# why do manitoba CUs have the highest rates on GICs



## anon125 (Feb 21, 2013)

a quick look at cannex 5 yr gics and usually it is achieva, oaken etc. who have the highest rates
why is this?

looking for secure higher rates for the RRIF
thanks


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## Beaver101 (Nov 14, 2011)

^ Great observation and good question.


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## lonewolf (Jun 12, 2012)

Online cost effective no bricks & mortar. Manitoba very stable economy without much boom & bust which would help with their investments in the community not going through boom bust cycles which I would speculate they would see less default on their loans. Remember credit unions are not like the banks which make billions in profits the profits go back to share holders.


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## james4beach (Nov 15, 2012)

Yes credit unions are more stable banks. (They are also not highly leveraged like banks, nor do they have enormous derivatives exposures like the big banks).

But the question is still valid. Why the Manitoba credit unions and not say Ontario or BC credit unions?

I deposit money with Assiniboine Credit Union / Outlook Financial.


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## andrewf (Mar 1, 2010)

They have a higher cost of funding/are riskier?

Not a popular answer, I know. Do you guys think the Manitoba government will be bailing out non-resident depositors?


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## Daniel A. (Mar 20, 2011)

One thing they have going for them is the lowest power rates in the country, something that is attractive for investment.


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## james4beach (Nov 15, 2012)

andrewf said:


> Do you guys think the Manitoba government will be bailing out non-resident depositors?


The province does not guarantee the credit union deposits. The same is the case in Ontario and other provinces.

The Deposit Guarantee Corp of Manitoba is independent, with assets raised by member institutions. They also have access to various lines of credit, I believe. It's important to realize that there is no government guarantee behind provincial credit unions.

If you want a govt guarantee, go with something that's CDIC insured, or a government bond. I invest primarily in those two things.


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## james4beach (Nov 15, 2012)

By the way, from my own study of one of the MB credit unions (Assiniboine and Outlook Financial) I evaluated their overall risk as being lower than the Big Six banks. They generally had better capital levels and less exposure to risky instruments such as highly leveraged derivatives. So even if there's a Canadian banking crisis and the big banks start suffering tremendous losses, as they did in 2007-2008, I really don't think the credit unions will have solvency problems. I don't feel nervous depositing money with MB credit unions, and all of you know how incredibly risk-averse I am.

Part of the reason the Big Six banks take such higher risks is that the CDIC deposit insurance emboldens them, and their depositors. Because of the federal backstopping, and the huge bailout support of the Big Five banks in 2008, people walked away not worrying about bank solvency. The CDIC insurance gives you even more safety.

Thus, the Big Six banks take on tons of risk. Credit unions have always operated more responsibly and actually have this funny real-world problem of staying solvent. We call that "real banking". The big banks don't do traditional, real banking. They are glorified hedge funds, insanely leveraged, with the Bank of Canada and CDIC providing limitless liquidity to keep your deposits safe. The deposits are a joke at the big banks anyway. They make their money from leveraged speculation, not banking.


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## lonewolf (Jun 12, 2012)

I have most of my money in online Manitoba credit unions. The online deposits do not receive dividends but allow out of Provence money to deposit. I asked several credit unions over the years who made more money the GICs online or the GICs held in bricks & mortar division of the credit union. The answer was the same @ all of them it was the same return was their goal which they were very closely achieving by the dividends. There was no guarantee of dividends so if credit unions had a bad year more likely to make more holding on line then with bricks & mortar. Real estate is a lot cheaper in Manitoba cities then in Toronto or Vancouver so taxes would most likely be lower. Up stream some mentioned electricity is lower in Manitoba. The cost to run the Bricks & Mortar in Manitoba I think might have an advantage over the other provinces.


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## Davis (Nov 11, 2014)

Oaken is in the online savings arm of Home Trust, whose headquarters are in Toronto. Deposits are insured under CDIC, not the DGCM.


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## anon125 (Feb 21, 2013)

thanks all


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## Beaver101 (Nov 14, 2011)

lonewolf said:


> ... Real estate is a lot cheaper in Manitoba cities then in Toronto or Vancouver *so taxes would most likely be lower*. Up stream some mentioned electricity is lower in Manitoba. The cost to run the Bricks & Mortar in Manitoba I think might have an advantage over the other provinces.


 ... RE may be a lot cheaper but don't think property tax is. I think wages are lower so this helps on the costs to run those entities.


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## birdman (Feb 12, 2013)

Definitely lower overhead costs to operate remotely and gather deposits on line and without the overhead. Mainly reduced salary costs which account for somewhere around 60% of operating costs. 2014 statement show $16 million in salary costs for $3 billion in assets. A successful BC credit union I deal with has $30 million in salary costs and only $2 billion in assets (2014 statements). The financial margin for the latter was $52 million vs $40 million for Cambrian (Achieva). Definitely different business models as Cambrian (Achieva) generates significantly less margin but this is more than offset by the lower operating costs (salaries). Its a complex business and there could be many reasons for the lower financial margin but one of these is simply higher deposit rates. Don't feel like going into it in more detail but all statements for all credit unions are available on line.


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## NorthernRaven (Aug 4, 2010)

For Cambrian (brick and mortar) GIC rates are only 10 basis points below their Achieva online equivalents, and even the HISA gap is only 45 points (1.25% vs 1.70%) - I think this is generally true for Manitoba CUs.

As far as I know, there isn't any good info on how much of the deposit base the Manitoba online divisions contribute (or how much of that is out of province). Sunova's 2013 annual report indicated that their Hubert division had paid $4 million in interest (including GICs). You could get a very fuzzy estimate that this indicate that Hubert represented 12-15% of Sunova's deposit base. Presumably at some of the longer established online divisions (Assiniboine's Outlook, for instance) it might be higher, but there doesn't seem to be any disclosures I can see. The Manitoba CUs seem to have been in a bit of a feedback loop over the last 10-15 in cutting costs to compete in their own rather unique rate environment - I believe many of them are towards the top of the list in "efficiency ratio" (a technical term relating operating expenses to net income).

As noted, CUs are better able to spend margin on attractive rates as their customers are in some sense their shareholders, so the interests align. A bank/trust has to consider this an investment in building the deposit base, and as it grows (and develops a core of stable deposits) will want to taper this back when possible. You can see this at different scales in places like ING/Tangerine, Peoples Trust, etc. After a time at the high end, they will settle in at whatever tier they find equilibrium at (Tang/PCF a step above the Big 5, Canadian Tire/Peoples a bit above them, etc). The top end will be new entries or smallfry (Zag, Bridgewater, Oaken) where it still makes sense to pay more for deposits and fight it out with the Manitoba CUs.

It is possible that there may have been some regulatory issues that kept any high-interest online divisions from popping up in BC or Ontario. I was never able to get any actual info, but it wouldn't be surprising if other provinces might not have quietly discouraged their CUs from dealing on a large scale outside their jurisdictions. Otherwise, it seems strange that the HISA business model was attractive to half a dozen Manitoba CUs, but none anywhere else. Ontario's Meridian CU has recently entered the game, although not quite at the full Manitoba interest levels.


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## stantistic (Sep 19, 2015)

*Sucker For Punishment*

I am a member of a Manitoba Credit Union (nameless for the moment). I bought some preferred shares, thinking that I would get a dividend tax credit on the resulting dividends. “Preferred shares pay dividends, while bonds pay interest. There is a very great tax advantage for investors for the former payment method because of the dividend tax credit.” This quote is from http://www.himivest.com/media/moneysaver_0605.pdf
Much to my surprise, I recently found that there was no tax credit due to a clause in the prospectus which explicitly states that for taxation purposes, the dividends were classed as “interest”.
I will no longer invest in preferred shares in that Credit Union as long as the above situation prevails.


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## NorthernRaven (Aug 4, 2010)

stantistic said:


> I am a member of a Manitoba Credit Union (nameless for the moment). I bought some preferred shares, thinking that I would get a dividend tax credit on the resulting dividends. “Preferred shares pay dividends, while bonds pay interest. There is a very great tax advantage for investors for the former payment method because of the dividend tax credit.” This quote is from http://www.himivest.com/media/moneysaver_0605.pdf
> Much to my surprise, I recently found that there was no tax credit due to a clause in the prospectus which explicitly states that for taxation purposes, the dividends were classed as “interest”.
> I will no longer invest in preferred shares in that Credit Union as long as the above situation prevails.


I believe that as part of this the CU can treat the "dividend" as a deduction on its taxes, and in theory that benefit may trickle through to bump up the dividend rate slightly (or not). Compare your after-tax yield vs what you would consider an equivalent investment of actual preferred shares in a listed company to see what works best for you.


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## stantistic (Sep 19, 2015)

*Altruistic or Stupid*

When I read about the compensation packages for CEO’s of the major Banks being in the range of 6 to 11 million dollars per year, I am happy to patronize a Manitoba Credit Union. However, when my credit union pays (proposed 3.75 %) per year and has no dividend tax credit on its preference shares whereas Banks pay 4.5 to 5.5 % and do provide dividend tax credit, I begin to wonder if I am being altruistic or stupid. But this situation at least is providing partial answer to the subject of this thread. To wit, the cost of capital is a little bit lower. 
What is happening in other Manitoba CUs with respect to preference shares ?


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## birdman (Feb 12, 2013)

It is possible that there may have been some regulatory issues that kept any high-interest online divisions from popping up in BC or Ontario. I was never able to get any actual info, but it wouldn't be surprising if other provinces might not have quietly discouraged their CUs from dealing on a large scale outside their jurisdictions. Otherwise, it seems strange that the HISA business model was attractive to half a dozen Manitoba CUs, but none anywhere else. Ontario's Meridian CU has recently entered the game, although not quite at the full Manitoba interest levels.[/QUOTE]

Credit Unions are provincially regulated which I expect may which would limit credit unions from other province "popping up".


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## Eclectic12 (Oct 20, 2010)

stantistic said:


> ... However, when my credit union pays 3.75 % per year and has no dividend tax credit on its preference shares whereas Banks pay 4.5 to 5.5 % and do provide dividend tax credit, I begin to wonder if I am being altruistic or stupid ...


Technically ... the institution decides whether they are going to follow the rules set by the Feds for their payments to be classed as "dividends".

Then too, the shares I bought in the CU in Ontario years ago were clearly identified as not being traded on the stock exchange and not meeting the requirements for the DTC. The way it was outlined to me was more along the lines of the Costco membership, where one has to have one to do business.

The cost savings and higher interest at the time compared to banks (pre-virtual, few fee banks), made buying the one share to setup an account worthwhile, before considering any gains. 


I am not aware of any CU whose shares would be eligible for the DTC but have not made an exhaustive search. 


As for "altruistic or stupid" ... I suspect this is similar do asking if putting money in a HISA that is also interest only versus buying the bank stock is making a similar decision.

Cheers


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## NorthernRaven (Aug 4, 2010)

frase said:


> Credit Unions are provincially regulated which I expect may which would limit credit unions from other province "popping up".


What I meant was that no credit union in, say, BC or Ontario had established its own online arm - some of the Manitoba ones date back 10-15 years, I believe, and there are now half a dozen. It may be that their own financial structures didn't make offering high rates in competition with the Manitoba ones feasible, but it may also be that Manitoba was less averse to allowing something designed primarily to attract out-of-province (and more volatile) deposits. Hard to tell.


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## Eclectic12 (Oct 20, 2010)

Does the VanCity CU creating in 1997 an online bank count as an "online arm"?
https://en.wikipedia.org/wiki/Citizens_Bank_of_Canada


Cheers


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## NorthernRaven (Aug 4, 2010)

Well, to be specific, we'd be interested in "online arms" that provided top-of-the-market, Manitoba-level interest rates, not just online banking access to something like that institution's normal bricks-and-mortar rates.

Citizens Bank seems to be interesting, in that VanCity CU seems to have created it as a separate, federally regulated, CDIC deposit-taking bank. It looks like it was trying to operate in the same space as ING (which launched in 1997 as well). Checking the Wayback Machine, it looks like around July 2007, Citizens had a HISA rate of around 3.55%, and ING was at 3.5%. Achieva (Cambrian CU) seems to have been at 4.35%, so there still seems to have been a "Manitoba gap" even then.

Note that VanCity went with a complete CDIC banking subsidiary (lots of work to establish), instead of just an online division of their credit union. There would be a number of good reasons to do it this way - customer comfort on the insurance, access to various things (including advertising) as a nationally regulated bank (the internet was much less of a thing back then), etc. But still, until Ontario's Meridian recently, I don't think I've see another example of a credit union outside Manitoba with a "top level rates" online division under its own provincial regulation. I found archived Achieva pages indicating they had a 4.8% rate back to 2000 - it seems hard to believe that no non-Manitoba CU would find this sort of funding model attractive, when 6 in Manitoba did (3 before the Great Recession). That's why I'd lean to some sort of looser touch by the Manitoba regulators, but again, who knows.


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## stantistic (Sep 19, 2015)

Freshly irritated this tax season, I will again ask, - What is the income tax treatment of preferred share dividends of Credit Unions in other provinces? See posts #15 and#17 this thread for background.


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## OhGreatGuru (May 24, 2009)

As frase and others have suggested, probably due to low overheads (and loyal customers due to good customer service); including:
-no obscene executive salaries; 
- no posh head offices in expensive real estate markets like Toronto and Vancouver; 
- no expensive national advertising campaigns;
- no self-indulgent foreign adventures to grow their business in other countries using our money; 
- etc.


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## AltaRed (Jun 8, 2009)

stantistic said:


> Freshly irritated this tax season, I will again ask, - What is the income tax treatment of preferred share dividends of Credit Unions in other provinces? See posts #15 and#17 this thread for background.


I suspect all? most? credit unions that have preferred share issues have the distribution classified as interest. This is due to the business structure of the company. Corporations with prefs that pay dividends eligible for the dividend tax credit are paying the dividends out of After Tax income, not Before Tax income. IOW, the corps have already paid income taxes at their corporate tax rate on their cash flow/earnings before doling out the dividends. Credit unions are likely paying out their 'dividends' from pre-tax income.

The reason we get the dividend tax credit is to avoid paying tax twice (one by the corporation and once by us). IOW, the gross up we get and use in our tax returns gross/net/taxable income lines is to bring the 'net' dividend we receive back to a pre-tax 'gross' dividend, pay income tax rates based on our own personal income tax rates, and then deduct the 'corporate tax' as a tax credit. That way, we pay income tax on dividend income based on our personal tax rates rather than the corporate tax rate.

That is why low income earners can have a very low, zero, or even negative "net" tax rate on eligible dividends, while high income earners can end up paying more than the 'corporate dividend tax rate'.


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## stantistic (Sep 19, 2015)

AltaRed, your arguments carried the day. The local Credit Union manager and a CPA agree with your views.


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## sags (May 15, 2010)

From what I have read, credit unions are the source of subprime mortgages the banks have declined to fund, and therefore have access to higher rates of returns.

They may also be the source of financing for subprime auto lenders and payday loan companies.


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## birdman (Feb 12, 2013)

Sags, I'm not sure where you are getting your info from and what province(s) you are referring to but in BC the credit Union lending is strictly governed with lending policies, etc requiring approval of the Financial Institutions Commission. The lending here is every bit as secure and goes through similar hoops as the chartered banks. Credit Unions have specific lending limits and are regularly inspected by the the commission. Yes, you can always have a branch manager of a Credit Union or Bank who starts to become generous is their lending and I have seen it many times but it doesn't last long and they are out of there. If you ever read the Financial Institutions Act of BC I think you will see how stringent the act and regulations are and rightly so due to the guarantee of the Credit Union Deposit Insurance Corp. 
While I cannot speak for other jurisdictions I would expect them all to be somewhat similar due in part to the guarantee provided. However, credit unions do not have the geographical diversification that banks do and I guess that if Manitoba credit unions loans to farms are a large part of their portfolio and the value of farms tank by 50% or so there could be some issues.


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## fraser (May 15, 2010)

Just applies with Hubert today. And with Equitable as well. Moving our money for higher rates from Peoples and Western.


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## MrMatt (Dec 21, 2011)

I honestly don't get it, per cannex, the spreads between the top GIC and lowest mortgage are 2.5% and 2.59%.
Home trust is 2.3% and 2.59%. 

Those values just seem way too tight.


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## birdman (Feb 12, 2013)

Mr Matt: Top Gic rates and top mortgage rates are not comparable as F/I's for the most part match the maturities of the loans to their deposits. In other words, a five year mortgage is funded by a five year deposit. Now, it is much ore complicated than that as they do run a managed mismatch in maturities and of course use interest rate swaps and other hedges to facilitate the process. Just look at any bank annual report and it will provide highlights and some more details. Its quite an involved process. Demand and shorter dated deposits are matched to LOC's, variable rate mortgages, demand loans, personal loans, overdrafts etc. At the end of the day its the net interest margin that is important, in other words the total interest income less the total interest expense. The reason for this is quite simple. If short term deposits (eg savings accounts, chequing, 90 day term deposits, etc) were used to fund a 5 yr mortgage at say 3% and then interest rates went up to 6% the F/I would be losing money on that mortgage.


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## NorthernRaven (Aug 4, 2010)

Cambrian tends to be somewhat more forthcoming about their financials than many of the other CUs. If you look on page 22 of their 2015 full financials, they kindly break down their assets and liabilities by maturity ranges. You can see that the "Variable to 6 months" category is 40-50% of their business. Those assets (variable rate mortgages and loans) average 2.7% interest, while the matching liabilities (non-term deposits) were at 1.65%. That represents their online HISA, and lower rates for savings in-branch.

Doing a quick weighted average, it looks like the gross margin was about 91 basis points (2.99% vs 2.08%). It might actually be more like 118bp - they have a chunk in "non-interest rate sensitive" representing equity and perhaps non-interest accounts. In any case, it is pointless to just compare a couple of interest rates - you need to take a look at the cost of funds, their spread and expenses.


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