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Agenda

DICO Update Credit Union Professionals’ Association Conference November 22, 2013 Andy Poprawa, CEO Guy Hubert, Director , Risk Management Deposit Insurance Corporation of Ontario. Agenda. Overview of the Credit Union Sector Potential Risks DICO Update Current Examination findings

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Agenda

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  1. DICO UpdateCredit Union Professionals’ Association Conference November 22, 2013Andy Poprawa, CEOGuy Hubert, Director , Risk ManagementDeposit Insurance Corporation of Ontario

  2. Agenda • Overview of the Credit Union Sector • Potential Risks • DICO Update • Current Examination findings • Questions & Discussion

  3. Ontario Sector Profile Credit Unions and Caisses Populaires

  4. Other Performance Benchmarks * Data as at 2Q 2012 ** as % of Total Assets

  5. Return on Average Assets (2001 – 2013)

  6. Sector Profile by Risk Level (% of Sector Assets)

  7. Sector Profile by DPS Risk Ratings

  8. Loan Costs 2003 - 2013

  9. Commercial Loan Growth

  10. Commercial Loans:Industry Concentration

  11. Commercial Lending Profile * Legend: < 2 = Low, 2-3 = Moderate, 3-4 Moderate-High, >4 High ** Legend: Low risk, Moderate risk, Moderate-High risk, High risk

  12. Loan Impairment 12

  13. Loan Impairments & Coverage Ratios by Size of Credit Union

  14. Three Year Outlook – Potential Risks

  15. Ontario Real GDP(Source: Ministry of Finance Fall 2013 Economic Statement)

  16. Ontario GDP Growth Outlook (Source: Ministry of Finance Fall 2013 Economic Statement)

  17. US GDP Growth Outlook (Source: Ministry of Finance Fall 2013 Economic Statement)

  18. Interest Rate Outlook (Source: Ministry of Finance Fall 2013 Economic Statement)

  19. Canadian Household Debt (Source: Ministry of Finance Fall 2013 Economic Statement)

  20. Canadian Household Net Worth (Source: Ministry of Finance Fall 2013 Economic Statement)

  21. Ontario Housing Prices(Source Central 1) Source: CREA, Central 1 forecasts. Note: MLS residential.

  22. Ontario Job Recovery (Source: Ministry of Finance Fall 2013 Economic Statement)

  23. Ontario Employment (Source: Ministry of Finance Fall 2013 Economic Statement)

  24. Three Year Outlook – Potential Risks

  25. DICO Update • All depositor funds protected • Insurance fund of $162.5 M (68 bps) at 3Q13 • No premium changes planned for 2014 • Target fund of 100 bps by 2020 – no increase expected in premiums • No failures during 2013 - 14 fewer credit unions • Still several outstanding claims with other parties • Risk assessments ongoing – continuing to monitor credit risk trends – 17 credit unions on watchlist

  26. Trend in the Deposit Insurance Reserve Fund and Losses Deposit Insurance Reserve Fund

  27. DICO Priorities for 2014 • ERM requirements for all Class 2 credit unions • New differential premium system starting in 2015 • Implementation of stress testing requirements for credit unions over $1 billion in assets • Expand examination scope & monitoring programs • Prompt action & resolution of high risk situations • Changes to Capital Adequacy Guideline - IFRS • New guidance for Corporate Governance

  28. DICO Examination Team • 6 Examiners • 5 have between 4 – 30 years experience in commercial credit with Credit Union, Banks, Asset-Based Lender • 1 is operations / structural risk specialist • 2 examiners are former internal auditors • Since 2012, most examinations performed by DICO team (specific exceptions)

  29. Risk Elements examined • Credit Risk • Market Risk • Structural Risk • Liquidity Risk • Operational Risk • Strategic Risk (incl. Capital Risk)

  30. Current Examination Findings Credit Risk - Retail Loans • Security – not always assessed properly – not always registered correctly • Debt serviceability – not always assessed conservatively. Sector Risk Assessment: Low

  31. Common Examination Findings Credit Risk - Commercial Loans • No annual reviews • No commitment letters (or not used properly) • LOCs not revolving and margined properly • Reporting requirements not defined (quality) • Excessive concentration (betting the farm)

  32. Common Examination Findings Credit Risk - Commercial Loans • Risk Rating framework not robust • No proper pricing for risk • Watch list process not well defined or utilized • Due diligence for syndicated loans not as robust Sector Risk Assessment: High

  33. Current Examination Findings Market Risk • Usually no issues with practices, but some inconsistencies in policies • Rated Effective in majority of 2013 examinations • Sector Risk Assessment: Low

  34. Current Examination Findings Structural Risk • Increasingly managed through 3rd party • IRR : • Short term (EaR) : largest exposure to falling rates • Long term (EVaR): mostly stable or slight exposure to falling rates • Few excessive mismatched positions • Sector Risk Assessment : Low / Moderate

  35. Current Examination Findings • Liquidity Risk • Quality of assets held for liquidity acceptable • Strategies to attract large deposit broker business have met with limited success. • Funding gaps bridged by broker deposits and /or increased borrowings and/or securitization • Monitoring of large deposits needs to be improved • Contingency liquidity plans not clearly defined • Stress testing not always performed • Sector Risk Assessment: Moderate / High

  36. Current Examination Findings • Operational Risk • Practices usually aligned with policies • Internal Audit function not always aligned with size and complexity of CU • IA’s recommendations not actionned • Division of duties • BCP / DRP not tested regularly • Sector Risk Assessment: Moderate

  37. Current Examination Findings • Strategic Risk • Strategic plan not aligned with size and complexity • No succession plans • Implementation of ERM on target • Directors Training and Competency policy in use • Profitability growth not sufficient to renew capital and support growth objectives • Difference bridged by issuance of Investment shares • Sustainability issues • Sector Risk Assessment: High

  38. Questions & Dialogue

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