There was a 7% increase in total savings in the country's credit unions in the year to the end of September, according to the Central Bank.

It reflects the general trend across the financial sector of increased savings and deposit levels throughout the pandemic.

In its latest Financial Conditions of Credit Unions Report, the regulator identifies the growing gap between savings and loans as a continued key challenge for credit unions.

The report, the seventh in the series, says reserves and liquidity levels had remained relatively stable across the sector during the pandemic. 

However, a number of credit unions face 'sustainability challenges', it warns.

That has seen a number of high profile collapses of credit unions as well as a spate of mergers across the sector in recent years.

The report said that latter trend continued in 2020 with two thirds of credit unions now having assets of at least €100m, up from just under 60% in 2019.

The number of credit unions with assets of less than €40m also continues to decline.

Savings levels on the rise

Total savings across the credit unions stood at €16.3 billion at the end of September.

That was up 7% from the €15.3 billion at the same time last year.

Average savings per member increased from €4,400 to around €4,700 over the period.

A number of credit unions have put deposit caps in place as they are being negatively impacted by low interest rates and by the requirement to put 10% of its assets aside in reserves.

The low interest rate environment saw the average return on investments declining further this year to 0.7% from 0.9% at the end of September in 2019.

Total investments increased to €13 billion in 2020, reflecting the savings inflows.

Declining lending volumes

Accentuating the problem, Covid-19 impacted credit union lending, the report found, in terms of both a reversal in lending growth and a small increase in reported arrears.

Increasing costs and declining income saw the total cost income ratio increasing from 68% five years ago to 88% at the end of September this year.

That represents the highest ratio in five years.

Personal lending continues to make up the bulk of new lending at credit unions with loans for house purchase and business credit representing only around 2% of new lending in each category.

"Overall, while the sector has shown a degree of resilience in 2020, the economic outlook is uncertain with Covid-19 and Brexit impacts potentially yet to be fully realised," Registrar of Credit Unions Patrick Casey said.

"A continuation of the trends identified in this report could see many individual credit unions facing sustainability challenges over the medium term. Credit union boards must therefore focus on the risks that flow from the continuing imbalance between savings and loans," Mr Casey said.

Mr Casey appealed to credit unions to focus on evolving their business models by using available lending capacity to serve members' needs 'on a safe and sound basis'.

"This offers a path to sustainability, which puts members' savings to a productive economic use in line with the goals of credit unions, and helps ensure an ongoing funding need for growth in members' savings," he said.

Reacting to the report, the Irish League of Credit Unions - which represents the vast majority of credit unions here and in the North - said its members had built up substantial capital reserves and provisions for loan losses.

It added that its members were in a good position to absorb inevitable loan losses, pointing out that arrears and loan losses had remained very low so far.

"ILCU credit unions increased their loan provisions by 10% to €326 million in the year to September 2020. This is in addition to €2.59 billion set aside in capital reserves. ILCU credit unions had €917 million in buffer capital above the required 10% of assets level," the League said in a statement.

It said the drop in lending in 2020 had not been unexpected , adding that it had come off a 4-year high in 2019.

The ILCU also pointed out that there had been some recovery in new lending for the quarter to the end of September.

Kevin Johnson, CEO of the Credit Union Development Association said the challenges of rising savings and muted demand for credit were not unique to the sector or to Ireland.

He said CUDA member credit unions had weathered the storm better than most by using digital innovation as a means of reaching a broader audience with a broader range of products.

It called for more innovation and reform to assist the sector in further diversifying its offering.

"CUDA is urging the Government to consider permitting Credit Unions to introduce their members to State Savings, where savings are placed directly with the Irish Government.  

"This would alleviate the capital pressure for Credit Unions, as the savings would no longer be on their balance sheet, while allowing them to continue to deliver important services to their members. We are also seeking legislative change to support the introduction of co-lending which would enable a group of Credit Unions to share the risk for some of the larger loan opportunities," Mr Johnson said.