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Credit Unions: Different From Banks but Similar Risks and Important Participants in the Canadian Financial System

Although typically smaller in size and scale, credit unions (CUs) and caisses populaires (CPs) in aggregate are important participants in the financial system with total membership exceeding 10 million, or more than 28% of the Canadian population. These full-service financial co-operatives generally have fewer products and services than banks, but often have lower fees, better rates, and superior customer service. CUs/CPs are usually local, community-based institutions that provide financial services in underbanked areas (i.e., small cities/towns and rural communities) and have a common bond and commitment to the people and communities they serve. CUs/CPs are not-for-profit, with excess funds either invested back, used to establish better interest rates and lower fees for members, paid out as dividends, or donated to local charities and community projects.

Key highlights include the following:

-- Credit unions and caisses populaires are an important component of the Canadian financial system as viable alternatives to banks, typically offering lower fees, better rates, and superior customer service in underbanked areas.

-- CUs/CPs are typically smaller in size and have an aging member base compared with banks, and the number of CUs/CPs has been declining as they merge to gain scale and expand offerings.

--Interest rate hikes will boost net interest margins on loan portfolios dominated by residential mortgages. Although asset quality remains strong, residential mortgages remain vulnerable to a housing market downturn. Credit metrics are expected to normalize and deterioration could be magnified if highly indebted households struggle with higher mortgage carrying costs.

“Although CUs/CPs generate sufficient earnings to readily absorb provisions for credit losses, CUs/CPs face a challenging macroeconomic environment moving forward. Residential mortgages represent over half of total loans. Although asset quality and credit performance remain strong and there are no signs of an immediate impact on credit quality, highly indebted households have been extending themselves financially to purchase homes at elevated prices, particularly during the pandemic. Additionally, high inflation will adversely affect expense lines and CUs/CPs have high expense ratios relative to banks because of their high-touch service and community support,” said Carl De Souza, Senior Vice President, North American FIG.