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

DBRS has today confirmed Vancouver City Savings Credit Union’s (Vancity or the Credit Union) Short-Term Instruments rating at R-1 (low) with a Stable trend. The rating remains supported by Vancity’s relatively low-risk core business, good penetration in its geographic market and its mutually beneficial relationship with Central 1 Credit Union (Central 1).

Vancity continues to feel pressure on its financial results from tighter margins brought on by the low interest rate environment, with net interest income coming in at $341 million, $20 million lower than the comparable figure in 2012. Interest margins are expected to continue to feel pressure throughout 2014 and plateau near the current levels for as long as the low-rate environment persists. Operating revenue lacks diversity away from interest sensitive revenue sources, with net interest income related revenue making up 75% of total operating revenue which poses a challenge given the systemic compression in interest margins. Fortunately, from both a cost of funding and quality of funding perspective, loan growth experienced in 2013 was fully funded by member deposit growth.

Operating expenses relative to operating revenue remained elevated in 2013, as Vancity continued to face costs associated with its major information technology project (IT Project) to move to a more modern core-banking platform. Vancity’s update of its banking platform is a complex, multi-year project that comes with sizable costs. In evaluating the project at the end of 2012, Vancity observed that they weren’t as far along as they had expected and costs were greater than planned; as a result, a decision was made to pause the project to re-evaluate objectives. Following a review of the project, the board of directors approved a plan to continue the implementation of the banking platform with a focus on having a simple solution that is scalable and grounded in the strategic context of offering a differentiated member experience. The IT Project is forecasted for completion in Q1 2017 and expense levels can be expected to be elevated to some degree until the project reaches its completion.

Vancity’s asset quality profile has remained strong, attributable to the mix of the loan portfolio being weighted towards lower-risk residential mortgages. However, geographically the portfolio is highly concentrated in southern British Columbia and on Vancouver Island as a result of the matching footprint of the Credit Union’s presence. This geographic concentration exposes the company to economic volatility within a relatively small region compared to financial institutions with larger provincial and national footprints. Additionally, in line with the geographic concentration, any weakness within the Vancouver housing market would disproportionately affect Vancity given its lack of diversity outside of the region and the lean of its portfolio towards residential mortgages and personal lending.

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 at A (high) and its Short-Term Notes at 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 in viewing a credit union as a stand-alone entity without taking into account its support from the provincial central.
Notes:

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Canadian Credit Union Centrals and Desjardins Group (December 2013), Global Methodology for Rating Banks and Banking Organisations (June 2014) and Criteria: Support Assessment for Banks and Banking Organisations (January 2014), all of which can be found on DBRS’s website at www.dbrs.com.

The sources of information used for this rating include company documents. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.