DBRS Confirms Credit Union Central Alberta at “A” and R-1 (low)

DBRS has today confirmed the ratings of Credit Union Central Alberta (Central) at “A” and R-1 (low); the trends are Stable. The primary factor in determining the ratings remains the low-risk business and strong financial risk profile of the Alberta Credit Union System (the System). While the assessment of the System provides the starting point for Central’s rating, there are no material deficiencies at Central that would negatively affect the rating relative to the assessment of the System; while profitability is limited, earnings are not a material rating factor for a credit union central. Central’s asset quality and financial risk profile metrics remain acceptable.

While the System’s asset quality has come under some modest pressure as a result of the lingering effects of the recession and the housing situation in Alberta, generally it remains in good shape and is a positive factor in the rating. The outlook for the System is inevitably linked to the economic environment in Alberta, which in turn is materially affected by volatility related to energy prices. However, it is possible that the growing importance to the economy of the capital-intensive oil sands production compared with conventional oil and gas may reduce this volatility in the future, which would be a positive factor for the System.

The System’s earnings before unusual items, dividends and patronage refunds increased by a modest 1.8% in 2010, while the adjusted return on equity declined to 8.9% from 9.6% in 2009. An increase in net interest income was offset by higher operating expenses, in part due to integration activities at Servus Credit Union. Central reported a profit of $8.3 million before extraordinary items and discontinued operations in 2010 versus a profit of $5.7 million on a similar basis in 2009; the improvement in earnings was primarily driven by valuation gains on Master Asset Value (MAV) notes of $4.0 million offset by a $1.3 million loan loss provision (compared with a small recovery in 2009).

In August 2010, discussions aimed at merging Central, Credit Union Central of Saskatchewan and Credit Union Central of Manitoba to become a single Prairie central were called off, primarily as a result of the Alberta government’s reluctance to give up regulatory authority over Central. While DBRS believed the three-way merger would have strengthened the newly-formed Central and provide stronger support for all three systems, we believe that Central remains a strong credit in its own right.

The System implemented a program beginning May 2, 2011, that allows members to access a number of services at all other credit unions without surcharges or additional fees, which is expected to improve customer satisfaction levels.

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 of A (low) and its support assessment of SA2 (reflecting the expectation of systemic and timely external support by the government of Alberta). The SA2 assessment results in a one-notch rating benefit to the intrinsic assessment.

Note:
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.