2016-11-29
The data for the third quarter of 2016 shows that the credit union sector is operating at a loss this year – EUR 4.4 million in losses were incurred. The loss-bearing activities were due to a further decline in credit union income and rise in expenses. The Bank of Lithuania, in preparation for the restructuring of credit unions, is carrying out a review of credit unions’ asset quality, whose results will be clear early next year.
‘The outlook for the further activities of credit unions will depend on the results of the asset quality review of 73 credit unions; they will reveal the real value of the assets of credit unions and their financial standing. It is, however, clear now that credit unions will have to take additional action to increase the share of their sustainable capital. As of next year, only capital that, where necessary, can be used to cover losses will be recognised as sustainable. Holding sufficient sustainable capital, credit unions will be stronger, as they will be able to withstand possible financial shocks,’ says Vytautas Valvonis, Head of the Supervision Service at the Bank of Lithuania.
According to the financial statements submitted by credit unions, two thirds (48) of credit unions earned EUR 3.7 million in profits over the three quarters of 2016; however, the loss incurred by the remaining 26 credit unions exceeded this profit by more than two times, amounting to EUR 8.1 million. Over the nine months of this year, the credit union sector earned 17 per cent less income year on year, whereas its expenses rose by almost 4 per cent.
‘With their earnings declining, credit unions should reduce the expenses they incur accordingly, but often the reverse trends are recorded. A union is not equal to another one, but some cases speak for themselves in particular. For instance, a credit union, for a few consecutive years operating at a loss, purchases luxury Porsche or Bentley cars. Such excessive spending cannot be justified,’ says Valvonis.
According to him, in order to accumulate sustainable capital ensuring stability in operations, credit unions have to significantly improve their performance, i.e. increase their income, reduce the costs, and look for sources of additional sustainable capital.
In the third quarter of this year, the composition of credit union assets remained basically unchanged – with loans accounting for the largest share (52%). The loan portfolio of credit unions grew by almost 6 per cent. This growth was driven by further increasing crediting of natural persons.
While the indicators defining loan quality improved somewhat, non-performing loans expanded (by EUR 0.8 million) and assets taken over for debts increased. This shows that members of credit unions default on their liabilities and in the future, due to loans outstanding and the selling of assets taken over for debts, they could incur significant losses that will have a negative impact on their capital.
The main source of credit union funding remains deposits accepted: almost 90 per cent of credit union assets were financed with them. Despite a contraction in the deposit portfolio by almost EUR 6 million, the overall contraction was mitigated by an increase in sight deposits – the inflows into the accounts of members of credit unions rose due to seasonal factors.
According to the data of submitted reports as of 1 October 2016, the capital adequacy ratio of the system of credit unions was 16.6 per cent (the requirement is 13%), the liquidity ratio – 52.99 per cent (the required minimum is 30%).
As of 1 October, six credit unions did not comply with prudential requirements: AMBER credit union, Pajūrio credit union, Centro taupomoji kasa credit union, Vilniaus kreditas credit union, Palanga credit union, and Pareigūnų credit union. Given that nearly all credit unions do not comply with the prudential requirement due to lack of capital, accumulation of sustainable capital is one of the major strategic goals for credit unions.
As of 1 October 2016, 74 credit unions were in operation. They united 162.3 thousand members (in Q3 2016, their membership increased by 1.8 thousand); however, following the initiation of bankruptcy proceedings against AMBER credit union in October, credit unions dropped to 73 in number. Currently, 61 credit unions are members of the Lithuanian Central Credit Union, while 12 credit unions operate independently.
For more detailed information about the operating results of credit unions for Q3 2016, see the Review of the Activities of Credit Unions (482.1 KB download icon) published on the website of the Bank of Lithuania. Aiming to increase transparency in the domestic financial market, the Bank of Lithuania publishes information (482.1 KB download icon) on each credit union’s key activity indicators and compliance with prudential requirements in a special summary.