Economic Participation

3.4 Economic Participation

mecu's goals

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economic participation

mecu adds value to the economy, members, employees, strategic communities, suppliers and the public sector through the Credit Union's operating expenditures and distributions.

Net interest margin

Net interest margin is a measurement of the difference between the interest income generated and the amount of interest paid out. mecu's net interest margin remained strong with a slight drop from last year, even with the Reserve Bank increasing interest rates over the year. This Reserve Bank action placed significant pressure on all ADIs, including mecu's ability to maintain profitable margins. Despite this, mecu has still performed strongly demonstrating the Credit Union's economically sustainable banking practices.

Figure 3b: Net interest margin

 

  

09/10

  

08/09

  

07/08

  

06/07

  

05/06

  

04/05

Interest income on loans

 

$108.0m

 

$89.9m

 

$80.4m

 

$66.8m

 

$59.8m

 

$56.7m

Interest income on investments

 

$21.9m

 

$24.9m

 

$28.1m

 

$25.0m

 

$18.9m

 

$16.6m

Interest expense on deposits

 

$67.5m

 

$64.2m

 

$62.4m

 

$48.9m

 

$39.9m

 

$35.6m

Net interest margin

 

$62.5m

 

2.92%

 

$46.0m

 

$42.9m

 

$38.8m

 

$37.7m

Net interest margin as a % of average assets

 

2.92%

 

3.01%

 

3.20%

 

3.20%

 

3.30%

 

3.40%

Refer to mecu's Annual Report for the geographic breakdown of deposits and loans. 

spotlight

margin squeeze and its impact on mecu

Competition for retail deposits including the money people invest in savings accounts and term deposits remains very fierce and shows no signs of easing.

Credit unions like mecu have always provided their members with competitively priced deposit products. The money members invest with credit unions is provided to other members in the form of loans.

During and since the Global Financial Crisis Australia's major banks began offering very competitively priced deposit products. They did this because their wholesale funding or the money they borrowed via commercial money markets to fund loans started to increase significantly in cost and became harder to secure.

This competition for deposits has meant the cost of mecu's deposits has increased significantly. In order to match or better our bank competitors mecu has increased its deposit product interest rates.

At the same time mecu has remained committed to continuing to provide members with market leading loan interest rates.

The overall impact of this situation has been to create a squeeze on margin which is the difference between what mecu pays members for deposits and the amount we charge members for loans. The difference is reducing.

Member funds

Member funds are predominantly retained profits. These funds belong to all members. They are reinvested in the core Credit Union business for the benefit of all members. Member funds increased by 23.75% compared to 2008/09. This is attributed to profit and the transfer of member funds from the mergers with RegionalOne Credit Union and Maroondah Credit Union.

Figure 3c: Member Funds

Member funds as at 30 June 2010

$259.8m

Member funds as at 30 June 2009

$209.9m

Member funds as at 30 June 2008

$181.3m

Member funds as at 30 June 2007

$162.9m

Member funds as at 30 June 2006

$145.6m

Member funds as at 30 June 2005

$128.4m

Change between 2008/09 and 2009/10

23.59%

Credit integrity

mecu's responsible lending practices give members confidence to invest money with their Credit Union. They also support the Credit Union's long-term economic performance and have resulted in a low provision for impaired loans against a growing loan portfolio.

Figure 3d: Credit control - bad debt write-offs

Year

  

Bad and doubtful debt expense ($)

  

Provision for impaired loans ($)

  

Total loan portfolio ($)

  

Provision for impaired loans to loan portfolio

2009/10

 

179,760

 

$554,833

 

1,958,974,225

 

0.03%

2008/09

 

292,812

 

410,793

 

1,397,920,362

 

0.03%

2007/08

 

151,778

 

335,061

 

1,101,879,505

 

0.03%

2006/07

 

176,334

 

445,611

 

941,697,201

 

0.05%

2005/06

 

264,011

 

666,815

 

844,449,970

 

0.08%

2004/05

 

66,276

 

1,033,459

 

813,722,501

 

0.13%

This year, 2009/2010 saw an exceptionally low delinquency result when compared to all industry benchmarks. Delinquent loans increased due to merged entities but remained very low by industry standards. mecu's Credit Integrity team adheres to all relevant legislation and codes regarding the handling of bad debt recovery. They assist members where possible to manage their credit responsibly. Recent interest rate rises combined with reduced or static household income may cause financial pressure for some borrowers, particularly those who have bought homes in the last 18 months. mecu continues to support members who may experience financial hardship and assist them wherever possible.

Suppliers

As a practice, mecu sources all of its supplies in the Australian market. Suppliers are required to demonstrate ongoing compliance with all relevant Australian laws and regulations.

mecu's five largest suppliers (based on supplier costs for the year) are listed in Figure 3e, together with the percentage of total operating expense they absorb.

Figure 3e: Primary suppliers

Suppliers

Service provided

  

% of total operating expense in 2009/10

  

Difference in actual expenditure between 2008/09 & 2009/10

Cuscal

Banking support services

 

11.18

 

21.60%

Data Action

IT and data processing

 

9.27

 

70.37%

QBE Mortgage Insurance Services

Mortgage Loan Insurance

 

2.76

 

16.86%

Hermes Precisa/Salmat

Mail house (commenced October 2008)

 

 

2.2

 

87.05%

CUNA Mutual

Corporate Bond and Package insurance

 

1.31

 

-28.96%

Cuscal is mecu's provider of wholesale and transactional banking services and represents 11% of operational expenditure. In 2009/10, Cuscal costs increased by 22% compared to 2008/09. Costs have increased primarily as a result of the increased transaction volumes resulting from the two mergers with Regional One Credit Union and Maroondah Credit Union. mecu is a shareholder in Cuscal.

Data Action, based in Adelaide, is mecu's core banking and information technology bureau service provider and represents 9% of operational expenditure. In 2009/10, Data Action costs increased by 70% compared to 2008/09, mainly as a result of an increase in facility management fees resulting from the two mergers with Regional One Credit Union and Maroondah Credit Union. mecu is a shareholder in Data Action.

QBE Mortgage Insurance Services provides mortgage insurance services to mecu. In 2009/10, mecu changed providers from GE Mortgage Service. Costs increased by 17% compared to 2008/09, however this is attributed to increased loan demand requiring loan mortgage insurance.

Hermes Precisa/Salmat provides statement mailing and other mail services to mecu. In 2009/10, payments to them increased by 87% compared to 2008/09. This is a result of mecu engaging Hermes Precisa/Salmat from October 2008 and their 2008/09 figures only representing part of the period. 

CUNA Mutual is a leading international financial services provider who provides mecu with Corporate Bond and Package insurance. Previously it was also the underwriter for life insurance on borrowers. In 2009/10, CUNA Mutual costs decreased by 29% compared to 2009/10. This is a result of mecu cancelling the provision of free Membercare life protection insurance for borrowing members, effective from 1 April 2009.

It is important for mecu to:

  • work with suppliers to improve the environmental and social impact of mecu products
  • encourage suppliers to reduce their environmental impacts
  • encourage suppliers to constructively manage their social impacts
  • purchase products that are environmentally and socially responsible; and
  • reduce resource consumption through product usage.

mecu has made a commitment to develop a supply chain management system as an outcome of implementing an EMS. This commitment will be met by June 2011. For further information on how mecu is working with suppliers to improve environmental and social outcomes, refer to the supply chain management section of this Report.

Cost of materials and services purchased

The cost of materials and services purchased increased in 2009/10 as a result of capital expenditure on Service Centre fit-outs in St Lucia and Toowoomba, as well as the installation of a new rediATM and numerous rediATM upgrades across the entire mecu rediATM network .

Figure 3f: Cost of materials and services purchased

Cost of materials and services purchased

09/10

  

08/09

  

07/08

  

06/07

  

05/06

  

04/05

    

Difference between 08/09 & 09/10

Total

$25.2m

 

$21.2m

 

$20.6m

 

$17.90

 

$19.40

 

$20.90

 

18.83%

Payment of contracts

One hundred per cent (100%) of contracts were paid in accordance with agreed terms and conditions.  mecu actively monitors methods of payment. mecu is continuing to reduce paper waste by using EFT where possible to make payments to creditors, rather than by cheque. mecu will continue to monitor and increase the use of EFT over cheque method where possible. 

Figure 3g: Payments made by EFT 

% of Total Payments made via EFT to:

  

09/10

  

08/09

  

07/08

  

06/07

  

Difference between 08/09 & 09/10

Creditors

 

73.00%

 

69.26%

 

65.00%

 

40.00%

 

5.85%

Invoices

 

73.00%

 

68.77%

 

63.00%

 

33.00%

 

6.80%

Payment of employees

Employee payroll and benefits paid increased by 45.67% from last year. This significant increase largely arises from mecu's merger with RegionalOne Credit Union and Maroondah Credit Union in July and August respectively.

Salaries are determined using a range of external benchmarks, including the Australasian Mutuals Institute Salary Survey, and are reviewed annually to ensure they remain competitive with industry standards. Based on the findings of this review, the salary structure was updated in 2009/10 to reflect increases across all grades and levels.

Figure 3h: Payroll and benefits

 

  

09/10

  

08/09

  

07/08

  

06/07

  

05/06

  

04/05

  

Difference between 08/09 & 09/10

Payroll and Benefits paid

 

$25.0m

 

$17.2m

 

$13.2m

 

$11.8m

 

$11.5m

 

$13.2m

 

45.67%

Subsidies

In 2009/10 mecu did not receive any subsidies.

Income tax

Income tax paid in 2009/10 increased by 3.83% and is attributed to the increase in mecu's profits this year.

Figure 3i: Income tax

Year

  

09/10

  

08/09

  

07/08

  

06/07

  

05/06

  

04/06

  

Difference between 08/09 & 09/10

Income tax

 

$7.5m

 

$7.2m

 

$7.4m

 

$7.0m

 

$6.9m

 

$5.2m

 

3.83%