DBRS Confirms Concentra at R-1 (low) with Stable Trend

DBRS has today confirmed the Short-Term Instruments rating of Concentra Financial Services Association (Concentra) at R-1 (low) with a Stable trend.

The rating continues to be based on a high level of implied support from Credit Union Central of Saskatchewan (SaskCentral; see separate press release published today). Under DBRS’s bank rating methodology, DBRS has assigned Concentra a support assessment of SA1, reflecting a strong expectation of timely support from SaskCentral. The lack of any notching in the rating, even though there are no guarantees in place, is a function of the strategic importance of Concentra to SaskCentral and the Saskatchewan credit union system. Without the support of SaskCentral, Concentra would be rated at a lower level.

On a stand-alone basis, Concentra’s strengths are in asset quality and liquidity; its major challenges include further reducing interest rate exposure (which results in volatility in profitability and internal capital generation), improving on its funding base (in quality, cost and diversification), and improving its geographic diversification.

Concentra reported lower earnings in 2010 compared with 2009, largely as a result of reduced securitization gains and an increase in expenses including the cost of settling two legal actions in Québec.

Concentra adopted IFRS on January 1, 2011; the primary change affecting capital is treatment of securitized assets. Concentra will bring about $1.5 billion in assets (including $1.3 billion of insured residential mortgages) that had been directly securitized back onto the balance sheet (offset by the securitization-related liabilities) and will reverse the unearned portion of previously booked gains on securitization, resulting in an increase in assets and a reduction in retained earnings and regulatory capital. The impact on capital will be recovered through increased net interest income over the life of the assets. Additional securitizations where Concentra acted as an intermediary between credit unions and Canada Mortgage and Housing Corporation will also be brought back on the balance sheet, although there will be no impact on retained earnings.

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

The applicable methodology is Canadian Credit Union Methodology (April 2011), Global Methodology for Rating Banks and Banking Organizations (January 2010) and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 2009)