decided to be the first CU in the country to charge members for very basic transactions. The €1 charge must be the highest of any financial institution in the country. It seems so short-sighted if it is being done for the reasons their CEO says it is. Plenty of people will close their accounts because of it. They'll never get them back, whereas a savings cap could have been targeted at higher balance members who are unlikely to be borrowers. I'm actually astonished the board agreed to go along with this idea.

Looking at their 2018 accounts online their problem seems to be as much to do with their very high cost-base as it is to do with negative interest rates. They had €4.5m in income and €4.1m in expenditure, of which €2.1m was salaries/pensions, and half a million of this was for key management personnel! The gap between the cost of running the place and the loan interest taken in was very big so their exposure to interest rate fluctuations should have been very obvious to see.
 

Brendan Burgess

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Looking at their 2018 accounts online their problem seems to be as much to do with their very high cost-base as it is to do with negative interest rates.

Very good analysis and it is the same for all credit unions.

They have comparatively high fixed costs.

But they are earning very little on their loans because there is no demand for loans.

They have only survived by taking in huge deposits from customers for which they pay nothing, but earn interest themselves by putting it on deposit usually for a fixed term. These fixed term deposits are maturing now and the credit unions are being charged for putting money on deposits.

So they are between a rock and a hard place. They no longer have a source of income. But their expenses including all the junkets for the board are still very high.

Brendan
 

24601

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But they are earning very little on their loans because there is no demand for loans.

There is about €14bn in non-mortgage consumer credit, so while the market is very small relative to the mortgage market there is some demand, and it had been growing until COVID-19 hit. However, the demand is too small relative to the credit unions' combined asset-base, and they do not have a large enough share of the small market they operate in. In any event, I really don't know what this CU hopes to achieve by doing this. It is likely to do much damage long-term with very uncertain short-term benefits. I suppose if they lose half their membership that will address some of their balance sheet risk!
 

Sconeandjam

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The credit union ethos many years ago was to use funds to help those who could not get a ordinary loans in banks due to low income or on sw. The loans were small like holiday, holy communion Christmas. In small towns the credit unions were able to manage those who did not pay and others that were worried about others hearing they did not pay their loans they paid every week.
The Regulator are pushing credit unions to be like a bank and fill in the gap between large pillar banks. Many now provide mortgages and large loans for high end cars.
I am with one credit union and the regulator pushed them to merge with other credit unions that were in large debts or struggling due to their issuing very large loans to those who would not pay but could pay. The debts in those credit unions are piling up and due to bad management allowing people not to pay their debts. Instead of letting the credit union go bankrupt the regulator forced the taking on of the credit union. The shareholders who have accounts objected to it but it went ahead anyway.
 
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Brendan Burgess

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Hi 24601

I have extracted the key pages from these accounts and attached them to this post.

Those accounts show the horrific problems facing the credit union. These accounts are two years old. They were flattered by €1.8m of investment income and a write-back of bad debts of €1.1m. I have removed these to show what the 2020 accounts might look like.

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That is a very serious loss for such a small institution.

Fortunately, the balance sheet can well absorb this level of losses for a few years, so members' money is not in danger.

But it's very hard to see how this credit union can return to profitability any time soon. I doubt if charging members €1 per transaction will make much of a dent.

They probably need a fundamental restructuring.
  • Return all the surplus cash to members
  • Scrap all the branches bar one
  • Oddly enough, set a minimum sized share account of €20k and restrict it to a few hundred members - to cut down the costs of dealing with small shareholders
  • Scrap the share and death benefit insurance
Brendan
 

Attachments

  • 1608024984222.png
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  • First South Credit Union Key figures Sept 2018.pdf
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Brendan Burgess

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Balance sheet


5176


They have €133m in cash, but only need €12m to fund the level of loans. In fact, they need less than €12m because the borrowers who owe €36m probably have about €12m in shares.

So they could set one against the other, and the net loans are probably only €24m. In other words, they are very close to financing all loans through the reserves without needing any shares.
 
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24601

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They probably need a fundamental restructuring.
  • Return all the surplus cash to members
  • Scrap all the branches bar one
  • Oddly enough, set a minimum sized share account of €20k and restrict it to a few hundred members - to cut down the costs of dealing with small shareholders
  • Scrap the share and death benefit insurance
Brendan

As a paper exercise that might be an effective approach but it would never work out in practice, and would only really be feasible as part of a voluntary wind-down strategy. The idea of returning all surplus cash to members would be politically unfeasible as well as being practically impossible given the way in which savings tend to be accumulated.

They probably do need to scrap most of the branches and reduce their operating expenses to level commensurate to their loan book size - it looks like they took in all the fixed costs of the credit unions they took over with no additional economies of scale achieved in the process. Perversely, some of the credit unions that merged with this CU in recent years were probably far better off on their own than as part of this bigger, less profitable entity.

I'm not sure whether setting a minimum savings balance of 20k would be a wise approach (unless as part of a voluntary wind-down). Most credit union borrowers have lower balances so this strategy would likely sink the business completely since the potential pool of future borrowers would be excluded from membership, and I'm not sure whether such an approach would even be legal.

They should definitely scrap all non essential insurance.

I'd also caution that things were probably a bit better than 2018 going into COVID-19 given the general growth in loans across the sector and that investment income might still be a factor for a few years depending on the maturity profile of their investments, but yes, €1 transaction charges or forcing members to sign up for current accounts is not going to solve their problems.

It's absolutely astonishing that the Central Bank was still approving mergers for this entity as recently as last year. Did you look at the accounts for the transferring credit union @Brendan Burgess ? They had a deficit of €259,548 for the 7 months year-to-date, loans of 3.7m, reserves of 2.4m and assets of 22.8m. Crazy stuff. The Central Bank had no business approving that.
 

Protocol

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3,505
Again, I ask, why aren't these CU competing with PCP, and offering loans at 2.9% - 4.9%?

I still see 7% being charged, even 9.5%!!!!


Or else, why not come together, and lend to social housing at 2% - 2.5%?
 

jpd

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And then you wouldn't need as much staff or managers?
But everyone wants one in THEIR town or borough

Tough call
 

Brendan Burgess

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I'm not sure whether setting a minimum savings balance of 20k would be a wise approach

My thinking here is that they need to get rid of all the small savers who use the Credit Union as an ATM. Lodging €20 and withdrawing €10.

So they should look for a few big term deposits.

It's completely against the spirit of the Credit Union, but they need to cut their costs dramatically if they want to survive.

Brendan
 

Brendan Burgess

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45,336
Did you look at the accounts for the transferring credit union @Brendan Burgess ? They had a deficit of €259,548 for the 7 months year-to-date, loans of 3.7m, reserves of 2.4m and assets of 22.8m. Crazy stuff.

I had not seen them at the time, but I have studied them now. They are a much truer reflection of the plight of the credit union movement as they are not flattered by investment income or big write backs of bad debts. This is what First Southern is going to look like when the investment income stops.

I attach the key pages but here is my summary:

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  • St Joseph's Cork key pages.pdf
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Brendan Burgess

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The Central Bank had no business approving that.

A tough one for the Central Bank.

They have reserves of €2.5m and are probably losing around €500k a year. So while there is no immediate danger, they would become insolvent in about 5 years.

I think that First Southern will become insolvent in about 10 years.

First Southern got about €2.5m in reserves from the transfer, but their losses will be €500k a year higher, assuming they make no changes.

But if they close the St Joseph's branch and fire the staff and return the surplus cash, they should benefit from it.

Brendan
 

24601

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331
My thinking here is that they need to get rid of all the small savers who use the Credit Union as an ATM. Lodging €20 and withdrawing €10.

So they should look for a few big term deposits.

It's completely against the spirit of the Credit Union, but they need to cut their costs dramatically if they want to survive.

Brendan

That thinking would be grand if a credit union was exclusively a balance sheet on a piece of paper. What do you think the long term prospects would be for a credit union whose membership is made up exclusively of people with large saving balances that have little to no demand for credit? They obviously have to address the balance sheet risks very aggressively but excluding the entirety of their potential future borrowing population from membership would be strategic suicide.
 

Brendan Burgess

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excluding the entirety of their potential future borrowing population from membership would be strategic suicide.

But I think that they will slowly run down their reserves through losses over the next few years anyway.

They don't need the deposits.

But they can still lend.

I just can't see how these credit unions will be viable.

Brendan
 

Sconeandjam

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But I think that they will slowly run down their reserves through losses over the next few years anyway.

They don't need the deposits.

But they can still lend.

I just can't see how these credit unions will be viable.

Brendan

Most this is down to the management and the regulator. The regulator told credit unions they have to have so much on deposit to cover the loans and they could not invest in bonds that were allowed before the crash.

Did this credit union have to take on debts from bad managed credit unions? Our one did and the massive debt carried for fancy new builds, debts from non paying loans and staff on above market rates have really affected the bottom line. No one was made redundant. The financial manager who is now the CEO is on the same money as the directors in pillar banks. Dividend is non existent due to these take overs.

Even with the new rules when applying for loans such as proof of income, does not mean they will pay it back. Yet those who are on social welfare or pension that rely on the credit union do call in and pay their loans. They are the little people that lodge 20euros into their loans and a 10euro savings. This will push those to go to loans sharks or provident cheque people.
This new Strategy might have back fired. The founding members with the credit union movement would definitely not be happy with the way the credit unions are going.
 

Brendan Burgess

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45,336
The regulator told credit unions they have to have so much on deposit to cover the loans and they could not invest in bonds that were allowed before the crash.

Hi Scone

No. They need to have reserves to cover their assets which includes cash on deposit and loans. That is reasonable and if the Credit Unions got rid of their surplus cash, the reserves required would fall.

The credit unions had no idea what they were doing so they invested in bad bonds. The Regulator was right to stop them from doing so.

If the members want to buy speculative bonds individually, that is fine. But they should not be giving the Credit Unions surplus money to invest in bonds.

Brendan
 
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