The Fight for Sustainable Growth Enabling credit unions for the future. Momentum conference November 8, 2013

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Katrina Bailey
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1 The Fight for Sustainable Growth Enabling credit unions for the future Momentum conference November 8, 2013

2 The premise THE WORLD HAS CHANGED CUs are struggling to keep pace with an increasingly complex, more demanding and competitive environment CUs need to consider a variety of strategies to ensure long term sustainability THE GROWTH IMPERATIVE In order to survive and thrive into the future CUs must focus on achieving long term sustainable growth DRIVERS OF GROWTH To fuel growth a CU needs to: - Be Competitive - Articulate and Deliver against a relevant Value Proposition - Generate Long Term Profitable Returns NON-INTEREST REVENUE SOLUTIONS Building a portfolio of non-interest generating offerings and services can be a key contributor to a successful growth strategy 1

3 Member needs and expectations are expanding. WINDS OF CHANGE Changing member needs & expectations Members have choice Increasing regulatory requirements / burden Challenging economic environment Overall aging of member population / challenge in attracting next generation Low growth or in some cases declines in member base Demand for expanded product / service offerings Expect 24/7, multi-channel access Increasingly price / fee sensitive 2

4 .. And they have more choice WINDS OF CHANGE Changing member needs & expectations Members have choice Increasing regulatory requirements / burden Challenging economic environment Aggressive competition from banks and other nontraditional players (price, product, market segments) Increased competition on co-op values by non-co-operative players Competitors have greater capacity to invest in needed technology (innovation / streamline costs) 3

5 Capital and liquidity requirements are increasing. WINDS OF CHANGE Changing member needs & expectations Members have choice Increasing regulatory requirements / burden Challenging economic environment Increasing capital and liquidity requirements Expanding compliance requirements (ERM, ICAAP and stress testing, FINTRAC, FATCA) Phase out of preferred tax rate Tightening mortgage regulations IFRS Wave II 4

6 .. While the capacity to generate the profit needed to generate those requirements is increasingly constrained WINDS OF CHANGE Changing member needs & expectations Members have choice Increasing regulatory requirements / burden Challenging economic environment Persistent low interest rate environment Unprecedented consumer debt levels High unemployment Liquidity imbalances Global uncertainty and volatility impacting consumer and commercial spending, portfolio risk, and availability of liquidity 5

7 Change is required to deal with the new reality WINDS OF CHANGE Changing member needs & expectations Members have choice Increasing regulatory requirements / burden Challenging economic environment IMPACT Harder to compete Harder to articulate the CU Difference Harder to generate returns and capital needed for the future 6

8 The quest for Growth Growth is evidence that a CU is delivering against a relevant / recognized value proposition WHY? Growth is the engine that enables a CU to deliver against that value proposition Scale matters TYPES Target growth in: - Members (market reach) - Total assets (overall scale) - Share of wallet (loyalty) - Market share (relative competitive position) Growth is required across all four dimensions 7

9 Depth of penetration varies Assets in billions of dollars Assets by Affiliation (2012) $157.0B $57.2B $36.6B $20.4B $16.9B $21.4B $4.7B BC AB SK MB ON Atlantic Total BC AB SK MB ON Atlantic Total # of CUs Total Assets $57.2B $20.4B $16.9B $21.4B $36.6B $4.7B $157.0B Profile of Credit Unions Avg. Assets per CU $1.3B $0.60B $0.28B $0.59B $0.26B $0.08B $0.41B Total Members 1,872, , , ,484 1,570, ,346 5,504,510 Avg. Members Per CU Avg. Assets Per Member 42,568 18,763 8,374 14,280 10,981 5,782 14,486 $30,535 $31,903 $33,618 $36,473 $23,305 $13,903 $28,530 Locations ,849 8 Source: CUCC Note: Includes affiliated and non-affiliated credit unions. Atlantic includes Newfoundland, Nova Scotia, Prince Edward Island, and New Brunswick

10 Opportunities to increase scale through consolidation 3,500 3,000 2,500 2, years The number of credit unions in Canada drops by half every 13 years 1,500 1,

11 The total CU System is small relatively speaking Total assets ($B) $800 $700 $600 $500 $400 $300 Total assets (2011) CUs represent < 4% Canadian bank assets (and < 6% P&C Bank assets) Co-operative system (CUs + Desjardins) represent < 10% Canadian bank assets $200 $100 $0 RBC TD Scotia BMO CIBC 10

12 an no individual CU holds a dominant position Billions $160 $140 $120 $100 $80 $60 $40 $20 $0 Cumulative assets by credit union (2011) 50% Cutoff The largest credit union represents only 11% of total CU System assets 11

13 Research shows growth and long term survival are highly correlated 5 YR CAGR ( ) > 25% 20% to 25% 15% to 20% 10% to 15% 5% to 10% 0% to 5% -5% to 0% -10% to -5% -15% to -10% < -15% Ontario CUs/CPs in existence in 2007, sorted by asset CAGR* CUs/CPs no longer present by 2012 (Total = 124) CUs/CPs still in existence as of 2012 (Total = 127**) < 0% CAGR Ontario CUs with flat or negative growth during the 5 year period ended 2007 had only a 16% chance of surviving another 5 years in their existing form - Growth < 5% during that same period, increased the survival rate to only 37% Similar studies in other provinces suggests that growth > 5% is needed to increase the odds of long term survival 12

14 Achieving growth requires a careful balance Competitive GROWTH Relevant value proposition Financial performance In order to grow CUs need to: Be Competitive on price, product offering, quality of service (table stakes) Articulate and Deliver against a relevant / differentiated value proposition 13 Generate long term profitable returns required to: create the capital and liquidity needed to support a larger balance sheet invest in the future innovation, technology deliver on your value proposition / brand promise effectively compete

15 Strong financial performance and a diversified financial strategy are key to supporting growth Competitive GROWTH Relevant value proposition Financial performance Net interest margin Operational efficiency Non interest revenue CUs are exploring strategies across all 3 financial levers to enable growth 14

A tale of declining margins & competitive pressure 5,48 5.

16 A tale of declining margins & competitive pressure 5, Ontario Aggressive competitive environment and low interest rate environment is driving margins down 2012 margin for top 25 CUs ranges between 1.40% and 2.90% on total assets 3, Bank margins range between 1.25% and 1.70% Operating expenses range from 0.80% to 3.80% on total assets Additional sources of revenues required to cover / enable more competitive pricing 4.50% 4.00% 15 Net interest margin 3.50% 3.00% 2.50% 2.00% 1.50% Manitoba 3.02% 2.49% 2.32% 1.93% 1.72% 1.61% Year

17 Economic and competitive indicators suggest low interest margins are the new reality The three Toronto-based banks posted record profit in Canadian personal and commercial banking and wealth management even as near record-low interest rates and tight net interest margins proved challenging for lenders (Financial Post Aug 29/13) The recent surge into record territory comes after the Bank of Canada said last week that it was pushing out its timelines for raising interest rates, a move that encourages loan growth by increasing confidence that rates will remain lower for longer. (Globe and Mail Oct 29/13) Net interest margin strategies Portfolio diversification (current concentration in Residential mortgages) Improve liquidity balance / matching (deposits vs loans) Syndication pools 16

18 Although generally better than smaller CUs, the largest CUs are also challenged with operating efficiency Number of CU by Operating Efficiency Range (2012) <60% 60-70% 70-80% 80-90% >90% Operating efficiency strategies Scale matters to drive down costs Continued consolidation / collaboration initiatives Alternative sources of revenue improve overall returns and /or enable more competitive pricing 17

19 Credit unions are exploring a wide range of fee and commission based sources of income Products Wealth management (funds, insurance, securities) Insurance (life, P&C, creditor) Credit cards Some also considering enhanced yield possible through holding own card portfolio on-book Services (to members and other institutions) Foreign exchange Loan administration Payroll processing Syndication / referrals Fees (although clearly less palatable for members) Loan origination / discharge Statements Transaction-based 18

20 Non-interest revenue as an enabler of growth Capacity to compete Enables more competitive pricing Rounds out product service offering so members don t need to go elsewhere (limit competitive risk) Shared platforms provide scale needed to access enhanced capabilities / offerings Grow share of wallet and total assets Deepen relationship with members by providing range of products throughout their lifecycle (keep relationship sticky ) Enhances capital position Contributes to the bottom line / growth of capital Activities generally do not attract capital requirement providing greater leverage for on-b/s growth Deliver on value proposition More holistic support of financial health & well-being of members Contributes to the bottom line amounts available to: Invest in new products / services Support patronage Support community investment / social impact investment 19

21 Canadian CUs/ CPs have scored well in customer service and satisfaction in comparison to Schedule I banks Ipsos Best Banking Award Canadian CUs / CPs ING Direct Desjardins TDCT BMO CIBC Scotiabank RBC PC Financial National Bank Total Awards Customer Service Excellence Value for Money Values My Business Recommend to Friends or Family Interest Rates & Service Charges Products & Services Excellence Financial Planning & Advice Branch Service Excellence ATM Banking Excellence Mobile Banking Excellence Automated Telephone Banking Excellence Live Agent Telephone Banking Excellence 20 Source: Ipsos Best Banking Award Recipients for 2013 Note: JD Power conducts a similar study however results are not provided for credit unions, as they do not meet market share requirements for the study

22 Parting reflections Competitive GROWTH Relevant value proposition Financial performance The growth imperative Evidence that you are delivering against a relevant value proposition Evidence that you are providing a viable alternative to members Members (current and future) have more choice Need to compete in terms of what you offer, how you offer it and how it is priced and deliver something more (differentiated value proposition) Financial performance matters CUs need to grow their own capital through operations Non-interest revenue solutions can be a useful tool in supporting all of the above 21

23 Questions Haig Vanlian, CA, CFA (204) Partner

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