By Matthew Ogg
The view of the Story Bridge from his office on Eagle Street couldn’t be better and as Credit Union Australia manages to resist the debt troubles that are causing headaches for the banks these days, acting-CEO Rob Nicholls explainswhy there is cause for so much optimism and what he hopes to achieve during his final year in charge of Australia’s largest credit union.
AS interest rates fall the margins for all lenders are squeezing tight, but Credit Union Australia (CUA) acting-CEO Rob Nicholls can take consolation in the fact his unlisted institution has avoided the bad debts that the banks simply couldn’t.
Nicholls and his peers at CUA have been criticised in the past for not growing fast enough in the boom times, but now as markets are getting tougher Australia’s largest credit union, with 800 staff, has a loan book he claims other institutions would die for.
“In times like these when the market turns upside down, all the credit unions are sitting with virtually no impact on our bad debts at all. Our delinquency on loans has hardly moved from what it was one or two years ago,” he says.
“Because we’re not listed and we’re not trying to pay dividends on shares, or increase the share price on the market, our total focus is on the customers as owners. It means that we do not attempt to make the same profit on our capital that a bank would.”
But despite CUA’s conservative model it still had a profit after tax growth of just over five per cent in the second half of the 2008 calendar year, with $20.5 million compared to $19.5 million in 2007.
Profit pressures force banks to push their risk curves, but the conservative approach of CUA means its profit downgrade will be relatively smaller this year compared to other lenders.
“Our profit will be a bit behind last year at less than 10 per cent, whereas other firms in this space are looking at 25 to 30 per cent drops. We’re all suffering the same margins and quite lower loan volumes, but we’re not suffering the bad debts, so we’re not getting that double whammy.
“But half of the CUA members are in Queensland and here we’re looking for above-market growth in deposits and loans for the second half of the year, and we’re very optimistic about 2010.”
Out of 35,000 mortgages on CUA’s loan books only 44 are behind their payments, and only two are mortgagee in possession.
“That’s nothing, absolutely nothing,”
Nicholls speculates that as a third tier institution CUA could further cement its position as an alternative to the big banks in the coming year, as second tier banks face potential mergers and takeovers.
“We’re getting more member growth where second tier banks are falling out - and what’s happening is we’ll probably see the big banks take out the middle,” he says.
“Our growth could be positively impacted if Suncorp and the Bank of Queensland are acquired by the major banks.”
While there has been some member growth it hasn’t exactly been a spike. However CUA is preparing to lift its profile through marketing and exposure.
Such a circumstance would certainly help, as the main problem credit unions now face is growth just below the market average, which could lead to diminishing relevance in their market share.
“We should be growing by at least the average growth of the market — CUA has always grown higher than the market, but the other credit unions collectively haven’t been. It’s not a dramatic change, but we now hold below five per cent of the market share for loans and deposits,”
And while other credit unions are finding it hard to grow with tight margins, CUA is ‘lining up the ducks’ for another merger, but it will have to wait a couple of years.
“With mutual funds you can’t make mergers happen, you have to wait for the others to get on board,” he says.
“I call it lining up the ducks — you have to have the board, the CEO and management prepared to merge, and you need the members to vote for it.
“We’ve probably been in the position to do a merger for the last year, but the process takes about two years.”
Around 700 credit unions have merged since 1973 and today out of the remaining 127 players, there are about 10 large mutual societies that CUA is interested in acquiring.
He points out that when credit unions started in Australia in 1946, every parish, employment group, community group and the like had their own credit union, but like any start-up business there were high levels of consolidation – something that has hastened in recent years due to a more competitive environment.
CUA’s last merger was on the first day of 2006 when they merged with Australian National Credit Union (ANCU), which at the time was the second largest union in the country. ANCU was based out of the southern capitals, but the newly merged mutual decided to stay in Brisbane for tax purposes.
“Queensland is the only state that charges stamp duty on transfer of assets, therefore we would have had to pay millions of dollars in stamp duties to move to Sydney or Melbourne.”
He believes the choice was fortunate, as Queensland will be in a strong position to work its way out of the recession once the uncertainty surrounding the state election is resolved.
“Southeast Queensland has been a hot brick of growth for 20 years, and while it’s slowed down for the minute, and there are some implications due to mining industry adjusting to low exports, we are still very confident that southeast Queensland is going to power on,” says Nicholls.
“We’re doing reasonably well with lending and we’re certainly seeing a lift in first home borrowers, which means the Government incentive is definitely having an impact – there’s been strong retail deposit growth, and people are going into cash because rates are so low. In that sense we are glad to have our headquarters here and we look forward to improving our market share in Queensland.”
To do that, Nicholls cites a team-based leadership philosophy that only gives incentive where it’s due, with modest rewards.
“That’s important. Because we’re not listed, our remunerations structure is not highly geared to incentives or bonuses. Most of us are on base salary with a modest annual bonus – senior executives get 20 per cent, a senior manager would get 10 per cent, so we’re not talking sheep farms here,” he says.
“We’ve got a balanced score card around member satisfaction, staff engagement, growth and asset quality.
“I think that’s important in the current climate where there’s a lot of concern about executive salaries and remuneration packages — we don’t have over the top reward systems.
“If you have policies that drive behaviour to achieve at any cost, then you get high risk, and high risk, when it turns on you can bite you on the backside.”
Turning 60 this month, Nicholls plans to retire to his Sunshine Coast home at the end of the year after 27 years in the industry.
He was asked to step in as acting CEO five month ago after the resignation of previous managing director Graham Olrich. Before the merger in 2006 Nicholls was the CEO of ANCU and also chairs Cuscal Limited, so it was a natural progression for him before retirement.
While discussing the future of CUA in his office, there is a lively boardroom meeting next door with the recruitment firm that will find his replacement.
Judging by the laughter it seems the process isn’t too heated or stressful and the board is committed to telling HR that they don’t want to find a CEO who wants to list, because they won’t do it.
“Years ago St George and Suncorp were in mutual buildings, but the minute you list you’re on the way to becoming a bank. So we will resist becoming listed to the death. We’re going to stick by our members,”
Australia’s largest credit union
• After tax half-year profit to December 2008: $20.5 million.
• Profit growth: 5.1 per cent.
• Staff: 800.
• Deposit growth: 12.8 per cent.
• Loan growth: 3.9 per cent.
• Liquid investment growth: 33.6 per cent.
• Loan book of 35,000 mortgages.
• 44 behind payments.
• 2 mortgagees in possession.