Increased regulatory oversight, heightened competition, margin pressures and the relentless need to drive profitability — does this sound familiar? Such credit union challenges are driving the need to consider new and innovative product and service offers. For many credit unions, this new path forward includes commercial mortgage lending.
A review of the most recent financial statements of Canada’s Top 5 credit unions (excluding Quebec) reveals that commercial loans, as a proportion of their total member credit, averaged 30 percent, confirming that this lending is a significant component of the balance sheet.
For credit unions, the commercial mortgage product and service offer can take several forms. Most common is direct member lending. Participation in larger loan syndications, recently made more accessible for credit unions in Ontario, is a viable option as well, offering the ability to partner with other credit unions.
What are the benefits of commercial mortgage lending? From a member’s perspective, it allows for a more complete product suite offer. From the credit union’s perspective, the benefits include greater “share-of-wallet” penetration with non-personal members. Commercial mortgage credit availability can also lead to enhanced deposits, resulting in positive funds-under-management growth. Similarly, the commercial mortgage product offers synergy with wealth management initiatives.
Commercial mortgage lending also has an efficiency ratio a fraction of a typical branch operation. Business development and credit underwriting resources can be centralized while multiple branch representation, a requirement for personal product offerings, is not typically required.
An important opportunity for credit unions is the ability to generate increased spread as well as fee income. Commercial credit is typically a “stickier” product, with a greater emphasis on member/lender relationships. Retail mortgage lending, a mainstay of many credit unions, tends to be a “commodity.” Interest rates are often the prime member consideration. Switching lenders for retail products is now easier than ever. This will become even more evident with new fintech service providers and the advent of “open banking” initiatives, which are on the horizon.
In the past, credit unions typically relied on a relatively modest suite of products that were focused on personal member needs. More recent initiatives such as the Credit Union Business Owner’s Strategy (CUBOS) include a mandate to “take advantage of new opportunities and expand existing business relationships.” Expanded credit union offers have included an array of products and services such as small and medium enterprise (SME) lending, enhanced banking packages and wealth management. A commercial mortgage offering further supports a non-personal member’s credit union experience.
There are significant differences between retail and commercial mortgage lending. Examples include the possibility of cost overruns and delays with construction completion, a reduction in cash flow resulting from large tenant vacancies and the fact that individual loan amounts are larger. Ongoing monitoring, including site visits to confirm occupancy and other factors, annual reviews to update member/guarantor net worth and regular stress testing are but a few of the tools available to manage a commercial portfolio.
Properly supported, a commercial mortgage offer can provide credit unions with operational efficiencies. The typical commercial mortgage can generate significant fee income and provide enhanced margins. There is an ever growing demand for commercial mortgage credit. Credit unions can capitalize on the opportunities this presents within their communities, allowing them to better serve and deepen member relationships while generating sustainable and more profitable growth. ◊
The key to success in rolling out a commercial mortgage offer is ensuring it is fully supported. Staff training and experience is paramount. Supports should include:
- Full alignment with the vision, mission and objectives of the credit union.
- Corporate governance framework supportive of the initiative.
- Appropriate and supportive policies and procedures.
- A robust capital, credit and operational risk framework.
- Clearly defined accountability of staff, management and Board.
- Appropriate ongoing reporting and monitoring capabilities.
- Staff with commercial real estate experience and business development expertise.
- A clear separation of sales and credit functions.