Ontario Credit Unions and Caisses Populaires SYSTEM OUTLOOK 3Q00

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1 Ontario Credit Unions and Caisses Populaires SYSTEM OUTLOOK 3Q00 INSIDE Economic Highlights: Growth in 2000 to exceed 4 % Page 1 Focus on Interest Rates: Steady as she goes for 2001 Page 2 System Highlights: Assets and capital reach new milestones Page 3 Off-balance sheet activity summary Page 4 System Financial Statements Pages 5, 6 and 7 Prepared by Deposit Insurance Corporation of Ontario Policy & Research Department systemoutlook@dico.com November, 2000 The information presented in this report has been prepared using a variety of sources, including unaudited reports submitted to DICO by Ontario s credit unions and caisses populaires. While DICO believes that the information contained in this report would be useful to readers, and considers the financial statements to be reliable, their accuracy and completeness cannot be guaranteed. Ce document est également disponible en français.

2 Electronic Publication: The System Outlook is available in PDF format (portable document file format), which can be read using Adobe Acrobat Reader. It can be downloaded from the Member Institution section on DICO s website at or you can subscribe for an electronic copy by ing us at systemoutlook@dico.com.

3 Ontario Economic Highlights Growth in 2000 to Exceed 4% Despite fears of an economic slowdown, overall growth for 2000 has been revised upwards to 4.5 per cent compared to 5.9 per cent in Much of this solid growth is due to the continued healthy domestic demand with a strong impetus from additional recent income tax reductions. Export growth however, continues to decelerate from its record 10.3 per cent growth in 1999 to a more modest forecasted growth of 6.4 per cent in This is particularly noticeable in the auto sector as U.S. demand softens from weaker consumer spending as the result of higher interest rates and lower stock market valuations. In Ontario, employment growth remains strong and unemployment is expected to remain below 6 per cent for the balance of the year. Disposable income is forecast to rise by 7.1 per cent in 2000 from a boost in wages and tax reductions. Forecast for 2001 Growth for 2001 has also been revised upward to 3.8 per cent from an earlier 3 per cent forecast. As in 2000, most of this growth will be driven by domestic demand. While housing starts are expected to decline by 2.7 per cent, construction activity remains strong with a forecast of 70,000 units. However, non-residential investment is expected to accelerate in the larger urban areas as additional projects are % 1.6 Continued Growth Expected: Ontario Real GDP Growth Actual 5.9 Forecast announced to help alleviate a critical shortage of high quality office space. Government spending on goods and services is also expected to increase by 3.5 per cent in 2001 compared to an estimated 2.6 per cent in 2000 and 1 per cent in The one dark cloud on the horizon is the anticipated further decline in export growth to 4.8 per cent as a result of lower exports of autos, auto parts and other consumer durables. Implications for credit unions Economic and business conditions in Ontario remain strong although, as we move into 2001 growth will moderate. This is not expected to have any significant negative impact on the system as a whole as consumer confidence remains high and disposable incomes increase. Residential housing remains strong and will continue to provide additional lending opportunities. The estimated decline in exports, especially in the auto sector will however need to be closely monitored. Although plans call for additional auto related capital spending in the coming years, the decline in demand in the U.S. may lead to further cuts in production, above those already announced by the big three auto-makers. Note: Economic data is provided by the Conference Board of Canada Q00 SYSTEM OUTLOOK, November, 2000 Page 1

4 Focus on Interest Rates Steady as She Goes for 2001 Source: The Conference Board of Canada Both Canadian and U.S. short-term interest rates are expected to remain essentially constant over the next 13 months. The Federal Reserve Board and the Bank of Canada are both faced with evidence of a slowing in the pace of aggregate demand growth, which takes some of the pressure off inflation concerns. In fact, the Conference Board of Canada is forecasting real GDP growth in both countries to range between 3 and 3.5 per cent next year, substantially down from the hot performance of the last two years. In addition, in both countries labour productivity growth remains robust, which also helps on the inflation front. Finally, both monetary authorities are uncertain about the underlying pace of non-inflationary growth. As a result, even though all agree that full capacity has now been reached in both Canada and the U.S., the monetary authorities are unwilling to act even should demand growth come in above traditional measures of the growth in capacity. Thus the Canadian 3-month Treasury-bill rate will average 5.6 per cent in 2001 basically unchanged from an average of 5.5 per cent this year. Recent Developments Short-term interest rates have remained remarkably flat since the 50 basis point increase in the Bank Rate on May 17. In Canada, 90-day Treasury Bills have moved only 7 basis points since August, while U.S. 90-day Commercial paper rates have varied by only 3 basis points over the same time period. North American long-term bond yields declined following the last central bank rate increases, as tighter monetary conditions reduced the perceived inflation risk. In addition, the actual and anticipated reductions in government debt continued to put downward pressure on long-term government bond yields, although the inversion in the yield curve on government bonds is currently less than it was in the spring. For example, the average yield on Government of Canada Bonds 10 years and over at 5.89 per cent is currently only 5 basis points below the 1-3 year average yield, while in the spring the negative spread was close to 30 basis points. However, the yield curve on corporate Bonds has a normal positive slope, with the Scotia McLeod corporate long-term bond rate currently running at around 7.29 per cent, compared to a rate of 6.95 per cent on medium-term corporate bonds. T-bill rate: Canada vs. U.S. 1Q98 to 3Q00 actual, 4Q00 to 4Q01 forecasts T-bill rate (%) Q98 3Q98 1Q99 3Q99 Canada 1Q00 Long-term Forecasts 2000 & 2001 [1999 actual results] Month Treasury Bill Yield 4.7% 5.5% 5.6% Chartered Bank Prime Lending Rate year GIC Rate year Mortgage Rate year and Over GOC Bond Rate Focus on Interest Rates and forecasts are provided by the Conference Board of Canada. Forecasts as at November Q00 1Q01 U.S. 3Q01 3Q00 SYSTEM OUTLOOK, November, 2000 Page 2

5 System Highlights System Assets and Capital Reach New Milestones Ontario system assets reached $15 billion this quarter, the highest level ever. From mid 1997, assets have been steadily increasing, culminating with the latest year-over-year growth of 5.8 per cent. This is the highest growth rate since Most of the growth has been driven by an increase in deposits of close to $700 million or 5.3 per cent. On the other side of the balance sheet, there has been a significant increase in lending activity. Loans have increased by approximately $735 million or 6.7 per cent during the latest twelve months. Over 50%, or $400 million, of this growth has come from commercial and agricultural lending, which has increased 26 per cent for the same period. During the past twelve months, capital has increased by 7.7 per cent to more than $1 billion this quarter. With this latest increase, regulatory capital is now 6.81 per cent of system assets. As a result of this capital growth, 320 member institutions representing 98.4 per cent of system assets now meet minimum regulatory capital requirements. This compares to 97.7 per cent of regulatory compliance as at 3Q99. Commercial Loans: Delinquency Concerns Total gross delinquency has declined from 1.48 per cent to 1.34 per cent over the past twelve months. Of particular note is the decline of 3 per cent in total gross delinquency in the day category. However, this improvement is not reflected in the commercial loan portfolio where delinquency has increased by 22 per cent from 3Q99. Basis Points Loan Costs and Loan Allowances as a % of Total Assets: 3Q97 to 3Q00 3Q97 3Q98 3Q99 3Q00 Loan Costs Loan Allow ance During this same period, the specific allowance for impaired commercial loans has increased by 22 per cent. In contrast, the non-specific provision has declined by 12 per cent. This change has contributed to the overall 3 basis points increase in loan costs. Given the increase in commercial delinquency, the reduction in the non-specific provision may be a cause of concern as economic conditions change. 3Q00 SYSTEM OUTLOOK, November, 2000 Page 3

6 System Highlights Off-balance Sheet Highlights The following table summarizes the volume of income producing items that are not reported on the credit union s balance sheet, as well as the level of relative income generated at 3Q00. This information is compared to results at 3Q99. Highlights include: Income from off-balance sheet activities now accounts for more than 9% of other income Total reported off-balance sheet activity has increased 44% for the latest 12 months Off-balance Sheet Activity 3Q00 ($ 000) 3Q99 ($ 000) Balance of administered loans at the end of the period 266, , % 35.37% Net mutual funds sold through mutual fund alliances 552, , % 55.14% 3Q00 % 3Q99 % Credit card receivables managed by credit card providers 22,162 11, % 4.14% Other (incl. letters of credit and guarantees) 70,079 48, % 3.58% Total off-balance sheet activity 911, , % % Total system assets and off-balance sheet activity 16,005,360 14,900,627 Total loans sold (latest 12 months) 73,471 N/A 1 Total loans sold (latest quarter) 40,223 1,599 Income earned on off-balance sheet activity 12,204 N/A 1 Off-balance sheet income as a percentage of other income Number of MIs engaged in off-balance sheet activity 1 N/A = Information not available 9.31% N/A Director s Benchmarking Report Survey Results In March 2000, directors and managers received a faxback survey on the quality and usefulness of the Director s Benchmarking Report, introduced earlier this year. We would like to thank the respondents for taking the time to complete the survey, and for providing constructive comments and feedback. Responses generally indicated a positive opinion of the Benchmarking Report. Most agreed that it has relevant information for directors and that it is useful in identifying potential risk. A majority of respondents agreed that it was well designed and user friendly. Most respondents also agreed that the Users Guide and the Technical Supplement contained helpful information. 3Q00 SYSTEM OUTLOOK, November, 2000 Page 4

7 Financial Highlights 3Q00 Dollars are expressed in millions Percentages are % of average assets 1 3Q00 2Q00 3Q99 Total Number of Member Institutions Number of Member Institutions below 5% Capital Net Interest and Investment Income $475 $460 $444 (Income from lending and investment activities) 3.24% 3.19% 3.19% Loan Costs $21 $20 $ % 0.14% 0.11% Gross Delinquency greater than 30 days $156 $154 $160 (as a percentage of total loans) 1.34% 1.34% 1.48% Other (non-interest) Income $129 $126 $117 (Fees and Commission Income) 0.88% 0.88% 0.84% Net Interest, Investment and Other Income $583 $566 $546 (Total Income) 3.99% 3.93% 3.92% Total Non-Interest Expenses $511 $504 $475 (Costs of Operations-excluding loan costs) 3.50% 3.50% 3.41% Net Income/(Loss) before Taxes and $72 $63 $71 Non-recurring & Extraordinary items 0.49% 0.43% 0.52% Net Income/(Loss) $59 $59 $ % 0.41% 0.53% Gross Liquidity as per Sections of Ont Reg.76/ % 17.75% 18.11% Average Assets per member institution $45.6 $44.8 $40.9 Median Assets $14.2 $13.0 $12.2 Regulatory Compliance at 3Q00 MIs below 5% requirement MIs above 5% requirement Totals Number of Member Institutions Assets ($millions) $236 $14,857 $15,093 Percentage of System Assets 1.6% 98.4% 100.0% Capital as a % of net assets per Ont. Reg. 76/ % 6.88% 6.81% Regulatory Capital ($millions) $6.7 $1,021.2 $1, Totals may not agree due to rounding. 3Q00 SYSTEM OUTLOOK, November, 2000 Page 5

8 System Balance Sheet 3Q00 Percentage of Total Assets 1 3Q00 3Q99 3Q00 3Q99 ($000) ($000) ASSETS Cash and Investments 3,020,772 2,951, % 20.7% Personal Loans 2,785,342 2,702, % 18.9% Residential Mortgage Loans 6,593,786 6,341, % 44.4% Commercial Loans 1,885,469 1,529, % 10.7% Institutional Loans 32,699 25, % 0.2% Unincorporated Association Loans 11,942 19, % 0.1% Agricultural Loans 408, , % 2.5% Total Loan Allowances (67,419) (66,934) (0.4%) (0.5%) Capital (Fixed) Assets 282, , % 2.0% Intangible & Other Assets 140, , % 0.9% Total Assets 15,093,375 14,268, % 100.0% LIABILITIES Demand Deposits 4,625,217 4,140, % 29.0% Term Deposits 3,891,110 3,638, % 25.5% Registered Deposits 4,572,917 4,488, % 31.5% Other Deposits 582, , % 5.0% Borrowings 52,978 25, % 0.2% Other Liabilities 331, , % 2.1% Total Liabilities 14,056,635 13,306, % 93.3% MEMBERS' EQUITY & CAPITAL Membership Shares 88, , % 0.7% Retained Earnings 710, , % 4.4% Other Tier 1 & 2 Capital 238, , % 1.6% Total Members' Equity & Capital 1,036, , % 6.7% Total Liabilities, & Members' Equity & Capital 15,093,375 14,268, % 100.0% Average Assets 14,638,843 13,929, Totals may not agree due to rounding. 3Q00 SYSTEM OUTLOOK, November, 2000 Page 6

9 System Income Statement 3Q00 (with Industry Comparison) ONTARIO SYSTEM Canadian Chartered Banks 2 Percentage of Average Assets 1 12 Months to 3Q00 3Q99 3Q00 3Q99 3Q00 ($000) ($000) Interest and Investment Income Loan Interest Income 853, , % 5.67% 4.34% Investment Income 137, , % 0.85% 1.37% Total Interest and Investment Income 991, , % 6.52% 5.49% Interest Expense Interest Expense on Deposits 476, , % 3.18% 3.35% Other Interest Expense and Dividends 40,615 20, % 0.15% 0.58% Total Interest Expense 517, , % 3.33% 3.70% Net Interest & Investment Income 474, , % 3.19% 1.79% Loan Costs 20,893 15, % 0.11% 0.24% Net Interest & Investment Income after Loan Costs 453, , % 3.08% 1.54% Other (non-interest) Income 129, , % 0.84% 2.25% Net Interest, Investment & Other Income 582, , % 3.92% 3.79% Non-Interest Expenses Salaries and Benefits 240, , % 1.61% 1.47% Occupancy 41,191 39, % 0.28% Computer, office & other equipment 61,373 56, % 0.41% Advertising & Communications 29,885 25, % 0.18% Member Security 36,604 36, % 0.26% Administration 58,239 65, % 0.47% Other 43,086 27, % 0.20% 1.22% Total Non-Interest Expenses 511, , % 3.41% 2.69% Net Income/(Loss) Before Taxes and Non-recurring 71,661 71, % 0.52% 1.10% & Extraordinary items Non-recurring & Extraordinary gains/(losses) 2,663 14, % 0.12% 0.00% Taxes 15,383 12, % 0.09% 0.37% Minority Interests 0.02% Net Income/(Loss) 58,941 73, % 0.53% 0.71% Average Assets -$000 14,638,843 13,929,510 1,330,529, Totals may not agree due to rounding. Ontario figures exclude leagues. 2. Source: Canadian Bankers Association, Detailed Financial Statistics. Consolidates all subsidiaries, such as investment dealers. 3Q00 SYSTEM OUTLOOK, November, 2000 Page 7