W E LO O K AT TH I N G S D I F F E R E NTLY
W E LO O K AT TH I N G S D I F F E R E NTLY
PEARLS Ratios
David Hewson – ILCU, Monitoring Dept
National Supervisors Forum 2011
AGM 2011
W E LO O K AT TH I N G S D I F F E R E NTLY
What will be covered today
1. PEARLS background
2. Key PEARLS, worked examples
3. Your PEARLS report, what to look out for,
trends, problems
4. How are you performing? Ranking your
PEARLS
5. How can you improve your PEARLS?
6. Questions & answers
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W E LO O K AT TH I N G S D I F F E R E NTLY
• Devised by WOCCU
• In operation world wide since 1990
• ILCU adopted PEARLS ratios & added ratios
tailored to the Irish Credit Union Movement
• ILCU updated PEARLS in 2008, 2009 and June
2011
• In June 2011 we added E6c Net Capital Ratio
(important solvency check) and A2b Fixed Assets
ratio (recent issues on valuations of premises)
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W E LO O K AT TH I N G S D I F F E R E NTLY
P
• PROTECTION
E
• EFFECTIVE financial structure
A
• ASSET quality
R
• RATES of return
L
• LIQUIDITY
S
• SIGNS of growth
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W E LO O K AT TH I N G S D I F F E R E NTLY
P
• P1 Provisions, P3 Solvency
E
• E6c Net Capital/Assets
A
• A1 Arrears
R
• R5 Expense/Income
L
• L1 Liquidity
S
• S1 Growth in loans
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PEARLS report
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W E LO O K AT TH I N G S D I F F E R E NTLY
Why use PEARLS?-Credit Unions
• PEARLS ratios provide supervisors with a snap
shot of the financial health of the credit union
• Focus on the key ratios (Provisions,
Arreras,Solvency etc)
• Review the other PEARLS ratios for detail (Loan
Interest, Growth in Savings)
• PEARLS report shows current status, and
results for previous year
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W E LO O K AT TH I N G S D I F F E R E NTLY
Why use PEARLS? ILCU
• Monitoring use PEARLS as part of risk based
approach to Monitoring.
• Assists with assigning resources (eg Field
Officer visits)
• Monitoring score credit unions on Arrears,
Provisions, Solvency, Reserves,
Liquidity,
Regulatory Requirements and other factors
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W E LO O K AT TH I N G S D I F F E R E NTLY
Prudential Return & PEARLS
• Prudential Returns are loaded onto the database
in ILCU, the PEARLS ratios are calculated
• Movement average and ROI/NI averages are
calculated using the pooled Prudential data.
• PEARLS results depend on accuracy of the
Prudential Return
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W E LO O K AT TH I N G S D I F F E R E NTLY
Prudential Return updates
• Prudential Return in the Republic was
substantially revised in December 2010. The
new version is now a more detailed 8 page
document (guidance note runs to 56 pages)
• Prudential Return for Northern Ireland will be
replaced by the FSA return in 2012 (first reports
due quarter end Dec 2012)
• Revised NI PEARLS will be developed for FSA
reporting
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W E LO O K AT TH I N G S D I F F E R E NTLY
2 - Key PEARLS, worked examples
Example (a) - P1 Provisions Ratio
Formula:
Bad Debt Provision Total per balance sheet
divided by
Res 49 provision minimum
Res 49 provisions is generated from the arrears table
Provision % increase as arrears become more long term
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W E LO O K AT TH I N G S D I F F E R E NTLY
Example (a) - P1 Provisions Ratio
Arrears category
Min % Provision
Example provision
10 -18 weeks
10%
€5,000
19-26 weeks
20%
€10,000
27-39 weeks
40%
€20,000
40-52 weeks
60%
€40,000
53+ weeks
100%
€25,000
Total provision
€100,000
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W E LO O K AT TH I N G S D I F F E R E NTLY
Example (a) - P1 Provisions Ratio
Total provision in balance sheet =
Res 49 provision minimum =
€150,000
€100,000
P1 Result =
150%
This CU has a buffer of €50,000
Minimum is 100%
Average is currently134%
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W E LO O K AT TH I N G S D I F F E R E NTLY
Example (a) - P1 Provisions Ratio
• Recent change to the ratio
• With updated Res 49, credit unions can add
provisions above the 10%, 20% minimums
within Res 49 table
• Your P1 ratio will take account of this and work
off total provision / minimum provisions
• If you adjust up provisions within Res 49, P1
ratio increases
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W E LO O K AT TH I N G S D I F F E R E NTLY
Example (b) - P3 Solvency Ratio
Measures cover for member savings in the event
of a wind up/liquidation
Formula:
(a)Assets + (b)Provision
minus
(c) Res 49 Provision + (d) Short Term Liabs
divided by
(e) Total Savings
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W E LO O K AT TH I N G S D I F F E R E NTLY
Example (b) P3 Solvency Ratio
(a) Assets
(b) Provision total
€1,000,000
€150,000
(c) Res 49 provision
(d) Short term liabilities
€100,000
€5,000
€1,150,000
minus
(e) Savings
€105,000
divided by
€900,000
P3 Result =
116%
Minimum is 109%
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W E LO O K AT TH I N G S D I F F E R E NTLY
Example (c) – E6c Capital Ratio
This a new ROI Capital Ratio and measures Realised
Reserves over assets, and takes account of deficits.
Formula:
All realised reserves and surplus (less deficit)
divided by
Assets
Minimum range is 8.5% - 10%
(must be 10% by 2013)
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W E LO O K AT TH I N G S D I F F E R E NTLY
Example (c) – E6c Capital Ratio
Regulatory Reserve
Undistributed surplus
Current surplus
Realised Reserves
Assets
€90,000
€5,000
€6,000
€3,000
€104,000
divided by
€1,000,000
E6c Result = 10.4% (meeting requirement)
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W E LO O K AT TH I N G S D I F F E R E NTLY
Example (c) – E6c Capital Ratio
Regulatory Reserve
Undistributed surplus
Current deficit
Realised Reserves
€90,000
€5,000
(€6,000)
€3,000
Assets
€92,000
divided by
€1,000,000
E6c Result = 9.2% (Borderline)
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W E LO O K AT TH I N G S D I F F E R E NTLY
Example (d) - A1 Arrears Ratio
Formula:
Gross Loans 10 weeks+ in arrears divided by total Gross loans
Gross loans 10 wks + in arrears =
Total Gross Loans =
€200,000
divided by
€800,000
A1 Result = 25%
Average is 17.8%
Note the Goal for ratios is 5%!
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W E LO O K AT TH I N G S D I F F E R E NTLY
Example(e) – R6 Wages/Income
Formula:
Salaries and related expenses divided by total income
Wages=
Total Gross Loans =
€60,000
divided by
€500,000
Result = 12%
Average is 19%
Goal is 15%
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Example (e) - L1 Liquidity Ratio
Formula:
Cash + Investments less than 3 months duration divided by
total unattached shares
Cash + short term inv=
Unattached shares =
€100,000
divided by
€400,000
L1 Result = 25%
Average is 39%
Goal is minimum 20%, up to 30%
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W E LO O K AT TH I N G S D I F F E R E NTLY
Questions on PEARLS examples?
AGM 2011
W E LO O K AT TH I N G S D I F F E R E NTLY
3 – PEARLS report, what to look out for
Q:What has changed this quarter? Jump in
arrears?
Q: Arrears up over several quarters?
Q: Is the P1 ratio falling, or close to minimum
100% level?
Q: Expense/income ratio now above norm?
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W E LO O K AT TH I N G S D I F F E R E NTLY
3 – PEARLS report, what to look out for
Q: Are reserves ratios stable? Or falling?
Q: Capital ratio below 10%?
Q: Falling loan book?
Q: Income ratios falling?
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4 – How are you performing?
Peer Rankings:
• As part of your PEARLS pack we include peer
rankings on key ratios
• Ranked against similar sized Cus
• e.g: CU ranked 13th of 40 CUs on arrears in their
peer group (assets of €25-€50m)
• Last quarter we ranked on A1 Arrears and P1
Provisions
W E LO O K AT TH I N G S D I F F E R E NTLY
4 – How are you performing?
Peer Rankings checks:
Q: Are we ranked in top half of our peer group?
Q: Has our ranking slipped from last quarter?
Q: Did our arrears increase exceed increase in
movement?
Q: Are we beating the average? (average for Peer
Group, and average for Movement)
W E LO O K AT TH I N G S D I F F E R E NTLY
5 – How can you improve your PEARLS?
P1 Provisions
 Review Res 49 arrears report monthly
 If P1 has fallen, an adjustment to provisions is
likely, and needs to be planned for
 Make adjustments to provisions quarterly
 Don’t leave it until year end
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5 – How can you improve your PEARLS?
A1 Arrears- At Lending stage, ahead of the
curve
 Update loan assessment techniques
 Stress testing – can borrower repay with higher
mortgage rate?
 ICB
 What if member’s income falls? (inevitable)
 Security on loans
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W E LO O K AT TH I N G S D I F F E R E NTLY
5 – How can you improve your PEARLS?
A1 Arrears- at credit control stage
 Take what you can get, but get something
 Positive tone – engage with members
 Preparation before contacting members
 Information – obtaining, confirming, storing,
follow up
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W E LO O K AT TH I N G S D I F F E R E NTLY
5 – How can you improve your PEARLS?
Income and Expenses ratios
• Get detail on sharp changes in expense ratios
• Apart from closely watching expenditure, can
income be increased?
• Should loan rates be increased?
• Or credit control pulling in more recoveries?
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Relevance of PEARLS
30.0%
26.1%
25.0%
20.0%
15.0%
13.5%
13.4%
11.1%
10.0%
9.7%
Restricted lending
Lending not restricted
4.5%
5.0%
0.0%
A1 Arrears
A1 Arrears 53
weeks
E6 Capital
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W E LO O K AT TH I N G S D I F F E R E NTLY
Help is available
• ILCU training courses
• ACCUP
• ILCUbis (business intelligence) to keep on top of
your financials. Monthly PEARLS, graphs etc
• Contact the ILCU Monitoring Department for
Guidance
dhewson@creditunion.ie
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Thank you for your attention
Questions?
dhewson@creditunion.ie
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