Spaghetti Westerns and Shakespeare:Outlook and Opportunities for

Ontario Credit Unions

A. Michael Andrewsmike@amandrews.ca

A. MICHAEL ANDREWS AND ASSOCIATES LIMITED Specialists in Financial Sector Policy, Strategy, Regulation and Supervision

Central 12009 Spring Conference

2

Outlook and Opportunities

The economic forecast and financial system risks pose significant challenges

The impact will not be uniform across the financial sector, or across the credit union system

Opportunities exist, even though “true it is, we have seen better days”

William ShakespeareAs You Like It, Act 1 Scene 7

3

Financial System Outlook and Risks Five main risks to

the financial sector1. Funding and

liquidity2. Capital adequacy3. Household balance

sheets4. Global economic

downturn5. Global imbalances

and currency volatility

4

Five main risks to the financial sector

1. Funding and liquidity

2. Capital adequacy3. Household balance

sheets4. Global economic

downturn5. Global imbalances

and currency volatility

Financial System Outlook and Risks

5

The (Relatively) GoodFunding and

liquidlyHousehold

balance sheets

Global imbalances and currency volatility

6

Funding and LiquidityEvents since mid-2007 have overturned many

assumptions about liquidity managementTriggered a rediscovery of the joys of retail

funding and boring retail bankingWholesale financing dried upIncreased competition for depositsFalling rates are compressing margins

Most credit unions continue to rely on traditional deposit mobilization—a strength relative to many financial institutions

7

Loan to Deposit Ratios

60

70

80

90

100

110

BC NB AB ON

L'Allia

nce MB NL SK PEINS

System averages, end-2007

Source: Calculated from Credit Union Central of Canada data.

8

Ontario CU-CP Net Liquidity

101112131415

Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08

Cash+investments-borrowing (percent of assets)

Source: Calculated from DICO data.

9

Household Balance Sheets

80

100

120

140

160

180

1990 1994 1998 2002 2006

United States

Canada

Household debt(percent of personal disposable income)

Source: Bank of Canada Financial Stability Review, Dec 2008.

10

Household Balance Sheets

60

80

100

120

140

1990 1994 1998 2002 20066

8

10

12

14

Debt-to-income ratio (left scale) Debt-service ratio (right scale)

Indebtedness Indicators

Source: Bank of Canada Financial Stability Review, Dec 2008.

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Global Imbalances and Volatility

Credit unions have less direct exposure than many other financial institutionsFew trading assetsLittle currency exposureLittle direct country-risk

exposureIndirect risks from the impact on

investor and consumer sentiment

12

The Bad

Capital Adequacy

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Capital Adequacy

So far so good, but it will get worse before it gets better

Trend in delinquency and non-performing loan coverage is a concern

Credit unions are limited in their ability to deal with losses—can’t go to the market with a new issue, so retained earnings is the only real buffer

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Ontario CU and CP Asset Quality

050

100150200250300

$ m

illio

ns

Q4-06

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Delinquent loans 30-90 days Delinquent loans > 90 days

Total loan loss allowance

Source: Calculated from DICO data.

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Capital Levels and Asset Quality

Source: Calculated from DICO data.

6.97.07.17.27.37.4

Q4-06 Q1-07Q2-07Q3-07 Q4-07Q1-08Q2-08 Q3-088090100110120130

Regulatory capital/total assets (left scale)Loan allowance/>90 day delinquent (right scale)

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And the UglyGlobal Economic

Downturn

17

Global Economic Downturn

0400800

1200

98 99 00 01 02 03 04 05 06 07 08

Manufacturing Jobs in Ontario (000s)

Global decline in demand is hitting Ontario manufacturing, but

The loss of manufacturing jobs is part of a long term trend that began before the cyclical downturn started

Source: Statistics Canada Table 282-0088.

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Strength In Hard-Hit Regions

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Strength In Hard-Hit Regions

05

1015202530354045

Northern Southwestern Central GTA Eastern

perc

ent o

f pro

vinc

ial t

otal

s

Population Credit Union Assets

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Strength in Hard Hit RegionsCU-CP market share in Ontario is about 5

percent overall, but only 2 percent in GTA35 percent of the population of Northern

Ontario are CU-CP members

Sources: DICO, CPA, Statistics Canada.

020406080

GTA Outside GTA

Population Bank Branches CU-CP Locations

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Strength in Hard-Hit SectorsDespite ongoing consolidation, still

some closed-bond industrial-based credit unions

Many of the largest community credit unions have strong roots in the auto and steel sectors

Plunging commodity prices are another blow to Northern Ontario, already reeling from a long decline in the forestry sector

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Opportunities in Challenging Times

“Ill blows the wind that profits nobody”William Shakespeare

Henry the Sixth, Part III, Act 2 Scene 5

Credit unions able to withstand the tempest can build on their strengths

Supporting local businesses Strengthening ties to the communityIncreasing market share

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Prospering in Tough TimesThe population of Sault Ste. Marie declined

by 5.6 percent from 1996 to 2001Thousands of jobs were lost in a small

communityUnemployment peaked at over 12

percent, more than twice the provincial average

Community First (formerly ASCU) grew by more than one-third, significantly increasing its market share as the banks cut back

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Prospering in Tough Times“People know that we are not going

to pull out or cut back because of the latest doom and gloom report in the newspaper. These business owners know they can count on us, and have become our best salespeople.”

Aldo Greco, quoted in A. Michael Andrews and Associates, Strengthening Ontario Communities:

The Contribution of Credit Unions and Caisses Populaires

http://www.ontariocreditunions.com/andrews/

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5% Market Share—25% SME

$15 billion

South-western

NorthernGTA

Eastern

Central

Banks 75%

CU-CP 25%

Business Credit OutstandingAuthorizations under $1 million, end 2006

Source: Statistics Canada Table 176-0045 and DICO.

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5% Market Share—16% AgAgricultural Credit Outstanding, end 2006

Source: Statistics Canada Table 176-0045 and DICO.

$4.8 billion

Banks84%

NorthernGTA

EasternCentral

Southwestern 12.5 %

CU-CP 16%

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Good Jobs in Smaller Communities

Credit unions and caisses populaires employ over 7,000 people in Ontario

Two-thirds of all financial sector jobs are in the GTA, but 80 percent of credit union and caisse populaire jobs are outside the GTA

Credit unions bring head office jobs to smaller communities

Average credit union wages are above the provincial average

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Community SupportMany credit unions dedicate two,

three or even five percent of pre-tax profits to community initiatives, compared to the one percent average among larger financial institutions

Especially important as other businesses and individuals cut back

Opportunity for credit unions to differentiate themselves and capitalize on community support

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In the Midst of the Tempest

What’s done can’t be undoneWilliam Shakespeare

Macbeth, Act 5 Scene 1

Just as the rising tide of fifteen years of unprecedented growth lifted all boats, the swirling eddies of the global economic downturn will test the soundness of all hulls and crew

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Drawing On Inherent Strength

Our remedies oft in ourselves do lieWilliam Shakespeare

All’s Well That Ends Well, Act 1 Scene 1

Credit unions that built a strong buffer of excess capital during the good times are well placed to weather the storm

Credit unions have a remarkable opportunity to differentiate themselves from the competition

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Seizing the OpportunityRequires a sound prudential base—capital

and liquidityToo late now to wish we had done things

differently in the good timesBuilding market share and brand

awareness Supporting businesses when the banks

are cutting backAvoiding layoffs and cutbacks in

community supportGetting the story out about credit unions

supporting their community

32

Looking Ahead

They say, best men are moulded out of faults, and, for the most, become much more the better for being a little bad.

William ShakespeareMeasure for Measure, Act V Scene 1

So lets hope that your credit union, and the system as a whole, proves to be only a little bad, and emerges much stronger from the tempest