Spaghetti Westerns and Shakespeare: Outlook and Opportunities for Ontario Credit Unions

1. Spaghetti Westerns and Shakespeare:Outlook and Opportunities forOntario Credit Unions Central 1 2009 Spring Conference A. Michael Andrews mike@amandrews.ca

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 Shakespeare As You Like It, Act 1 Scene 7

3. Financial System Outlook and Risks • Five main risks to the financial sector • Funding and liquidity • Capital adequacy • Household balance sheets • Global economic downturn • Global imbalances and currency volatility

4. Financial System Outlook and Risks • Five main risks to the financial sector • Funding and liquidity • Capital adequacy • Household balance sheets • Global economic downturn • Global imbalances and currency volatility

5. The (Relatively) Good • Global imbalances and currency volatility • Funding and liquidly • Household balance sheets

6. Funding and Liquidity • Events since mid-2007 have overturned many assumptions about liquidity management • Triggered a rediscovery of the joys of retail funding and boring retail banking • Wholesale financing dried up • Increased competition for deposits • Falling 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 System averages, end-2007 Source: Calculated from Credit Union Central of Canada data.

8. Ontario CU-CP Net Liquidity Source: Calculated from DICO data.

9. Household Balance Sheets Household debt (percent of personal disposable income) United States Canada Source: Bank of Canada Financial Stability Review, Dec 2008.

10. Household Balance Sheets Indebtedness Indicators Source: Bank of Canada Financial Stability Review, Dec 2008.

11. Global Imbalances and Volatility • Credit unions have less direct exposure than many other financial institutions • Few trading assets • Little currency exposure • Little direct country-risk exposure • Indirect risks from the impact on investor and consumer sentiment

12. The Bad • Capital Adequacy

13. 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

14. Ontario CU and CP Asset Quality Source: Calculated from DICO data.

15. Capital Levels and Asset Quality Source: Calculated from DICO data.

16. And the Ugly • Global Economic Downturn

17. Global Economic Downturn • 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.

18. Strength In Hard-Hit Regions

19. Strength In Hard-Hit Regions

20. Strength in Hard Hit Regions • CU-CP market share in Ontario is about 5 percent overall, but only 2 percent in GTA • 35 percent of the population of Northern Ontario are CU-CP members Sources: DICO, CPA, Statistics Canada.

21. Strength in Hard-Hit Sectors • Despite 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

22. 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 community • Increasing market share

23. Prospering in Tough Times • The population of Sault Ste. Marie declined by 5.6 percent from 1996 to 2001 • Thousands of jobs were lost in a small community • Unemployment 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

24. 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/

25. 5% Market Share—25% SME Business Credit Outstanding Authorizations under $1 million, end 2006 Source: Statistics Canada Table 176-0045 and DICO.

26. 5% Market Share—16% Ag Agricultural Credit Outstanding, end 2006 Source: Statistics Canada Table 176-0045 and DICO.

27. 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

28. Community Support • Many 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

29. In the Midst of the Tempest What’s done can’t be undone William 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

30. Drawing On Inherent Strength Our remedies oft in ourselves do lie William 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

31. Seizing the Opportunity • Requires a sound prudential base—capital and liquidity • Too late now to wish we had done things differently in the good times • Building market share and brand awareness • Supporting businesses when the banks are cutting back • Avoiding layoffs and cutbacks in community support • Getting 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 Shakespeare Measure 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