DBRS Confirms Credit Union Central Alberta at A, R-1 (low)

DBRS has today confirmed the Senior Long-Term Debt rating of Credit Union Central Alberta Limited (Central) at “A” and the Commercial Paper rating at R-1 (low), both with Stable trends. The anchoring factor in determining the ratings is the low-risk business and strong financial risk profile of the Alberta Credit Union System (System).

The System had a good year in 2008, recording record earnings of $143 million. The System generated 11.5% on-balance sheet asset growth, funded entirely by deposits. Three of the four largest credit unions (Common Wealth, Servus and Community Savings) merged on November 1, 2008, to form a single credit union with about $9.5 billion in assets, or about 58% of total System assets.

Central booked a $38 million loss for the 2008 year, caused by further asset-backed commercial paper (ABCP) write-downs, partially offset by a gain on the sale of the merchant acquiring business. As the credit card operations (including both CUETS, which was sold in 2007 and the merchant acquiring business) provided a substantial proportion of Central’s profits, Central is expected to generate earnings at lower levels going forward.

Central, Credit Union Central of Saskatchewan and Credit Union Central of Manitoba have entered into discussions aimed at merging to become a single Prairie Central. Should the proposal gain widespread approval, the targeted merger date is January 1, 2011.

Central’s financial risk profile, while still acceptable given strong liquidity levels and anticipated ongoing support from the System, has weakened somewhat over the past several years in terms of its ability to generate stable levels of internal capital generation. Asset quality at the Central level remains strong other than the ABCP-related securities, which accounted for about 10% of the securities portfolio (after write-downs) at year end.

The System’s asset quality weakened in 2008 from unsustainably strong levels in 2007; however it remains at solid levels. Exposure to the Albertan economy remains a factor in the rating, as the economy is more prone to cyclical conditions than most provinces.

Under DBRS’s global rating methodology for banks and bank-like financial institutions, Central’s Senior Long-Term Debt rating, at “A”, is composed of its intrinsic assessment at A (low) and its support assessment at SA2 (reflecting the expectation of systemic and timely external support by the government of Alberta). The SA2 results in a one-notch rating benefit to the intrinsic assessment.

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

The applicable methodology is Rating Canadian Provincial Credit Union Centrals, Credit Unions and Desjardins Group, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.