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In 2022 Saskatchewan's credit unions received a huge one-time windfall from the sale of Concentra Bank. Credit unions have used their share of the revenue to strengthen their capital positions, invest in technology and return profits to members. However, by converting a strategic asset into cash, the provincial system has moved away from shared delivery, lost a source of recurring revenue and handed control of their wholesale banking operations to a publicly-traded for-profit entity. Will Saskatchewan's credit unions leverage this opportunity to transform their businesses, or will this be a one-time event? Some backgroundConcentra dates back to 1967 from its founding as the Co-operative Trust Co. of Canada. In 2005 it became Concentra Financial Services Association and in 2016 converted from a cooperative association to a Schedule I Bank. In 2022 Concentra Bank was sold to Equitable Bank, where it continues as a wholly-owned subsidiary. Concentra was created as a shared service for Saskatchewan's credit unions to pool excess liquidity, offer Trust services, syndicate loans and other scale-dependent wholesale activities. As Concentra grew it expanded across borders to serve credit unions in other provinces, challenger banks and fintechs. By 2022 Concentra had over $11B in on-book assets, $36B assets under management, $146M in revenue and profits of $43M. Concentra was 84% owned by Saskatchewan's credit unions via SaskCentral, the provincial liquidity provider. Sale to Equitable BankIn early 2022, Concentra announced an agreement to be acquired by Equitable Bank for approximately $470M, a $35M premium on book value. Concentra's sale was precipitated by a number of factors including Saskatchewan credit unions looking to simplify their shared services model, and by the provincial regulator's concerns over concentration risk. The deal closed in November 2022. Concentra Bank now operates as a subsidiary of EQ and day-to-day business has continued essentially unchanged. Impact on Saskatchewan's credit unionsFinancial Impact Concentra's sale created a huge one-time windfall for Saskatchewan's credit unions. SaskCentral normally distributed up to $5M in Concentra profits as dividends to member credit unions.  In 2022 that grew to a one-time payout of $290M. This represented approximately 25% of total Saskatchewan CU revenue and 60% of net income. Individual credit unions received up to $68M.  At first look it's hard to argue with the logic. Credit unions received 60 years worth of regular dividends in one go, generating a huge cash infusion and short-term profitability bump. Credit unions varied in their approach to dealing with this windfall. Unity credit union is a good example of an organization that divided the amount into different purpose-led buckets: We utilized a portion of these funds to increase our Member Rewards allocation for 2022, pay the costs related to the Xpress banking implementation and make two donations of $50,000 each to the Hospital Auxiliary for the purchase of new beds and the Town of Unity to enhance the walking paths. The rest of the funds were used to build capital to strengthen the credit union’s financial position into the future. Since this was a one-time injection of funds, we tried to use them prudently. Other credit unions opted to split the funds between cash reserves and member patronage: From that sale Radius Credit Union received a tax-free dividend of just over $5.3 million that was then allocated to reserves. This one-time injection of capital has assisted with our capital growth and has enabled us to pay the almost $1.3 million in patronage payments to our membership. The dividend also created a one-time boost to efficiency ratings and revenue diversification (depending on whether the CU booked the dividend as interest or non-interest revenue). The capital itself represented a boost of approximately 1% of each CU's total assets and will stay on the books. Any analysis of 2022 performance needs to take the dividend into account (note that I've updated my previous Insights to reflect this). Access to Wholesale Services This cash payment came with a significant tradeoff in the form of lost control. Under their previous ownership model, credit union leaders sat on the Board of Concentra Bank. They exercised influence over everything from Concentra's pricing structure to technology investments. And they received a modest profit share. Now, Concentra is wholly-owned by a TSX-listed entity responsible for delivering profits to its major shareholders. Concentra Bank and EQ Inc have re-iterated their commitment to serving credit unions. New ownership may result in new products and services coming to market, leveraged by Equitable's increased scale and nimbleness. Should credit unions want to look elsewhere there are limited cooperative options. Central 1 and Desjardins both offer Trust services, and Desjardins is active in the treasury space. Big banks are generally uninterested in working with all but the very largest credit unions. Time will tell if this move will increase competitiveness in the wholesale banking marketplace. Strategic Investments The most significant impact will be if credit unions use this one-time cash injection to make themselves more competitive. This could include investments in digital platforms, strategic cost reductions or development of new products and services. Simply using the cash as a source of cheap regulatory capital is unlikely to make the kind of lasting change needed. Looking aheadWill Saskatchewan's credit unions revert back to normal performance, or will the Concentra sale be a trigger for sustained performance improvements? We'll get our first look when annual reports start coming out in early 2024.
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Doug MacdonaldAnalysis of credit union, challenger bank and fintech competitiveness. Archives
January 2025
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