DBRS Morningstar Confirms Affinity Credit Union at R-1 (low), Trend Changed to Negative

DBRS Limited (DBRS Morningstar) confirmed Affinity Credit Union’s (Affinity or the Credit Union) Short-Term Issuer Rating and Short-Term Instruments rating at R-1 (low). The trend on all ratings was changed to Negative from Stable. Affinity’s Support Assessment is SA2, which reflects DBRS Morningstar’s expectation of timely systemic external support from the Province of Saskatchewan (Saskatchewan or the Province; rated AA, Under Review with Negative Implications, by DBRS Morningstar) through Credit Union Central of Saskatchewan (rated R-1 (low) with a Stable trend by DBRS Morningstar), particularly in the form of liquidity. Affinity has been designated a Provincial Systemically Important Financial Institution, which also increases the likelihood that systemic external support would be forthcoming. At present, the SA2 designation does not result in any uplift for the Short-Term Instruments rating.

KEY RATING CONSIDERATIONS
The Negative trends reflect the abrupt and severe economic disruption resulting from the Coronavirus Disease (COVID-19) pandemic, as well as the oil price shock, both of which are likely to weaken credit fundamentals. DBRS Morningstar notes that the Credit Union has a large exposure to commercial loans, which comprise 28% gross loans, and non-mortgage-related consumer loans, which comprise 10% gross loans.

RATING DRIVERS
Given the Negative trends, an upgrade is unlikely at this time. The trend could revert back to Stable if Saskatchewan’s economy is able to reopen and the Province’s economic potential approaches pre-crisis levels. Material and sustained weakness in loan performance resulting in a significant increase in loan losses due to a longer than expected adverse impact of the coronavirus and the oil price shocks could lead to a downgrade.

RATING RATIONALE
Affinity maintains a solid franchise across its core operational footprint in Saskatchewan, specifically in the city of Saskatoon, which is also the commercial hub of the Province. Based on its strong operating franchise, Affinity generates solid recurring earnings. Notably, Affinity had the highest ratio of noninterest income as a portion of operating revenues in F2019 relative to its provincial peers, which DBRS Morningstar views positively. Although the Credit Union has a good risk profile, which is driven by its generally conservative underwriting policies and practices, and its asset-quality metrics improved in 2019, the impact from the coronavirus pandemic and the oil price shock could substantially raise delinquencies and loan losses for Affinity. Positively, the Credit Union is funded primarily through stable member-sourced core retail deposits. Affinity’s liquidity position remains sound and compares favorably with peers. Capitalization levels also provide for a substantial capital cushion that should allow the Credit Union to absorb stressed levels of losses.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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