Ontario Credit Unions and Caisses Populaires SYSTEM OUTLOOK 2Q00 INSIDE Economic Highlights: Continued strong growth for 2000 expected Page 1 Focus on Interest Rates: Interest rate increases on hold Page 2 System Highlights: System Growth and Capital Compliance Page 3 Highlights of off-balance sheet activity Page 3 System Financial Statements Pages 4, 5, and 6 Prepared by Deposit Insurance Corporation of Ontario Policy & Research Department E-mail: systemoutlook@dico.com August, 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.
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Ontario Economic Highlights Slower but Continued Strong Growth in 2000 Growth in Ontario s economy is still on target to exceed 4% in 2000 with the main impetus of the current growth coming from domestic demand. Continued strong employment growth, consumer spending and new housing construction is contributing to the economic growth in 2000. The Ottawa-Hull region is expected to see the strongest growth of 6.6%, resulting primarily from expansion in the hightech sector. Growth in the greater Toronto region is forecast to reach 4.4% as a result of continued expansion in manufacturing, construction and services. The impact of rising interest rates in recent months is expected to decelerate demand. However, consumers in Ontario are not expected to retreat in the near term, given rising wages, pent-up demand, major tax reductions and the recent federal pay equity settlement. Spending could even be higher than predicted if, contrary to the current forecast, consumers decide against increasing the ratio of income devoted to savings. The forecast growth of 3.2% in provincial employment will closely match growth in 1999. Unemployment is expected to remain under 6% for 2000 and result in wage increases of some 3% compared to less than 1% in 1999. 7 6 5 4 3 2 1 0 % 1.6 Continued Growth Expected: Ontario Real GDP Growth 1996-2001 4.7 3.9 1996 1997 1998 1999 2000 2001 Forecast for 2001 Actual 5.9 Forecast Despite a decline in exports and a deceleration in growth, the Ontario economy will remain on solid footing through 2001 with overall projected growth of close to 3%. Implications for credit unions Economic conditions in Ontario remain very strong and continue to provide a good business environment for member institutions. Increased savings and economic activity should provide excellent opportunities for additional asset growth. The increases in interest rates over the past 12 months should start to be reflected in improvements in financial margins and earnings later this year or early 2001. Note: Economic data is provided by the Conference Board of Canada 4.4 3.0 2Q00 SYSTEM OUTLOOK, August, 2000 Page 1
Focus on Interest Rates Interest rate increases on hold Source: The Conference Board of Canada After a number of interest rate increases over the past nine months, the Bank of Canada is holding rates steady in line with the Federal Reserve Board in the U.S. The end to the long string of interest rate hikes is the result of growing evidence of economic weakness in both Canada and the U.S. In Canada, the unemployment rate increased slightly to 6.8 per cent. Housing starts fell to 135,000 units in June, the fourth consecutive monthly decline from a high of 169,000 units in February. In the U.S. housing starts have declined for three months in a row, reinforcing the view that the economy is starting to slow. The 3-month Treasury-bill rate will average 5.5 per cent in 2000 compared with 4.7 per cent last year. In 2001, rates are expected to average 5.7 per cent. The negative spread between Canadian and U.S. interest rates will persist in 2000 because U.S. labour markets will remain much tighter than those in Canada. What s in Store for the Remainder of 2000: U.S short-term interest rates are 175 basis points higher than they were a year ago. The impact of the recent rate increases is expected to rule out any further increases in interest rates for the remainder of 2000. The Bank of Canada matched the 50 basis point increase in the U.S. Federal Funds rate in May to maintain interest rate spreads and protect the Canadian dollar. The Canadian dollar should be trading at a much higher level given the positive economic news released in the past few months. However, it still remains below the $0.68 U.S. level, although has seen some recent improvement. It is unlikely that interest rates in Canada would rise independently from the U.S. However, the Canadian economy remains strong and the central bank recently increased its growth projections by 25 basis points to a range of 4.25% to 4.75%. While core inflation has remained below expectations and within the target range, the central bank still has concerns with higher inflation. Therefore further interest rate increases in Canada have not entirely been ruled out. T-bill rate: Canada vs. U.S. 1Q98 to 2Q00 actual, 3Q00 to 4Q00 forecasts T-bill rate (%) 5.5 4.5 3.5 1Q98 3Q98 1Q99 Canada Long-term Forecasts 2000 & 2001 [1999 actual results] 1999 2000 2001 3-Month Treasury Bill Yield 4.7% 5.5% 5.7% Chartered Bank Prime Lending Rate 6.4 7.3 7.5 5-year GIC Rate 4.8 6.0 6.1 5-year Mortgage Rate 7.6 8.3 8.2 10-year and Over GOC Bond Rate 5.7 5.8 5.6 Focus on Interest Rates and forecasts are provided by the Conference Board of Canada. Forecasts as at September 2000. 3Q99 1Q00 U.S. 3Q00 2Q00 SYSTEM OUTLOOK, August, 2000 Page 2
System Highlights System Growth System assets grew significantly in 2Q00. Total assets have now reached almost $15 billion. This is an increase of $380 million, or 2.6% from 1Q00 (10% growth on an annualized basis) and $790 million, or 5.6% from 2Q99. Of particular note is the growth in commercial lending activities. Compared to 2Q99, commercial and agricultural loans increased by $340 million or 18%. During the same period, total other loans increased by $290 million or 3%. However, profitability has decreased. Return on Assets (ROA) has declined from 51 basis points at 2Q99 to 41 basis points at 2Q00. This is primarily due to lower net interest income and higher loan costs. The lower net interest income is attributable to lower yields on commercial and agricultural loans along with increases in other interest and dividends. Higher loan costs are to a large extent the result of increased loan impairment on commercial and agricultural loans. Total system loan delinquency (over 30 days) was 1.34% as at 2Q00. At the same time, delinquency on commercial and agricultural loans was 2.3%, and accounts for approximately 30% of total system loan delinquency. Moreover, impairment on these loans has increased by 16% from 2Q99. Capital Compliance Regulatory capital increased by $24.7 million from 1Q00. Aggregate system capital decreased marginally to 6.67% from 6.68% in 1Q00, due to the growth in assets. The number of MIs below the 5% regulatory requirement declined from 14 at 1Q00 to 11, with 1.8% of system assets. 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 income produced by them. Compared to 1Q00, the most significant changes are: $36 million increase in mutual funds sold through mutual fund alliances Income from off-balance sheet activities now account for more than 5% of other income Off-balance Sheet Activity at 2Q00 1. Loans sold which the credit union continues to administer 2. Loans sold which the credit union does not continue to administer 3. Balance of administered loans at the end of the period 4. Net mutual funds sold through mutual fund alliances 5. Other liabilities sold (e.g. leasing arrangements) 6. Credit card receivables managed by credit card providers 7. Letters of credit and guarantees issued Amount (millions) No. of institutions $71.9 28 $31.3 5 $209.9 40 $570.7 115 $37.3 16 $15.9 30 $26.9 59 8. Total off-balance sheet activity* $861 141 9. Income earned on off-balance sheet activity 10. Off-balance sheet income as a percentage of other income 11. Total system assets and offbalance sheet activity * Item 8 equals the sum of items 3 to 7. $6.6 110 5.2% $15,785 2Q00 SYSTEM OUTLOOK, August, 2000 Page 3
Financial Highlights 2Q00 Dollars are expressed in millions Percentages are % of average assets 1 2Q00 1Q00 2Q99 Total Number of Member Institutions 333 342 351 Number of Member Institutions below 5% Capital 11 14 19 Net Interest and Investment Income $460 $458 $454 (Income from lending and investment activities) 3.19% 3.21% 3.30% Loan Costs $20 $21 $15 0.14% 0.15% 0.11% Gross Delinquency greater than 30 days $154 $196 $160 (as a percentage of total loans) 1.34% 1.73% 1.48% Other (non-interest) Income $126 $126 $116 (Fees and Commission Income) 0.88% 0.88% 0.84% Net Interest, Investment and Other Income $566 $563 $555 (Total Income) 3.93% 3.96% 4.03% Total Non-Interest Expenses $504 $498 $475 (Costs of Operations-excluding loan costs) 3.50% 3.50% 3.45% Net Income/(Loss) before Taxes and $63 $65 $80 Non-recurring & Extraordinary items 0.43% 0.46% 0.59% Net Income/(Loss) $59 $64 $71 0.41% 0.45% 0.51% Gross Liquidity as per Sections 16-18 of Ont Reg.76/95 17.75% 16.78% 17.71% Average Assets per Member Institution $44.8 $42.5 $40.3 Median Assets $13.0 $12.1 $12.0 Regulatory Compliance at 2Q00 MIs below 5% requirement MIs above 5% requirement Totals Number of Member Institutions 11 322 333 Assets ($millions) $268 $14,662 $14,930 Percentage of System Assets 1.8% 98.2% 100.0% Capital as a % of net assets per Ont. Reg. 76/95 2.95% 6.74% 6.67% Regulatory Capital ($millions) $7.9 $987.7 $995.6 1. Totals may not agree due to rounding. 2Q00 SYSTEM OUTLOOK, August, 2000 Page 4
System Balance Sheet 2Q00 Percentage of Total Assets 1 2Q00 2Q99 2Q00 2Q99 ($000) ($000) ASSETS Cash and Investments 3,089,996 2,958,933 20.7% 20.9% Personal Loans 2,766,564 2,660,663 18.5% 18.8% Residential Mortgage Loans 6,475,888 6,294,808 43.4% 44.5% Commercial Loans 1,796,238 1,489,472 12.0% 10.5% Institutional Loans 27,578 23,154 0.2% 0.2% Unincorporated Association Loans 18,218 18,353 0.1% 0.1% Agricultural Loans 396,801 362,363 2.7% 2.6% Total Loan Allowances (70,240) (69,303) -0.5% -0.5% Capital (Fixed) Assets 285,189 275,097 1.9% 1.9% Intangible & Other Assets 144,051 130,030 1.0% 0.9% Total Assets 14,930,285 14,143,570 100.0% 100.0% LIABILITIES Total Deposits 13,570,426 12,913,602 90.9% 91.3% Borrowings 44,774 18,219 0.3% 0.1% Other Liabilities 309,072 278,902 2.1% 2.0% Total Liabilities 13,924,272 13,210,724 93.3% 93.4% MEMBERS' EQUITY & CAPITAL Membership Shares 86,678 103,592 0.6% 0.7% Retained Earnings 675,849 582,165 4.5% 4.1% Other Tier 1 & 2 Capital 243,486 247,090 1.6% 1.7% Total Members' Equity & Capital 1,006,013 932,847 6.7% 6.6% Total Liabilities, & Members' Equity & Capital 14,930,285 14,143,570 100.0% 100.0% Average Assets 14,437,440 13,770,033 1. Totals may not agree due to rounding. 2Q00 SYSTEM OUTLOOK, August, 2000 Page 5
System Income Statement 2Q00 (with Industry Comparison) ONTARIO SYSTEM Canadian Chartered Banks 2 Percentage of Average Assets 1 12 Months to 2Q00 2Q99 2Q00 2Q99 2Q00 ($000) ($000) Interest and Investment Income Loan Interest Income 828,141 803,012 5.74% 5.83% 4.30% Investment Income 130,666 118,697 0.91% 0.86% 1.34% Total Interest and Investment Income 958,807 921,710 6.64% 6.69% 5.49% Interest Expense Interest Expense on Deposits 461,963 445,570 3.20% 3.24% 3.25% Other Interest Expense and Dividends 36,761 21,868 0.25% 0.16% 0.58% Total Interest Expense 498,724 467,439 3.45% 3.39% 3.70% Net Interest & Investment Income 460,083 454,271 3.19% 3.30% 1.79% Loan Costs 20,073 15,337 0.14% 0.11% 0.23% Net Interest & Investment Income after Loan Costs 440,010 438,933 3.06% 3.19% 1.56% Other (non-interest) Income 126,420 115,661 0.88% 0.84% 2.28% Net Interest, Investment & Other Income 566,429 554,595 3.93% 4.03% 3.83% Non-Interest Expenses Salaries and Benefits 236,812 225,235 1.64% 1.64% 1.47% Occupancy 40,430 40,212 0.28% 0.29% Computer, office & other equipment 60,743 55,559 0.42% 0.40% Advertising & Communications 29,290 23,622 0.20% 0.17% Member Security 35,744 37,832 0.25% 0.27% Administration 59,698 72,055 0.41% 0.52% Other 41,072 20,359 0.28% 0.15% 1.21% Total Non-Interest Expenses 503,790 474,873 3.50% 3.45% 2.69% Net Income/(Loss) Before Taxes and Non-recurring 62,639 79,722 0.43% 0.59% 1.14% & Extraordinary items Non-recurring & Extraordinary gains/(losses) 11,798 4,573 0.08% 0.04% 0.00% Taxes 14,983 13,556 0.10% 0.10% 0.37% Minority Interests 0.01% Net Income/(Loss) 59,454 70,738 0.41% 0.51% 0.76% Average Assets -$000 14,437,440 13,770,033 1,289,858,126 1. 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. 2Q00 SYSTEM OUTLOOK, August, 2000 Page 6