Credit Unions Face National Turmoil

The game is up for Irish credit unions as the scale of losses is unveiled in the public domain. Long used to hiding behind rhetoric, the ILCU has been rendered mute - silenced in two revealing sets of figures.

Credit union problems have exploded on the front page. 115 are operating at a loss for their first quarter and unlikely to turn a profit this year, with another 123 sailing close to the red ink. Oops! all four wheels are coming off.

Some are going to fail and others have been told to stop lending. Last year loan arrears jumped 22% hitting a whopping €513m , provisions weighed in at a hefty €284m or 4%. Believe it or not! Write offs were only €50m! Oops! the long awaited bad lending workout has started.

But this isn’t the half of it as credit unions had refinanced a whopping €272m raising the bar on impaired loans to €785m in 2008.

Oops! it’s not over yet …..The other bit called investments is reckoned according to one astute observer to be another €345m bringing the grand total to €1.13bn or 7.7% of total assets.

Just how bad these figures will finally finish up at is anyone’s guess. My guess is the good old unions will realise at least 10% loan write offs if not higher.

It seems that some are taking the pain early. I have seen one or two even write down the value of their buildings as their new auditors make their standards known. High street commercial property is down about 50%. Some of the bigger credit unions sank their entire reseves into new iconic buildings that are empty most of the week.

Meanwhile back in Mount Street things are not looking so rosy. Rumour has it that requests for help from cash starved credit unions are being declined. Oops!...seems as if the good old savings protection scheme fund is not as liquid as it should be.

The ILCU annual Beano, its accounts, are showing the weakness of its financial affairs that blows the notion it has the financial muscle to prevent credit unions from failing. Rather it looks ominously like it will do well to survive the results of its own aggressive investment strategy. Declaring €5.7m in investment losses on a portfolio heavily weighted to marketable securities is quite something else when the world and its mother knows what happened in 2008. Maybe it thinks credit union directors will only look at the colour pictures. I suspect that accounting flexibility is being used in the "held to maturity category" and values reflect maturity rather than current values. Then again maybe it has managed to do what no one else has. Then again pigs might fly.

More challenging will be the capitalisation call from ECCU and where the ILCU gets this money from. Up North it is believed to be busy talking up the value of credit unions paying premiums years in advance. Then again it does hold premiums on account feeding them to ECCU on the drip and earning a nice return to boot.

This brings up another strange issue. ECCU is a regulated and taxed entity. ILCU is unregulated and enjoys income tax free status. Nice one if you can get it. Now ILCU acts as an agent for ECCU. But ECCU has only one staff member so how is it managing its operations? Well its operations are managed under agreement with ILCU to whom it pays commission which is of course a cost. So ECCU pays income to ILCU which is tax free in its hands. ILCU in turn capitalises ECCU with guess what – yup the very same money ECCU has paid it, less a bit to pay for administration costs.

It’s all nice and dandy until ECCU needs more capital which seems to have happened with the unexplained losses on investments of €4m odd.

So what’s the real story? Well if you strip out ECCU and SPS income and costs and focus on the core business it evaporates before you eyes. That’s right. The core business ain’t paying its way by a country mile and then some. Apart from its never ending supply of rhetoric, the only asset the ILCU has is its headquarters building – a jaded near worthless pile, worth about its written down book value. The return for its 510 odd members massive investment is a big fat ZERO, a few glossy magazines and two websites.

As it faces the turmoil of credit union failure the ILCU should recall an epoch when it threatened to bring down a government. The same party remains in power today and recalls how a deal made was broken and how a government nearly fell. Double Oops!

Minister Brian Lenihan has told the Regulator to issue a code on loan arrears to credit union as the latest attempt to garner support for longer lending limits appear to have foundered.

Bottom line is the problems been stored up for years are now all popping up at the same time which not such a bad thing as it may finally act as the calalyst for change.