DBRS Confirms Credit Union Central of Saskatchewan at R-1 (low)

DBRS has today confirmed the Commercial Paper rating of Credit Union Central of Saskatchewan (SaskCentral or Central) at R-1 (low) with a Stable trend.

The rating remains supported by the healthy credit union system in Saskatchewan (the System), with its defendable market niche in rural areas of the province and high penetration rate among the population. Limited System size, a high cost structure and asset concentration remain key challenges for the System.

Central’s direct operations are almost totally focused on providing liquidity, clearing and settlement services for the System (including maintaining the liquidity portfolio supported by mandatory System deposits); most of the services provided by other provincial centrals to their respective systems are provided by 84%-owned Concentra Financial Services Association (Concentra; see separate press release published today). While Central itself is not expected to generate high levels of profitability, this is not a critical aspect of DBRS’s rating methodology for credit union centrals (provided they do not generate ongoing losses) as centrals exist to provide services to their members.

Central faces challenges in its exposure to Concentra, which is expected to generate most of Central’s consolidated earnings and internal capital generation for the foreseeable future. The DBRS report on Concentra dated May 11, 2011, provides additional analytical rationale used in determining the DBRS rating on this important aspect of Central. While Central does not guarantee any obligations of Concentra, DBRS ascribes a very high level of implied support, as Concentra performs functions that are critical to Central fulfilling its mandate to serve the credit unions of Saskatchewan, particularly in terms of taking deposits in excess of mandatory requirements and loans to credit unions. This implied support of Concentra by Central is integral in DBRS’s assessment of the ratings for both Concentra and Central.

The System generated record earnings (before patronage allocations and dividends) in 2010 of $109 million – a 59% increase relative to 2009. The 2010 return on equity increased to 10.3%, up from 6.8% in 2009. SaskCentral (on a consolidated basis excluding unusual items and discontinued operations) reported a profit of $21.4 million in 2010 versus $48.2 million in 2009; the lower profit was largely a result of lower securitization gains, lower securities gains at SaskCentral and higher expenses, partially offset by higher net interest income.

In January 2011, a proposed merger between three of the four largest credit unions in the province was called off; had it been successful, the combined organization would have accounted for 40% of System assets.

In August 2010, discussions aimed at merging SaskCentral, Credit Union Central Alberta (CUCA) and Credit Union Central of Manitoba to become a single prairie central were called off as a result of the Alberta government’s reluctance to give up regulatory authority over CUCA. While DBRS believed that the three-way merger would have strengthened the newly-formed Central and all three systems, we believe SaskCentral remains a strong credit in its own right. Even without the prairie merger initiative, SaskCentral intends to make a proposal to the Office of the Superintendent of Financial Institutions to continue as a federal association under the Co-operative Credit Associations Act (Canada).

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

The applicable methodologies are Canadian Credit Union Methodology (April 2011), Global Methodology for Rating Banks and Banking Organisations (January 2010) and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 2009), which can be found on DBRS’s website at www.dbrs.com.