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

DBRS Limited (DBRS) has today confirmed Credit Union Central Alberta’s (Alberta Central’s) Issuer Rating and its Senior Long-Term Debt rating at “A” and its Short-Term Instruments rating at R-1 (low). The trends on all ratings remain Stable.

Alberta Central provides services to the Alberta Credit Union System (the System), particularly liquidity management. Other services include asset and liability management, government relations, audit, information technology, payments and statements and purchasing. The System financials are the combined financials of the individual credit unions, which own Alberta Central and account for it on an equity or cost basis.

The ratings of Alberta Central reflect DBRS’s intrinsic assessment (IA) of the System at A (low). The IA reflects the System’s satisfactory franchise strength, earnings power, risk profile and capitalization, as well as its strong funding and liquidity. This analysis considers not only the intrinsic fundamentals of the combined credit unions, but also the position of Alberta Central and its generally positive contribution to the overall system. Moreover, Alberta Central does not exhibit any significant problems that would affect the assessment of the System. Given the role and importance of Alberta Central, its IA is equalized with that of the System.

Reflecting the importance of the credit union system in the provincial economy and the role of Alberta Central, DBRS also considers the potential for support from the provincial government of Alberta, which is rated at AA (high) with a Stable trend. Indicative of this importance, credit union branches account for about 19% of bank and credit union branches in the province (including the branches of ATB Financial (ATB), an Alberta government-owned financial institution). For Alberta Central, this level of systemic support is assessed at SA2, reflecting DBRS’s expectation of timely external provincial support, resulting in a one-notch uplift for Alberta Central from its IA of A (low), resulting in its final rating of “A.”

The cohesiveness of the System is enhanced by the credit unions’ joint ownership, control and deposit funding of Alberta Central, their reliance on Alberta Central for critical services, as well as the provincial deposit insurance program. Deposits in Alberta credit unions are 100% insured by the provincial government through the Credit Union Deposit Guarantee Corporation (CUDGC), with no upper limit. DBRS considers that individual credit unions are dependent on the reputation of the credit union system more broadly, and therefore, individual credit unions would likely support each other to the extent that their fiduciary and other responsibilities allow.

The Stable trend reflects DBRS’s view that the ratings are well positioned in their categories. While there is limited upside potential for the ratings from current levels, material improvements in the System’s franchise strength, for example, by growing the membership base, and in the System’s earnings power, particularly in efficiency, would strengthen the rating assessment. A significant deterioration in credit performance could put downward pressure on the trend, if deterioration were worse than expected during a typical cyclical downturn, especially if it indicated weakness in credit underwriting or risk management. The rating could also come under pressure if there is a reduction in DBRS’s assessment of the likelihood of provincial support.

The provincial economy’s emphasis on the oil and gas and petrochemical industries exposes Alberta to downward trends in commodity prices; the current low energy price environment will inevitably affect the Alberta System as economic activity in the province comes under downward pressure and asset quality deteriorates. Additionally, while it is difficult to estimate the impact of the wildfire at this point in time, net of recoveries from insurance, there will likely be an interim period of late payments and concessions made by credit unions to affected customers. DBRS notes that there are only two credit union branches in Fort McMurray, both owned by Servus Credit Union, the largest credit union in the province. Rebuilding efforts should have a positive impact on the economy, which could help offset weakness caused by low energy prices. Regardless, with loss provisions only accounting for a long-term average of 9.1% of income before provisions and taxes, there is ample capacity for the System to absorb higher levels of credit costs.

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.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (December 2015) and DBRS Criteria: Support Assessment for Banks and Banking Organisations (March 2016), which can be found on DBRS’s website at www.dbrs.com.

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