David Newman's letter to Manitoba CU regulator | General comparisons | Discussion forum

My own thoughts are:

• The implication is that credit unions shouldn't be doing business with non-residents of their province, or certainly not through non-resident agents. Whether a non-resident GIC broker would come under the authority of provincial regulators of the broker's own province is an interesting grey area; otherwise this point is only of theoretical interest to a direct non-resident customer of a Manitoba CU.
• the "cost of funds" point seems too simplistic. Not all their long-term loans are going to be best-rate residential mortgages; presumably their farm and commercial loans will be at higher rates. I took a look at a few annual reports for Manitoba CUs; there seemed to be a healthy margin between the interest paid to members, and the interest revenue from loans.
• He seems to have wrong numbers for the Manitoba fund (they are now MDGC, not CUDGC); his dollar amounts are substantially off, and his "129 times" multiplier should actually be more like 100. Manitoba actually has one of the higher fund ratios in Canada.
• I'm not sure there is that much effective difference between MDGC and DICO (the Ontario equivalent). Although DICO is an "agency of the province of Ontario", I'm not sure if that commits the Ontario government to ultimately backstop DICO's liabilities or not.

The Manitoba CUs seem to offer similar rates to their bricks and mortar customers, so if these really were "aggressive and unsound business practices", the online stuff would be irrelevant - the CUs would need to be reined in domestically in any case.

I did some poking around last year on Manitoba CUs, but could never get a straight answer from anyone as to why it was only they playing in this high-rate space, not their counterparts in other provinces. Presumably it is some combination of the Manitoba regulators being more open to non-resident deposits, or Manitoba having greater need or productive use for additional higher-cost deposits, or whatever.

Assiniboine's Outlook has been around for over a decade, but I'm not sure whether the current large gap between Manitoba GIC rates and the rest of the industry has always been so big. But stripped of the non-resident and MDGC stuff, the argument implicit in Newman's letter is that the interest rate structures of most Manitoba CUs are "aggressive and unsound", and that their regulator may be asleep at the switch, which seems a little extreme...

FWIW, I've pulled some numbers from Assiniboine's annual reports for the last 4 year (2007-2010). Their "interest paid" to depositors has been about 53-59% of "interest earned" from loans (59% in 2010). This seems a rather higher percentage then some CUs from other provinces I checked as comparison: the BC/Alta/Ont ones I looked at seem to pay out more in the 30-40% range in 2010. But for 2010 an amount equivalent to over 15% of Assiniboine's "interest earned" was added to their retained earnings, which doesn't seem out of line with those non-Manitoba ones I looked at. I'm not sure if Manitoba CUs are paying out smaller dividends, or have other efficiencies or whatnot, but it certainly isn't obvious that they are running any more ragged than elsewhere.

Manitoba credit union assets, on a per capita basis, seem pretty close to their next door neighbours in Saskatchewan, so I'd imagine their popularity is fairly similar. But the Saskatchewan credit unions don't seem to need to pay such high rates to their depositors. A couple of the Sask CUs I looked at paid out interest equivalent to about 1.5% of their deposit base, and my BC and Ontario comps were 1.6-1.7%. Assiniboine was around 2.3%, and Cambrian (the Achieva people) at 2.6%. Unfortunately, there doesn't seem to be any way to break out the online or non-resident components, but a higher cost of funds seems to be baked into the Manitoba system generally, for whatever reason.

Raji said:

… explain how Achieva/Cambrian has been able to do so for over 12 years, while at the same time growing their assets, profits and capital.

Could all of this be the fact that Fiscal Agents makes money as a deposit broker and these credit union offers are simply adding a high level of competition?

To be fair, the current spread between the mortgage and GIC is pretty low right now, not representative of the normal spread. If mortgage rates went unchanged for a significant length of time the GIC rates would probably have to come down. As long as their overall margin between the interest from their loan book and interest paid is sufficient in the medium term, a short period of thin spreads isn't going to unbearable. The spreads were higher earlier this year, and they are probably paying out less interest since the trend is probably to park shorter term rather than taking up long-term GICs right now.

It will be interesting to see how the margins look when the 2011 annual reports come out.

I doubt you'll get any interesting information from PR or customer service people. What's really needed is to buy a banking analyst or management type a couple of pints and have them sketch out the basic balances, how things have evolved in Manitoba, and whatnot.

For anyone interested, I've got a quick and dirty graph of 5-year GIC/mortgage rates at Cambrian/Achieva. I pulled the numbers from old pages at the Internet Archive (aka the Wayback Machine), and the Achieva ones in particular are a little lumpy.

Thanks for the info about Cambrian's quarterly financials – I had been looking for something like this for one of the CUs and missed them. I'm not worried about the Manitoba CUs per se, but I'm curious as to how they've evolved to these high-rate anomalies, and what tradeoffs they've made.

The 5 year spread would be of interest mainly in that the CUs probably want some sort of rough balance on the length of their loan and deposit maturities to reduce their interest rate risks. One of the Saskatchewan CUs (Conexus) that otherwise posts lousy GIC rates (4 years at 1.7%) has a 5 year rate at 3%, presumably to attract longer-term deposits. FWIW, Cambrian's interest payouts as a percentage of loan and gross revenue has actually been dropping the last few quarters, which is probably why the Manitoba CUs can resist reducing their GIC rates for awhile.

Interestingly, Newman's Fiscal Agents does have one Manitoba credit union (Westoba) on their list of financial institutions they deal with, so his qualms about Manitoba deposit insurance aren't absolute! My guess is that most of the Manitoba CUs don't have a commission program in place for GIC brokers – they offer their best GIC rates publicly (the bricks and mortar rates are only a tenth of a percent lower than the online divisions'). Westoba, however, has branch rates that are an extra 0.25% lower than most of the others, and a quarter point seems to be a typical broker commission from what I can find.