# Billy Hobbs article on CU dividends and ILCU response



## kaplan (23 Jan 2011)

ILCU have responded to an article written by in the Irish Examiner. 

Note its line 

_"In order for credit unions to continue to be a valuable source of financial support to members and their communities, and in order to remain competitive, some credit unions may not be in a position to pay dividends as high as previous years." _


No admission here of the emerging dividend story.
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## kaplan (24 Jan 2011)

Latest update 
Over 300 are likely to pay less than 1% with 196 paying less than 0.50% of which 82 will pay nothing at all.

Ability to pay a dividend and the rate is the key financial performance indicator for the Irish credit union business model. Given a threshold confidence level of a minimum  1% this means that three hundred credit unions are probably experiencing varying degrees of serious financial stress.


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## ontour (25 Jan 2011)

kaplan said:


> Ability to pay a dividend and the rate is the key financial performance indicator for the Irish credit union business model. Given a threshold confidence level of a minimum  1% this means that three hundred credit unions are probably experiencing varying degrees of serious financial stress.



Your extrapolation is very flawed.  A credit union could be paying a high dividend but using reserves to fund the dividend.  Another credit union may pay a very meagre dividend as they are concerned about the future state of the economy and wish to increase their reserves.

As I understand it, Credit Unions have been required to increase their bad debt provision this year which has an impact on the ability to fund dividend payments.  This increase in provision does not analyse the risk in the loan book so it may be far too much or in many cases far too little.

Even if all credit unions applied an identical policy for determining dividends, as all the ads say...past performance may be no indication of future performance. Imagine having bought bank share based on the dividends that they were paying shareholders....    

To assert that 2 out of 3 credit unions are in 'serious financial trouble' based on the dividend paid is misleading.  Actual bad debt, share-loan ratios, operating costs etc. provide a better and more balanced assessment of the start of the credit unions


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## julius128 (25 Jan 2011)

kaplan said:


> Ability to pay a dividend and the rate is the key financial performance indicator for the Irish credit union business model. Given a threshold confidence level of a minimum  1% this means that three hundred credit unions are probably experiencing varying degrees of serious financial stress.



I don't agree with you at all, paying less than 1% dividend it does not mean Credit Unions are in serious financial stress.
There are lots of new regulation came into affect from Central Bank and Financial Regulator which forced Credit Unions to put aside lot more reserve for the sake of members themselves. 
So even Credit Unions wish to pay more dividend, regulator doesn't allow them.
And obviously lot of members have lost their jobs or had pay cut which forced them to re-negotiate the loans, and according to new regulations, Credit Unions are forced to put aside more reserve for these loans.

Credit Unions are in much much better positions than Banks as it runs by members not like these greedy bankers


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## county (25 Jan 2011)

kaplan said:


> Latest update
> Over 300 are likely to pay less than 1% with 196 paying less than 0.50% of which 82 will pay nothing at all.
> 
> Ability to pay a dividend and the rate is the key financial performance indicator for the Irish credit union business model. Given a threshold confidence level of a minimum 1% this means that three hundred credit unions are probably experiencing varying degrees of serious financial stress.


 

Dont agree with this.  If I were on the board of a credit union I would be recommending that no dividend be paid in these uncertain times and rather hold onto it as a reserve in the event of future shocks.  Remember AIB back in 2008 when they declared a dividend was this a sign to us all that they were ok.. i doubt... today they are delisted.  It is also worth remembering that Credit Union's as far as i think were not established as an investment institution rather a cooperative to enable the supply of credit to those which had no alternatives


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## Brendan Burgess (25 Jan 2011)

I have moved the posts about the discussion between Bill Hobbs and the ILCU to a separate thread

http://www.askaboutmoney.com/showthread.php?t=150245


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## kaplan (28 Jan 2011)

@wizardr I too have questioned why 10% and note the WOCCU benchmark is 15%. Risk weighted capital adequacy is not a feature of the Irish prudential regime but is in the US, Canada and Australia. Credit unions here can only generate capital from retained earnings. Some elswhere have managed to tap capital markets.

@county are you suggesting that credit union dividends are equivalent to dividends declared on private equity? The implication is credit union shares are a form of risk capital which is what of course they were at one time.

@ontour; my extrapolation is based on declared rates and results confirmed by ILCU in this article


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## kaplan (28 Jan 2011)

*ILCU questions deposit safety*

In an extraordinary article ILCU's Kieron Brennan dubbed "Mr Credit Union" has questioned the safety of credit union deposits with Irish covered banks and by implication questioned the value of the state guarantee. The very same guarantee that backs €11.5bn in credit union savers funds. This at a time when hundreds of thousands of credir union customers will not be paid a dividend for last year, many not for two years.

It seems anxious to score points in the ongoing war with the central bank, ILCU has shot itself in the foot yet again. It's comments are irresponsible in the extreme and contradictory to its previous statements. Only months ago Brennan was offering to invest credit unions funds in Government bonds. 

If ILCU persists it could trigger a run on deposits with credit unions.


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## WizardDr (28 Jan 2011)

Kaplan - is that 15% on 'total assets' and out of 'retained profits'?
Given that the CU income py is 6% and costs are 3.8% (which can only rise with more 'professional' staff) leaving 2.2% before dividend ..the 10% ratio here is unsustaianable as configured.


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## kaplan (29 Jan 2011)

@wizard Irish credit unions are by law obliged to transfer 10% of annual surplus to statutory reserves. 

These reserves must be 10% of total assets of which 8% must be held in statutory reserves and 2% in non-distributable reserves.

The WOCCU standard is 15% of total assets. 

The margins you use are interesting - perhaps you might be good enough to explain how you arrived at them and let us know of the data set you are working off.


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## Brendan Burgess (29 Jan 2011)

http://www.independent.ie/business/irish/mr-credit-union-is-squaring-up-for-new-battles-2512819.html


> "Mr Credit Union" has questioned the safety of credit union deposits with Irish covered banks



Hi Kaplan

Where does it say that in the article? 

By the way, I think that the biggest threat to Credit Unions is not loan losses but is one of the banks defaulting on their deposits and the government being unable to meet the guarantee. 

It seems to me that the provisions against loan losses, in most credit unions, is probably adequate or approaching adequacy. But with half of their assets on deposits in Irish banks, a failure by an Irish bank would wreck a whole lot of credit unions.


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## kaplan (29 Jan 2011)

@brendan here's the article


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## Brendan Burgess (29 Jan 2011)

Thanks - that is not the article you quoted. But they are pretty damning comments ok.   

Brendan


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## kaplan (31 Jan 2011)

*ILCU branded as negligent*

Follow up Irish Examiner article is here.

@brendan the greatest risk is the ability or otherwise of the state to support its banks one has to consider the probability of that risk materialising.

On the other hand it is highly likely that a number of credit unions will fail and have to be closed or merged into others. 

The highest risks facing credit unions stem from poor governance and management which has given rise to imprudent investment and loan losses, cost inefficiencies, declining margins manifest in turn in dividends.

ILCU has admitted that upwards of 80 credit unions will be unable to pay a dividend (one in five) up from 60 last year. Given its propensity to downplay bad news the figure is likely to be higher.


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## county (31 Jan 2011)

kaplan said:


> @wizardr I too have questioned why 10% and note the WOCCU benchmark is 15%. Risk weighted capital adequacy is not a feature of the Irish prudential regime but is in the US, Canada and Australia. Credit unions here can only generate capital from retained earnings. Some elswhere have managed to tap capital markets.
> 
> @county are you suggesting that credit union dividends are equivalent to dividends declared on private equity? The implication is credit union shares are a form of risk capital which is what of course they were at one time.
> 
> I am merely suggesting that by viewing the ability of an institution to pay or not to pay a dividend is a blinkered view on that institutions overall strength and by using the AIB's dividend venture as an example.


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## Complainer (23 Jul 2011)

Commission on the CU industry is now consulting with the public


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## kaplan (24 Jul 2011)

Interesting development which could encourage people to have a say in what they want from their credit union rather than what ILCU and others say they might want. Bill Hobbs has an article here in which he writes of a county based instead of parish based network.


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## kaplan (1 Sep 2011)

Hobbs has developed on his article in his submission to the commission on credit unions. The submission titled *[broken link removed]*has been posted to his blog [broken link removed]


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## WizardDr (27 Sep 2011)

@Kaplan - you referred ages ago to a 15% Reserve Ratio and the WCCU. I have reviewed Pearls and the best I can locate is a 10% ratio but it includes a number of other elements other than retained earnings. Can you help? Also my fugures are extracts from the ILCU as in the income and expenditures are % of total assets.

Sorry I wasn't back on this post sooner.


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## WizardDr (3 Oct 2011)

Any sign of Kaplan?

I need an answer on where the WCCU have a 15% ratio that you mentioned previously.
Thanks.


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## Slim (3 Oct 2011)

WizardDr said:


> Any sign of Kaplan?
> 
> I need an answer on where the WCCU have a 15% ratio that you mentioned previously.
> Thanks.


 
I had a look at the Woccu site and could only find reference to  10% reserve ratio. This was in the Model Rules for CUs. Interestingly, in the News section this was reported  [broken link removed]

Quite interesting.


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## kaplan (4 Oct 2011)

[MOD EDIT: OT sentence removed]

WOCCU's benchmark is of course 10%.

 But debate is getting bogged down in capital adequacy/reserves issues.

 I have written here in the past that perhaps the 10% could have been flexed to 8% - but that was before the scale of loan losses considerably worsened.

It may be the case that some credit unions will take a hit on reserves this year - so just as well they weren't burnred up to fund dividends.


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## ajapale (4 Oct 2011)

Some OT posts / parts of posts removed.

Please keep this thread on topic:  

Discuss other aspects of CU policy, operations and regulation in other threads in the CU forum.

Please do not engage in personalised OT discussion.

aj
moderator


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## kaplan (4 Oct 2011)

@wizard 

The 15% is a target "performance" benchmark. The 10% is the "minimum institutional capital" level promoted by WOCCU. 

Suggest opening a thread on the capital/reserve ratio issue as it's quite topical.


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## Complainer (4 Oct 2011)

kaplan said:


> @wizard
> 
> The 15% is a target "performance" benchmark.



Who's target is this? Who set the target?


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## kaplan (5 Oct 2011)

Sticking to the thread - the Hobbs article posits that mergers are inevitable and good if done for the right reason. It makes sense to consolidate down to few larger balance sheets with the same branch footprint if it creates a sustainable credit union system.


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## kaplan (5 Oct 2011)

_The issue of rationalisation — or cooperation as it is called within the league, is a matter for individual credit union boards to decide on. 
The ILCU will continue to facilitate credit unions that do choose to restructure. It should be remembered that restructuring is not by its nature a bad thing._ quote from the article link at the start of this thread.

Why not deal with the thread and provide cogent reasons for your position


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## ajapale (5 Oct 2011)

More OT posts removed.

Please keep this thread on topic:  

Discuss other aspects of CU policy, operations and regulation in other threads in the CU forum.

Please do not engage in personalised OT discussion.

aj
moderator


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