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In the Big Leagues

Puerto Rico’s credit unions are out to be increasingly competitive financial services players


January 16, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

Stepping up to the plate:Credit unions are expanding their services and becoming more sophisticated, aggressive competitors in the financial marketplace

The dawn of the year 2003 finds Puerto Rico’s leading credit unions in an unprecedented expansion mode.

For the sector’s top leaders, the expansion is occurring on several fronts. Some, such as Coopaca, VegaCoop, and Zeno Gandia, are making their first-ever incursions into commercial lending as well as new moves to capture market share in areas beyond the communities where they originated or their traditional personal loans forte.

The intense activity in the sector is in large measure the result of last October’s thorough revamping of the Savings & Loan Cooperative Societies Act, which governs the island’s credit unions. The new law, which entirely replaced the previous regulatory regime dating from 1989, has opened the door for credit unions to enter into direct competition with commercial banks and other financial institutions.

In addition to permitting credit unions to offer their members commercial loans-- including provisions for federal U.S. Small Business Administration-guaranteed loans-- Law 255 allows credit unions for the first time to offer small personal loans and mortgage loans to those who aren’t credit union members. They can also sell insurance policies as insurers or agents for other insurance cooperatives and establish subsidiaries and affiliates, including nonfinancial businesses.

In essence, the credit unions are being empowered to emerge from their humble beginnings and evolve into attractive one-stop financial services supermarkets, much like many of today’s other leading financial institutions in Puerto Rico.

A long-sought new era begins

We’ve been looking for these changes for more than 30 years," said Federico Rivera Saez, chairman of the Cooperatives’ League. Because of the low cost of funds at credit unions, due to their 100% tax exemption and nonprofit status, these developments are expected to help make the new financial services products highly competitive and attractive to individuals and the business community.

As of September 2002, the island’s 144 credit unions together had assets of $5.2 billion, $3.3 billion in loan portfolios and deposits totaling $3.8 billion. The credit unions currently have a presence in 76 of Puerto Rico’s 78 municipalities, with 230 offices or branches across the island.

Credit unions have long been formidable competitors of commercial banks and small nondepository loan institutions when it comes to personal loans. According to statistics compiled by the sector’s regulator, the Corporation for the Supervision & Insurance of Cooperatives (Cossec), the industry-average interest charged by credit unions for personal loans was 9.88% in September 2002. As of that month, the personal loans portfolio of the island’s credit union sector exceeded $1.78 billion.

According to Cooperatives’ League figures, credit union members have saved tens of millions of dollars thanks to the lower personal loan rates charged and higher deposit account rates offered by the regular personal loans lending sector. "We conservatively estimated a 2% lower rate on our loans," said the league’s executive director, Sandra Rodriguez Planell. "That comes out to approximately $62 million in savings for our members."

However, credit unions tend to be slightly less competitive than other financial institutions in other areas of their loan portfolios, such as mortgage loans and auto loans. They report September 2002 average interest rates of 7.89% and 8.80% respectively in these areas, which is higher than what their banking counterparts charged.

Tax advantages

The fact credit unions are free from bearing the tax burden that is carried by other financial institutions is a major advantage for the sector. The advantage benefits both the institutions as a whole and their individual members, who don’t pay taxes on their dividend earnings at credit unions.

Though sources in the banking industry have been reluctant to discuss the matter, the credit unions’ tax advantage appears likely to become an increasingly sore point as the competition increases.

Bankers resent, for example, being accused of not contributing as much as credit unions to the communities they serve. The reality is--above and beyond their community reinvestment and charitable activities--each year banks must also contribute tens of millions in taxes to the Treasury Department in order to support basic government services throughout Puerto Rico.

Nevertheless, Treasury Secretary Juan Flores Galarza told CARIBBEAN BUSINESS the administration has no intention of making the credit unions share the tax burden, despite their growth and incursion into more commercial activities. In fact, law 255 extended tax exemption to also include credit unions’ prospective subsidiaries.

Strength through consolidation

In addition to tax exemption, the consolidation process has also continued to play an important role in the strengthening of the credit union sector. Only 144 of the 171 credit unions that existed around the island in 1998 remain today.

Through its acquisition of the former Merci-Coop, for example, sector leader Coopaca gained a presence in municipalities such as Carolina, Caguas, and Ponce--far from its home base in Arecibo. The transaction added nearly 20,000 members to the Coopaca membership base of 77,000, and as of September 2002 accounted for more than $50 million of Coopaca’s $362.2 million in assets.

The consolidation process brings with it, naturally, economies of scale that continue to propel further gains. Coopaca President Jose Fuentes Oyola says the former Merci-Coop members were integrated smoothly into their new home, and have enjoyed the benefits of the sector leader’s better service and higher dividends.

Throughout the consolidation process, the sector has continued to register steady growth with regard to other key indicators of its health, namely membership, assets, and deposits. Between 1998 and 2002, total assets in the sector grew from $4.1 billion to $5.2 billion, while the total loan portfolio grew from $2.8 billion to $3.3 billion.

Further evidence of the sector’s building strength came to light in November 2002, when Banco Popular revealed its latest brand awareness study confirmed credit unions enjoy a substantially higher level of awareness than such major banks as Westernbank and Citibank.

As economist Luis Rodriguez Baez of consulting firm Estudios Tecnicos has pointed out, if all the assets of the credit union sector were to be consolidated into a single institution, it would be the island’s fifth largest financial institution in assets alone. According to Cossec, it would also have the largest network with 230 offices and branches throughout the island.

"If the credit unions were to unite to offer homogenous products, under a single brand, corporate identity, and public presence, they would have more than 200 branches…with a critical mass approaching a million clients," observed Rodriguez Baez.

The economist also pointed to an October 2002 survey of 1,200 homes by the Sales & Marketing Association that revealed strong consumer preferences toward the credit union sector. With regard to the attributes consumers seek in financial services, for example, low interest rates on loans was cited by 69%-- emerging as the top factor-- and high interest rates for deposits was cited by 67%.

VegaCoop Executive President Ruben Morales told CARIBBEAN BUSINESS that as a result of the incentives provided by the new cooperative law, he and his colleagues are working on strategies to pool their resources more effectively. The fruits of that effort can already be seen in the joint promotional offers for credit cards issued by credit unions. Morales said a similar effort could be made as the sector starts to target the small-loans sector.

Underserved regions

Given the new set of circumstances propitiating its growth, the credit unions’ current presence on the island has been characterized as demographically-- and geographically-- disproportionate. At present, they are most heavily concentrated in the corridor of the island that runs from Arecibo to Mayaguez; the San Juan and Ponce regions, meanwhile, are relatively underserved.

Of the 870,000 island residents who are members of credit unions, more than 398,000 live in the Arecibo or Mayaguez regions. Only 203,000 live in Puerto Rico’s two most populous regions, San Juan and Ponce.

As of September 2002, only 12 of the 144 credit unions on the island had over $100 million in assets. The top six institutions are all from the island’s north-central and western regions. None of the top 12 are based in the San Juan region.

The island’s top credit unions, however, have recently begun penetrating the metropolitan San Juan market through branch expansions in and around major shopping malls and the launch or enhancement of Internet banking services.

Already Coopaca and the Dr. Manuel Zeno Gandia Co-op-- both of which are based in Arecibo-- have their largest and busiest branches in San Juan metro areas such as Levittown, Hato Rey, and Rio Piedras.

While Coopaca recently opened a new branch in Los Colobos Mall in Carolina and announced it will build another in Bayamon this year, Zeno Gandia has lately been more focused on growing its client base through its Internet banking service, called Virtual Coop.

"We now have the ability [through Virtual Coop] to offer our clients better service than many well-known banking institutions," said Zeno Gandia Executive President Efrain Domenech. Virtual Coop was developed in partnership with Funds Express, an Austin, Texas-based Internet financial services provider that currently serves over 525 financial institutions throughout the U.S.

Meanwhile, Vega Alta-based VegaCoop is in the midst of a flurry of branch building this year, during which it is also celebrating its 50th anniversary. Executive President Ruben Morales said the credit union is in the process of adding an in-store branch on the premises of a major (and as yet undisclosed) supermarket chain in Bayamon.

Morales said construction is also about to get underway on a new $720,000 branch (complete with auto banking lanes) adjacent to Plaza Caribe in Vega Alta, and that the credit union is relocating its Dorado branch to a location that is more accessible, has more parking, and can accommodate auto-banking lanes.

"The metropolitan area is of great interest to us," Morales said. "Right now we’re concentrating on Bayamon, where we already have a branch and we already know the market." The construction will boost VegaCoop’s branch network from five to seven.

Both Coopaca and VegaCoop have also significantly increased their advertising budgets, including islandwide television ads, radio campaigns, and advertising in San Juan-area movie theatres. VegaCoop’s new media campaign theme, "The Hands of Puerto Rico Are the Hands of VegaCoop," is indicative of the institution’s broader aspirations.

How credit unions work, and evolve

As financial institutions, credit unions are organized to provide their members with a safe place to save and borrow from at reasonable rates. In essence, members pool their funds to make loans to one another.

Because credit unions are nonprofit, they can generally offer lower rates for personal loans and higher rates on many deposit accounts. Puerto Rico’s 144 credit unions are regulated by the Corporation for the Supervision & Insurance of Cooperatives, which also insures members’ deposits for up to $100,000.

By opening a share account in a credit union-- which is required for membership-- one becomes a member and co-owner of the institution. The deposits made in share accounts earn tax-free dividends on an annual basis, based on the institution’s earnings.

The share account also constitutes the collateral upon which a member may apply for loans and provides the basis for other member benefits, which vary among the different institutions. At the Coopaca, VegaCoop, and Dr. Manuel Zeno Gandia credit unions, for example, the main benefits are free life or funeral insurance.

During strong financial years-- which for top local credit unions have been many recently-- members can gain significantly from bonus dividends. These dividends are made with any surplus cash the credit union accumulates from investments and loan revenue.

Credit union membership carries with it the opportunity to participate in how the credit union is run, including a vote in annual meetings and the election of the board. Each member of the credit union has an equal vote.

Puerto Rico’s credit unions pride themselves on the amount of their reinvestments in their members’-- and their communities’-- quality of life. VegaCoop, for instance, has established an annual $75,000 scholarship fund for members’ school-age children, as well as an annual summer camp program. Many of the island’s credit unions also actively support continuing education programs and sponsor institutional newspapers and numerous cultural and sports activities.

In the past, credit unions often weren’t as convenient as commercial banks, but that is changing fast. With the dawn of online banking, the top local credit unions are now only as far as the nearest computer. Most also belong to the principal ATM / ATH and credit card networks. Moreover, in response to member demand, many leading credit unions are adding auto-banking lanes to their branch networks.

Credit Unions with $100 million or more in assets
As of September 2002

Name: Headquarters / Employees / Members / Assets

Coopaca: Arecibo / 187 / 77,232 / $362.2 million

Rincon: Rincon / 35 / 14,502 / $253.1 million

Aguada: Aguada / 39 / 23,219 / $216.2 million

VegaCoop: Vega Alta / 95 / 35,267 / $196.6 million

Isabela: Isabela / 44 / 28,435 / $180.2 million

Zeno Gandia: Arecibo / 62 / 36,888 / $174.3 million

Credicentro: Barranquitas / ?66 / 17,896 / $153.8 million

Manati: Manati / 81 / 23,124 / $126.5 million

San Rafael: Quebradillas / 60 / 18,302 / $120.7 million

MaunaCoop: Maunabo / 76 / 14,118 / $112.0 million

Lares: Lares / 56 / 18,944 / $101.7 million

Camuy: Camuy / 46 / 10,279 / $100.5 million

Source: Corp. for the Supervision & Insurance of Cooperatives

Credit Union presence in Puerto Rico
As of September 2002

Region: Credit unions / Employees / Members / Assets

Arecibo: 15 / 651 / 252,201 / $1.3 billion

Mayaguez: 19 / 346 / 146,615 / $1.1 billion

Central: 22 / 502 / 132,019 / $847 million

Caguas: 15 / 430 / 136,248 / $719 million

San Juan: 55 / 355 / 105,369 / $648 million

Ponce: 18 / 279 / 97,687 / $562 million

Total: 144 / 2,563 / 870,139 / $5.2 billion

This Caribbean Business article appears courtesy of Casiano Communications.
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