DBRS Confirms Vancity’s Short-Term Rating at R-1 (low)

DBRS has today confirmed the Short-Term Instruments rating of Vancouver City Savings Credit Union (Vancity or the Credit Union) at R-1 (low) with a Stable trend. The rating remains supported by Vancity’s relatively low-risk base business, which primarily focuses on providing consumer financial services, with an emphasis on residential mortgage lending funded by core deposits. Vancity’s rating is further strengthened by reasonable market penetration in its core market of the Greater Vancouver Area and southern Vancouver Island.

Vancity continues to face two key issues: (1) the Credit Union continues to have a high cost structure, which, if not addressed, could limit its ability to compete on price and/or reinvest in the business in the future, and (2) non-interest income remains an underrepresented revenue source, which is an important issue to address given DBRS’s expectation of continued long-term margin compression in the financial services industry.

Vancity continues to benefit from its relationship with Central 1 Credit Union (Central 1), particularly with respect to Central 1’s large liquidity pool.

Under the DBRS support assessment ratings system, Vancity is assessed SA2, reflecting the expectation of timely systemic external support from Central 1. DBRS currently rates Central 1’s Medium & Long-Term Senior Notes & Deposits A (high), its Subordinated Debt “A” and its Short-Term Notes R-1 (middle); all trends are Stable. Support assessments for credit unions are unique in that the supporting organization is partially owned by the supported one, rather than the other way around. As in prior years, DBRS has not assigned an intrinsic assessment to Vancity as a result of the difficulty in viewing a credit union as a stand-alone entity, without taking into account its supporting provincial Central.

In 2009, Vancity embarked on a program to simplify and strengthen the structure of its organization, including the sale of the home, auto and travel insurance portfolio; the sale of the retail banking portfolios of Citizens Bank of Canada (Citizens); and the sale of the Inhance Investment Management’s (Inhance’s) funds business. In addition, Vancity reduced its non-member-facing workforce by 4%. In DBRS’s opinion, the changes were positive in that Vancity is now a leaner organization, although the changes may further increase Vancity’s dependence on net interest income.

The remaining insurance business is solely involved in providing life, creditor and title insurance to the Credit Union’s customers. Citizens is now focused entirely on commercial mortgage lending, Visa card services and foreign exchange. Inhance was dissolved and under terms of the sales agreement, a division of Vancity will continue to provide socially responsible advisory services to the acquirer of the funds management business. In 2009, Vancity also acquired the remaining 25% of a real estate development project called Dockside Green Limited Partnership (Dockside Green) and now wholly owns the development.

Vancity recorded a 6% decrease in earnings before taxes, unusual items, patronage rebates and contributions in 2009 over 2008, in part because the insurance operation, the Citizens bank assets and the mutual funds business that were sold were not treated as discontinued operations. The adjusted return on equity (ROE) for 2009 of 9.5% was slightly lower than the 9.8% recorded in 2008. Unusual items, which net to less than $2 million (tax estimated), included $32.6 million in positive items (primarily a gain on the sale of several operations), offset by a $30.3 million charge against Dockside Green. Asset quality weakened in 2008 and 2009 but has since shown some improvements.

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

The applicable methodologies are the Canadian Credit Union Methodology, the Global Methodology for Rating Banks and Banking Organizations and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on the DBRS website under Methodologies.