Canada credit unions may challenge big banks: report

TORONTO (Reuters) - Canadian credit unions could challenge the country’s big banks for deposits in the personal and commercial banking sector, helped by a legal change that allows them to incorporate on a federal level, according to a report from Moody’s Investors Service.

The Moody’s research, released on Tuesday, showed credit unions already account for 16 percent of domestic deposits and 19 percent of residential mortgages, market shares that could increase as credit unions centralize across Canada.

A move by the federal government in its March budget that allows credit unions to operate across the country by incorporating federally -- as opposed to just provincially -- will likely boost their power, Moody’s said.

“Given the size and significance of the credit union segment in Canadian personal and commercial banking, we believe that a smaller number of centralized credit unions could pose a longer-term strategic challenge for the Canadian banks in the domestic market,” Moody’s analyst Ali Mozaffari wrote.

“Operating on a national level will allow credit unions to enhance their franchises and opens access to new funding sources such as covered bonds.”

Most credit unions are independent entities owned by their members, but many have organized “centrals” -- known as corporate credit unions in the United States -- to provide support functions such as payment clearing, funding and liquidity to individual members.

Moody’s said incorporating federally will allow Canadian credit unions to build national branch networks, and the increase in size and scale could also allow the co-operatives to offer a wider array of banking products.

Canada's Big Six domestic banks -- Royal Bank of Canada RY.TO, Toronto-Dominion Bank TD.TO, Bank of Nova Scotia BNS.TO, Bank of Montreal BMO.TO, Canadian Imperial Bank of Commerce CM.TO and National Bank of Canada NA.TO -- together dominate retail banking, but credit unions are growing faster than the banks, Moody's showed.

What’s more, the successful consolidation model of financial co-operative Desjardins Group, a big player in the province of Quebec, illustrates how powerful credit unions can be when centrally organized.

Credit unions have already begun to centralize activities in several regions of Canada, and are using the support of credit unions centrals to organize and grow. While centralizing has decreased the number of individual credit unions, it also boosts their ability to manage risks.

“To the extent that this segment consolidates, streamlines its operations, creates nationwide branch networks, and broadens its offerings, it could expand its share of the Canadian retail financial services market,” Mozaffari said.

Reporting by Andrea Hopkins; editing by Rob Wilson