DBRS Confirms Central 1 Credit Union at A (high), A and R-1 (middle)

DBRS has today confirmed the Medium & Long-Term Senior Notes and Deposits, Subordinated Debt and Short-Term Notes ratings of Central 1 Credit Union (Central or Central 1) at A (high), “A” and R-1 (middle), respectively. All trends are Stable.

The primary considerations in determining the rating are the low-risk business and strong asset quality and financial risk profiles of the British Columbia credit union system (B.C. System) and Ontario credit unions that are members of Central (Ontario Members). The 2008 business combination of the former Credit Union Central of British Columbia (CUCBC) and Credit Union Central of Ontario (CUCO) to create Central had a number of benefits, including improved regional diversification, increased flexibility with a larger Central balance sheet compared to the larger credit union members, as well as the future potential for improved efficiencies through economies of scale.

Under DBRS’s global rating methodology for banks and bank-like financial institutions, Central’s Medium & Long-Term Senior Notes and Deposits rating is composed of an intrinsic rating of “A” and a support assessment of SA2; the SA2 assessment, which reflects the anticipation of government support, through Central, for the B.C. System and the Ontario credit union members from the governments of B.C. and Ontario respectively, results in a one notch rating benefit to the intrinsic assessment. This support situation is somewhat unusual in that two provincial governments are the supporting entities.

Central 1 and most credit unions in British Columbia and Ontario began reporting IFRS in 2011. Central 1’s net income decreased by about 50% in 2010 compared to 2009, largely as a result of unusually strong 2009 earnings, while the B.C. System and Ontario Members recorded earnings increases of 25% and 20% respectively.

A new Inter-Central Liquidity Agreement replaced the National Liquidity Fund Agreement (NLFA) in early July 2011. The new liquidity structure is a credit pool of $2 billion with $400 million committed each from centrals in Manitoba, Saskatchewan and Alberta, and $800 million committed from Central 1. The funds will remain on the balance sheet of the respective central and will not be segregated. In a liquidity crisis, Central 1 would have access to up to $1.6 billion under the liquidity agreement ($800 million of its own funds and $800 million shared proportionally from the other centrals). DBRS views the new structure as an improvement over the NLFA. The new structure is intended to be utilized for more localized events; it cannot be used in a market disruption. Please see the DBRS press release on this agreement dated July 6, 2011 for more information.

In addition, the centrals have set up a joint venture to house the group clearing arrangement with the Bank of Canada. Formerly, Credit Union Central of Canada (CUCC) operated the Group Clearing Agreement, although in practice, operations were outsourced to Central 1 and the other Centrals. CUCC will become purely a national trade association. Previously, the centrals pledged 0.5% of system assets to the Bank of Canada for settlement purposes under the Canadian Payments Association; under the new system, the amount pledged has doubled. Since the centrals indemnify each other under both the old and new group clearing agreement, the increase in the level of assets pledged acts as an additional liquidity buffer for the combined credit union system, albeit on a very short-term basis.

On December 31, 2009, Central completed the acquisition of 27% of The CUMIS Group Ltd. for approximately $109 million in conjunction with The Co-operators Life Insurance Group Ltd. (and related entities), which acquired the other 73%. In 2010, Lambton Financial Credit Union became a Central 1 member; although modest in size ($190 million in assets), it is the first credit union to join since the 2008 creation of Central 1. On June 1, 2011, Meridian Credit Union (Meridian) amalgamated with Desjardin Credit Union, increasing the level of Ontario assets affiliated with Central 1 by about $1.4 billion.

Note:
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 Organizations (January 2010) and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 2009), which can be found on our website under Methodologies