Central Bank provides update on the financial condition of the Credit Union sector

• Financial Conditions of Credit Unions Report - updated sector data reflects return to more normal economic activity levels - but risks and challenges remain
• Savings and loans imbalance continues to challenge credit union sustainability
• Credit unions need to focus on addressing their business model challenges, ensuring this is supported by strong governance and embedded risk management

The Central Bank today (14 December) published its eighth edition of the Financial Conditions of Credit Unions Report. The report provides an update on the financial performance and position of credit unions, to inform credit unions and provide input for boards as they undertake their own strategic analysis and decision-making.

The report notes that changes in the financial services sector are being driven by rapid technological transformation, new entrants to the market and the planned exit of some incumbent providers. For credit unions to continue to be relevant to their members into the future, they need to leverage potential opportunities by embracing the process of innovative business model change within existing legislative and regulatory flexibilities. The report also highlights that credit unions need to understand the impact of climate change on their risk profile and enhance existing risk management frameworks to ensure robust climate risk identification, measurement, monitoring and mitigation.

The report concludes that it has been another challenging year as credit unions have had to continue to navigate through the impacts of COVID-19 as well as other business challenges. While there are some positive trends in reported sector data for the year to 30 September 2021, reflecting a return to more normal economic activity levels, significant risks and challenges remain. The report identifies key trends, including:

• Lending - credit unions have participated in the recovery in credit demand as COVID-19 restrictions were eased. However, the overall loan to asset ratio at 27.1% remains close to historically low levels. Notably, nearly two years after the introduction of additional capacity in the regulatory framework for house and business lending, credit union remains heavily dependent on unsecured personal lending.
• Savings – while savings continued to increase year on year, now totalling €16.79 billion, the pace of growth during 2021 has slowed compared to 2020 - which may reflect steps taken by many credit unions to manage savings inflows and also some reversal of COVID-19 effects. Asset and liability management remains a key priority given the sectoral imbalance between savings and loans which has been growing in recent years.
• Reserves - average sector total realised reserves as a percentage of total assets have increased marginally from 15.9% at 30 September 2020 to 16.0% at 30 September 2021. This is a positive trend given the importance of reserves in underpinning member confidence, particularly at times of uncertainty, disruptive change and where sustainability challenges persist.

Commenting on the report, Registrar of Credit Unions Patrick Casey said: "Notwithstanding some positive trends in the data, credit unions need to ensure that, to the extent that reported surpluses may have been impacted by one-off gains, this does not distract them from addressing the underlying sustainability challenge arising from the long term divergence between lending and savings.

“Addressing sustainability through business model change, including by availing of the capacity and scope within the existing regulatory framework, requires effective leadership, strategic thinking and sectoral collaboration, supported by strong governance and embedded risk management at a credit union level.

“Credit unions need to focus on evolving their business model and take advantage of opportunities that are available – including lending on a safe and sound basis to service their members’ needs.”

Note

View previous reports on Financial Conditions of Credit Unions.