DBRS Morningstar Confirms Vancouver City Savings Credit Union at R-1 (low) with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed Vancouver City Savings Credit Union’s (Vancity or the Credit Union) Short-Term Issuer Rating and Short-Term Instruments rating at R-1 (low) with Stable trends. The Credit Union has a Support Assessment of SA2 reflecting DBRS Morningstar’s expectation of timely systemic external support from the Province of British Columbia (B.C.; rated AA (high) with Stable trend by DBRS Morningstar) through Central 1 Credit Union (rated A (high) with a Negative 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 ratings reflect Vancity’s solid franchise as the largest credit union in B.C. by total assets and the second-largest by membership. The Credit Union’s footprint is predominately in the Greater Vancouver Area (GVA), where it holds strong market shares driven by its large and growing membership base. At the end of F2019, Vancity’s market shares for residential mortgages and deposits stood at about 5% and 6%, respectively, while its members represented just less than 11% of the provincial population. The ratings also take into consideration the likely negative impact on Vancity’s financial performance from (1) a sharp contraction in economic activity resulting from the impact of the Coronavirus Disease (COVID-19) pandemic and (2) elevated levels of consumer indebtedness coupled with sharp house price increases over the last five years.

RATING DRIVERS
Given the current environment, absent a significant strengthening in the Credit Union’s franchise and financial fundamentals, an upgrade of Vancity’s short-term ratings is unlikely. The ratings would be downgraded as a result of a material deterioration in Vancity’s asset quality that significantly affects financial performance.

RATING RATIONALE
Vancity, which offers a complete suite of banking products to its retail and small business members in the GVA, had total assets of $23.2 billion at the end of F2019. The Credit Union generates solid recurring earnings that provides it with a cushion to absorb higher provisioning expenses. Vancity’s net income before distributions declined by 24% to $70 million in F2019 as the low rate environment pressured net interest income while provisions for credit losses (PCL) almost doubled to $23 million on a year-over-year basis. DBRS Morningstar expects earnings to remain under pressure in F2020 following several rate reductions by the Bank of Canada and the likelihood of an increase in PCLs as a consequence of the coronavirus pandemic.

Supportive of its loss-absorbing capacity, Vancity has historically generated some of the strongest asset quality metrics among its Canadian peers. However, Vancity has significant exposure to business and commercial real estate loans totalling 33% of the total loan portfolio. As a result, asset quality could deteriorate rapidly should the economic impact from the coronavirus pandemic persist and result in rising levels of delinquencies and loan losses. Vancity is mainly funded through stable branch-raised retail deposits that benefit from its strong member relationships and an unlimited provincial deposit guarantee. DBRS Morningstar notes that the Credit Union’s funding and liquidity position has remained stable since the onset of the coronavirus pandemic.

In DBRS Morningstar’s assessment, Vancity’s capitalization remains robust although the Credit Union’s total capital ratio, which primarily comprises equity, declined marginally in F2019 to 14.7% from 14.8% in the previous year. This ratio is comparable with Canadian credit unions that have similar risk profiles. Based on DBRS Morningstar’s calculation, as of May 2020, Vancity had a capital cushion of $530 million above regulatory requirements to help absorb potential 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:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020) https://www.dbrsmorningstar.com/research/362170/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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