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

DBRS Limited (DBRS) has today confirmed the ratings of Central 1 Credit Union (Central 1), including Central 1’s Issuer Rating at A (high) and Short-Term Notes rating at R-1 (middle). All trends are Stable. Simultaneously, DBRS has assigned a Short-Term Instruments rating of R-1 (middle) and has discontinued the Short-Term Notes rating for clarity and consistency with rating descriptions used for similar institutions. This Short-Term Instruments rating applies to the same instruments issued using the Short-Term Notes description.

The primary considerations in determining the ratings are the low-risk mix of business and strong asset quality of the British Columbia credit union system (B.C. System) and Ontario credit union system (Ontario System; collectively with the B.C. System, the System). Central 1’s liquidity is strong and Central 1’s capital is generally strong, although a regulatory requirement for a borrowing multiple on the Mandatory Liquidity Pool results in regularly scheduled share calls to top up this portion of capital because of System growth. Profitability at the System level is under pressure (particularly in Ontario) because of the low interest rate environment, overreliance on net interest income and high cost levels. Asset quality is high, which should be expected at this point in the credit cycle.

In early 2014, British Columbia’s Financial Institutions Commission, the provincial regulator, named Central 1 as a domestic systemically important financial institution within the Canadian credit union system. The designation comes with the recognition of the importance of Central 1 within the national credit union system and has resulted in an enhanced regulatory and supervisory framework for Central 1.

On December 18, 2014, Central 1 and Concentra Financial Services Association announced the signing of a Memorandum of Understanding exploring the possibility of combining their respective trust services, securitization, derivatives, commercial lending, credit union lending, foreign exchange and funding operations. Discussions regarding this possibility continue.

The B.C. Ministry of Finance is in the process of reviewing the B.C. Financial Institutions Act and the related Credit Union Incorporation Act, which may result in changes to regulatory requirements for both Central 1 and the B.C. System to be more in line with the Office of the Superintendent of Financial Institutions (OSFI) Basel 3 standards for liquidity and capital. There is also discussion about the possibility of reducing the 100% credit union deposit guarantee provided by the Credit Union Deposit Insurance Corporation of British Columbia. Although a reduction in the guarantee could result in some outflows of deposits, it would almost certainly be phased in over a period of time, reducing any harm that the change might cause.

As the regulator in Ontario, the Deposit Insurance Corporation of Ontario’s mandate is set out in the Credit Unions and Caisses Populaires Act, 1994, which undergoes a review every five years and is currently under review. As in British Columbia, the most likely developments from this review would be in moving Ontario credit union legislation and regulation more in the direction of OSFI Basel 3 standards.

The System has material exposure to the Canadian residential mortgage market. Any slowdown in this market may slow earnings generation, while a downturn in the residential mortgage market could hurt asset-quality indicators and ultimately have an impact on provisioning levels.

There are various factors which could reasonably have a positive or negative influence on the credit strength of Central 1. Merging with other Canadian Centrals to form one large central has the potential to be positive while a material weakening of asset-quality metrics caused by housing market deterioration or other factors or a material deterioration in system earnings or financial risk profile top the list of negative influences. DBRS also believes that one or more large credit unions successfully applying for a federal charter might have negative implications.

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

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.

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

The applicable methodologies are Rating Canadian Credit Union Centrals and Desjardins Group (December 2014), Global Methodology for Rating Banks and Banking Organisations (June 2015) and DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015), which can be found on DBRS’s website at www.dbrs.com.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.