Credit Union Auckland breaches Reserve Bank capital requirements, pitches merger to survive

Credit Union Auckland is proposing to merge with the larger First Credit Union after the former found itself in breach of Reserve Bank capital ratio requirements. Photo / Supplied

Credit Union Auckland (CUA), with more than 6500 members, is recommending a merger with much larger compatriot First Credit Union after breaching Reserve Bank capital requirements.

Credit unions are regulated by the Reserve Bank as non-bank deposit-takers (NBDT), and are required to operate with capital ratios of at least 8 per cent if assessed by a rating agency, or 10 per cent if not.

In accounts for the year to June 2023, Credit Union Auckland (CUA) reported a capital ratio of just 7.75 per cent, triggering a formal “event of review”. Auditors BDO flagged this development as “Material Uncertainty Related to Going Concern”.

CUA recently issued advice to its members recommending a merger with First saying: “CUA’s board does not believe it is financially viable for CUA to continue in its current form.”

CUA has $26.2m in deposits and has made $22.9m in loans to its members.

Its membership includes more than 2000 people inherited from the former New Zealand Firefighters Credit Union (NZFCU), which merged with CUA in 2022 after they also suffered a capital ratio squeeze.

By the end of 2020 NZFCU found itself on the wrong side of its required ratio of 10 per cent, triggering a scramble to find a resolution. An earlier attempt to merge with Credit Union Baywide failed to achieve member ratification before CUA emerged as a more acceptable suitor.

CUA has run consistent losses since 2019, with 2023 seeing red ink spike with an $805,884 deficit following provisions for bad loans more than doubling and administration expenses increasing 50 per cent.

Notes to the CUA accounts said the capital ratio breach was planned to be mitigated from November last year by First providing a $700,000 credit note facility.

The two credit unions have since elected to attempt a merger, with CUA holding a Special General Meetings on April 18 for their members to vote on the proposal. Proceeding with the merger will require at least 75 per cent of CUA’s membership to vote in favour, and First’s board to then approve the deal.

CUA was given a CCC+ rating by Equifax, with a negative outlook. First is rated as BB and stable by Fitch.

First is considerably larger than CUA, with nearly 20 times total assets, around 10 times the members, and a relatively healthy capital ratio of 13.27 per cent.

Simon Scott, the chief executive of First, said the merger would allow expansion into Auckland, and for CUA members to get lower fees and provide a wider pool of funds to borrow from.

“[CUA] have historically been a great small credit union that the members have supported over many years. Alas, the costs of compliance and regulation proportionally fall on smaller entities and this is an example to a great extent,” Scott said.

CUA’s meeting documents cited its board declaring the merger appears the only way forward: “At this stage, there are no other obvious options to secure the long-term future of CUA.”

Herald requests to CUA for comment went unanswered.

Matt Nippert is an Auckland-based investigations reporter covering white-collar and transnational crimes and the intersection of politics and business. He has won more than a dozen awards for his journalism - including twice being named Reporter of the Year - and joined the Herald in 2014 after having spent the decade prior reporting from business newspapers and national magazines.