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

DBRS has 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 the 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) while improvements have been made, the Credit Union continues to have a high cost structure 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.

The relationship with Central 1 Credit Union (Central 1) continues to benefit Vancity, 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 of viewing a credit union as a stand-alone entity without taking into account its support from the provincial central.

Vancity recorded a 66% increase in earnings before taxes, unusual items, patronage rebates and contributions in 2010 over 2009, resulting in an adjusted return on equity (ROE) of 12.6% in 2010 compared with 9.3% in 2009. The improved earnings were driven by a 19% increase in net interest income; a significant portion of this increase relates to management action to lock in funding costs prior to the three interest rate increases in 2010. The 2010 loan loss provision increased to $27.7 million from $18.5 million in 2009, although the higher 2010 provision included a $3.6 million general reserve strengthening and the 2009 provision included a $16.9 million general reserve reversal. Asset quality, as measured by loans with specific allowances-to-total loans, continued weakening to 57 basis points (bps) from 39 bps of the portfolio over the course of 2010. Some stress is still evident in the non-mortgage consumer loan portfolio as well as in the business loan and commercial mortgage portfolios.

Vancity embarked on a program to simplify and strengthen the structure of the organization in 2009, including the sale of the home, auto and travel insurance portfolio; the sale of the retail banking portfolios of Citizens Bank of Canada; and the sale of Inhance Investment Management’s funds business. The capital raised was reinvested in the core business. In DBRS’s opinion, the changes were positive in that Vancity is now a leaner organization. Also in 2009, Vancity acquired the remaining 25% of a real estate development project called Dockside Green Limited Partnership and now wholly owns the development.

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

The applicable methodologies are Rating Canadian Provincial Credit Union Centrals, Credit Unions and Desjardins Group; Global Methodology for Rating Banks and Banking Organisations; and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.