Piggybank With Eyeglasses And Calculator On Wooden Table, TFSA, RRSP

Canada’s credit unions are enjoying some margin expansion as rising interest rates alleviate the pressure they’ve been under since the global financial crisis, according to a report published Friday by Toronto-based rating agency DBRS Ltd.

Net-interest margins (NIMs) at Canada’s credit unions appear to be increasing this year in the wake of rising interest rates, the report says. Credit union NIMs had been under pressure for the previous 10 years, declining from 2.77% in 2008 to 2.14% in 2017.

Data for a sub-set of credit unions shows that NIMs are finally creeping higher once again, according to the report, rising from 2.17% in mid-2017 to 2.25% in mid-2018.

“Rising yields on credit unions’ commercial and non-residential consumer loan portfolios appear to be contributing to higher overall yields, even as mortgage loans re-price more slowly. At the same time, the credit unions’ cost of funds appears to be lagging the rise in rates,” says DBRS in the report.

Typically, the credit unions enjoy higher NIMs than the big banks, as they generate higher yields, and their funding costs are only “marginally higher” compared with the big banks and Desjardins.

The credit unions produce higher yields, the report says, primarily because they only hold about 15% of their interest-earning assets in low-yielding cash & securities, compared with about 40% for the banks.

This trend to fatter margins is expected to continue over the next couple of years, as rates are expected to continue rising, but credit unions will be challenged with “managing the cost of competing for deposits in a rising rate environment,” says the report.

“Credit union NIMs will likely increase over time in a rising interest rate environment. However, the pace of the increase will depend upon how quickly credit union loan portfolios re-price and the competitive environment for demand and term deposits,” the report concludes. “In a rising rate environment, credit unions would need to offer competitive rates on deposits in order to retain to their stable funding.”