DBRS Morningstar Confirms BlueShore Financial at BBB (high), Changes Trends to Negative

DBRS Limited (DBRS Morningstar) confirmed BlueShore Financial Credit Union’s (BlueShore Financial or the Credit Union) Long-Term Issuer Rating at BBB (high) and Short-Term Issuer Rating at R-1 (low). DBRS Morningstar also changed the trend on both ratings to Negative from Stable. BlueShore Financial’s Support Assessment remains at SA2, reflecting the expectation of timely systemic external support from the Province of British Columbia (the Province; rated AA (high) with a Stable trend by DBRS Morningstar) through Central 1 Credit Union (rated A (high) with a Stable trend by DBRS Morningstar), particularly in the form of liquidity. The SA2 designation does not result in any uplift to the ratings.

KEY RATING CONSIDERATIONS
The Negative trends on the ratings reflect the potential impact on the Credit Union’s financial performance as a consequence of (1) a sharp contraction in economic activity resulting from the impact of the Coronavirus Disease (COVID-19) pandemic; and (2) high levels of consumer indebtedness against a backdrop of elevated real estate prices in the Greater Vancouver Area (GVA). DBRS Morningstar recognizes that BlueShore Financial benefits from a significant buffer to absorb potential losses given conservative loan-to-value ratios associated with its residential mortgage and commercial portfolios. However, should economic conditions worsen, resulting in a significant real estate correction in Vancouver, the Credit Union could experience a substantial reduction in collateral values given that the majority of BlueShore Financial’s exposures are secured through real estate.

The ratings also take into consideration BlueShore Financial’s franchise position as a provider of midmarket private banking services to an affluent West Coast credit union customer segment. The Credit Union has generated relatively good recurring earnings, although these will likely come under short-term pressure in the current economic environment. Asset quality also remains sound but is susceptible to some deterioration given BlueShore Financial’s concentration risk associated with its retail and wholesale credit risk exposures, the majority of which are in the GVA. Lastly, DBRS Morningstar views BlueShore’s liquidity position as appropriate.

RATING DRIVERS
Given the Negative trend, an upgrade is unlikely at this time. However, the trend could revert to Stable when British Columbia’s economic potential approaches pre-crisis levels and the Credit Union maintains sound credit fundamentals.

Material and sustained weakness in loan performance, which results in a significant increase in loan losses and sustained earnings pressure, would result in a ratings downgrade.

RATING RATIONALE
Underpinning BlueShore Financial’s franchise strength is its position as a niche player within the Province’s credit union industry. Specifically, the Credit Union provides midmarket private banking and wealth management services to its relatively affluent members. Benefitting from its higher-net-worth membership, BlueShore Financial has grown assets under management to $1.5 billion from $800 million over a five-year timeframe. In DBRS Morningstar’s assessment, this is supportive of BlueShore Financial’s value proposition. Furthermore, the Credit Union has also increased its market share of loans and deposits in the Province to 5.4% of residential mortgages, 5.5% of deposits, and 6.7% of commercial loans.

BlueShore Financial has generated solid recurring earnings that are reflective of its strong franchise and its comprehensive suite of products (retail banking, commercial banking, cash management, insurance, leasing, and wealth management). Due to the coronavirus pandemic, earnings are likely to be pressured in the short term, although pre-provisioning income remains sufficient to absorb elevated provisioning expenses.

BlueShore Financial’s underwriting practices are underpinned by conservative risk management policies implemented by an experienced risk-management team. Asset quality metrics have historically been very sound with provisioning as a proportion of net loans averaging only 6 basis points (bps) over the past five years. Nevertheless, the economic fallout from the pandemic could stress the Credit Union’s portfolio, which is secured mainly by real estate. The current economic lockdown may be impairing the ability of borrowers to remain current on mortgage payments as reflected in the substantial requests for payments deferrals BlueShore Financial has processed to date. In addition, the economic stresses could negatively affect house prices in the GVA, and hence collateral values for BlueShore Financial. Furthermore, the Credit Union has substantial exposure to commercial real estate loans, which are more susceptible to underperformance in the current environment relative to residential mortgage loans.

BlueShore Financial is funded primarily through deposits generated through its branches or sourced from institutional relationships, including municipalities, universities, schools, and hospitals. DBRS Morningstar assesses BlueShore Financial’s deposit base as relatively stable and subject to low flight risk. In addition, the Credit Union’s funding structure is well aligned with its lending activities. BlueShore Financial’s deposit base has a higher proportion of term deposits compared with its credit union peers, reflecting a higher net-worth membership. The termed nature of the deposit base provides BlueShore Financial with greater certainty when managing interest-rate risk and liquidity, but at a higher cost.

In DBRS Morningstar’s view, BlueShore Financial has a sound capital position. DBRS Morningstar notes that capital ratios for BlueShore Financial are at the lower end compared with its rated credit union peers in Canada. In F2019, BlueShore Financial’s total capital ratio improved slightly to 12.8% and was ahead of both the regulatory minimum of 10% and its internal capital target. Furthermore, based on its Internal Capital Adequacy Assessment Process, conducted annually, BlueShore Financial had sufficient capital to absorb heightened levels of provisioning expense.

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.

The Grid Summary Grades for BlueShore Financial Credit Union are as follows: Franchise Strength – Good; Earnings Power – Moderate; Risk Profile – Good/Moderate; Funding & Liquidity – Good; Capitalization – Good/Moderate.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 11, 2019): https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations

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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