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After operating at a loss last year, credit union sector preparing for reforms

February 28, 2017

According to the data of unaudited reports, in 2016, 48 credit unions earned EUR 3.8 million in profits; however, 25 credit unions that operated at a loss incurred a somewhat higher loss, which determined loss-bearing operation of the credit union sector – the loss incurred amounted to EUR 38.8 thousand (according to unaudited data for 2015 – EUR 3.6 million).

‘Last year’s currently-published operating result of the credit union sector could be adjusted by a close-to-an-end general credit union asset quality review that we have carried out in preparation for credit union restructuring to be commenced this year. We have already noticed some signs of preparation for changes by credit unions themselves. At extraordinary general meetings of members, credit unions actively discuss issues of the establishment of new central credit unions, also address other issues related to the sector’s future reform,’ says Vytautas Valvonis, Director of the Supervision Service of the Bank of Lithuania.

According to the data as of 1 January 2017, credit unions had granted EUR 342.2 million in loans to their members, which accounted for more than 51 per cent of their assets. In the fourth quarter of 2016, credit union loans grew marginally, but their loan portfolio expanded by EUR 60.7 million throughout last year, an increase of one-fifth. Annual credit growth was driven by intensified crediting of natural persons.

With the expansion of the loan portfolio and a decline in specific provisions (for loan loss provisioning charges) by 15.5 per cent (to EUR 17.5 million), the ratio of specific provisions to loans decreased by 1.9 p.p. (to 4.9%). The loans under which debt obligations are overdue for more than 60 consecutive days, increased by EUR 2.2 million, compared to those at the end of 2015, while non-performing loans – by EUR 4.2 million.

‘This shows that members of credit unions default on more and more liabilities, which is a worrying signal. The asset quality review conducted will help reveal the actual value of credit union loans, the size of losses incurred due to loan risk and their influence on the sustainable capital being formed by credit unions. After receiving explanations from credit unions in relation to the review, preparation of final conclusions is near completion,’ says Valvonis.

Accepted deposits remain the major funding source for credit unions – more than 90 per cent of credit union assets were financed with them. In 2016, the deposit portfolio expanded by EUR 3.9 million (0.7%), to EUR 590.7 million as of 1 January 2017. The total annual growth in the deposit portfolio was driven by sight deposits.

As of 1 January 2017, 73 credit unions operated in Lithuania, with a total membership of 163.1 thousand. The Lithuanian Central Credit Union (LCCU) included 61 credit unions, 12 operated independently.

The legal acts adopted in 2016 provided conditions for the establishment of new central credit unions (five credit unions will be able to establish them upon agreement; currently, one central credit union is operating). It is planned that all credit unions will become members of central credit unions. The aim of this restructuring is that central credit unions and their member credit unions become jointly financially responsible for each other. The existing Law on Credit Unions provides for a possibility to restructure credit unions also into banks.