Make no bones about it, our recession is credit driven off the back of a property boom to bust cycle. With an overhang of unsold new homes of 50,000, house prices are predicted to fall by at least 30% by the end of 2009 from peak prices in 2006. This is a conservative estimate where analysts have no previous experience in which to ground their expectations. Unemployment is expected to double with upwards of 70,000 additional people signing on the dole and private sector incomes will contract as taxes are increased and discretionary income is slashed by struggling employers. Credit and savings growth will drop from 20+% pa to low of about 6%.
Credit unions despite what the ILCU has said are not immune from the effects of recession and global credit crisis. In many ways they are more acutely exposed than the troubled Irish banks and are far less safe than banks.
The global crisis has seen the collapse in financial asset values underpinning credit union investments in retail financial products. Already multi-million euro losses are being recorded across a range of products including the ILCU sponsored unit trust vehicle, the CTT, which has experienced a 10% loss of about €60m in FRN’s.
The loan to total asset ratio is key to understanding the leveraging effect of the global crisis as the lower the ratio, the higher the investment risk exposure to investment losses. Those credit unions having a low ratio and exposure to equity based products are likely to be experiencing large accumulating losses that will have to be accounted for this year. In all likelihood a significant number of low ratio credit unions will be unable to pay any dividend to their savers.
As far as lending is concerned, over the past 5 years or so, credit unions have been storing up a hard core of bad debt they have yet to write off. Loan delinquency levels, even under lax ILCU provisioning standards, have been the highest when benchmarked to mature credit union sectors elsewhere. Since the collapse of the property bubble, loan delinquency has worsened as borrowers begin to default on unsecured loans taken out to finance and furnish their new homes. As credit union lending is almost 100% unsecured, these loans are almost always the first people decide not to make repayments on. Furthermore many credit unions engaged in high risk commercial lending and speculative property development finance, two sectors experiencing melt down. Many of these loans are severely impaired where security, if any, has lost 40% of value. Some of the largest credit unions are faced with writing off multi-million euro business lending exposures.
Credit union lending is highly exposed to the impact of a worsening recession which is not predicted to wane until 2011.
It seems then that most if not all credit unions will be declaring investment losses in their accounts which for many will impact quite negatively on dividends and even reserves. As far as bad loans are concerned, credit unions should increase general provisions and start making the specific provisions needed to begin the process of write downs which must inevitably occur. The days of hiding bad debts are over.
Credit unions despite what the ILCU has said are not immune from the effects of recession and global credit crisis. In many ways they are more acutely exposed than the troubled Irish banks and are far less safe than banks.
The global crisis has seen the collapse in financial asset values underpinning credit union investments in retail financial products. Already multi-million euro losses are being recorded across a range of products including the ILCU sponsored unit trust vehicle, the CTT, which has experienced a 10% loss of about €60m in FRN’s.
The loan to total asset ratio is key to understanding the leveraging effect of the global crisis as the lower the ratio, the higher the investment risk exposure to investment losses. Those credit unions having a low ratio and exposure to equity based products are likely to be experiencing large accumulating losses that will have to be accounted for this year. In all likelihood a significant number of low ratio credit unions will be unable to pay any dividend to their savers.
As far as lending is concerned, over the past 5 years or so, credit unions have been storing up a hard core of bad debt they have yet to write off. Loan delinquency levels, even under lax ILCU provisioning standards, have been the highest when benchmarked to mature credit union sectors elsewhere. Since the collapse of the property bubble, loan delinquency has worsened as borrowers begin to default on unsecured loans taken out to finance and furnish their new homes. As credit union lending is almost 100% unsecured, these loans are almost always the first people decide not to make repayments on. Furthermore many credit unions engaged in high risk commercial lending and speculative property development finance, two sectors experiencing melt down. Many of these loans are severely impaired where security, if any, has lost 40% of value. Some of the largest credit unions are faced with writing off multi-million euro business lending exposures.
Credit union lending is highly exposed to the impact of a worsening recession which is not predicted to wane until 2011.
It seems then that most if not all credit unions will be declaring investment losses in their accounts which for many will impact quite negatively on dividends and even reserves. As far as bad loans are concerned, credit unions should increase general provisions and start making the specific provisions needed to begin the process of write downs which must inevitably occur. The days of hiding bad debts are over.
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