DBRS Confirms Credit Union Central of Saskatchewan at R-1 (low) with a Stable Trend

DBRS Limited (DBRS) has today confirmed the Short-Term Instruments rating of Credit Union Central of Saskatchewan (SaskCentral) at R-1 (low) with a Stable trend. The confirmation of the rating follows a detailed review of SaskCentral’s operating results, financial fundamentals and future prospects.

The rating of SaskCentral is driven by DBRS’s intrinsic assessment of the Saskatchewan Credit Union System, including its satisfactory franchise strength, earnings power, risk profile, funding and liquidity, and capitalization. The analysis considers not only the intrinsic fundamentals of the combined credit unions but also the position of SaskCentral and its contribution to the overall system.

SaskCentral’s rating also reflects the importance of the credit union system and SaskCentral within the province of Saskatchewan; SaskCentral’s rating considers the potential for support from the provincial government, which is rated AA with a Stable trend. For SaskCentral, this level of support is assessed at SA2, reflecting the expectation of systemic and timely external provincial support. However, there is no resulting uplift on SaskCentral’s short-term rating of R-1 (low).

SaskCentral provides services to the credit unions of Saskatchewan (the System), particularly liquidity management, clearing and settlement. Its key investment, 84%-owned Concentra Financial Services Association (Concentra), provides additional services to the System and credit unions elsewhere in Canada. The System financials are the combined financials of the individual credit unions, which own SaskCentral and account for it on a cost basis.

The cohesiveness of the System is reflected in the credit union’s joint ownership and funding of SaskCentral and its reliance on SaskCentral for critical services, as well as through the deposit insurance program provided through the Credit Union Deposit Guarantee Corporation (CUDGC), which is accountable to the provincial government and primarily funded through annual assessments paid by credit unions. DBRS considers that individual credit unions are dependent on the reputation of the credit union system more broadly, and therefore, individual credit unions will likely support each other to the extent their fiduciary and other responsibilities allow.

The System’s risk profile is satisfactory, with largely secured loans and a history of good credit performance, although it is limited by geographic concentration. The System has a good capacity to absorb credit costs, with loss provisions well-covered by income before provisions and taxes.

SaskCentral’s exposure to Concentra represents a significant concentration of earnings, asset quality and financial risk. SaskCentral does not have unrestricted access to Concentra’s cash and financial assets, because its 47.13% voting interest does not give it a controlling ownership position. While SaskCentral does not guarantee any obligations of Concentra, DBRS ascribes a high level of implied support, as Concentra performs functions that are important to SaskCentral in fulfilling its mandate to serve the credit unions of Saskatchewan. This implied support of Concentra by SaskCentral is integral in DBRS’s assessment of both Concentra and SaskCentral. Concentra’s Issuer Rating is A (low) and its Short-Term Instruments rating is R-1 (low); both trends are Stable. By statute, a Financial Services Association cannot be controlled, but DBRS notes that Concentra is considering continuance as a bank, which will result in a change in SaskCentral’s voting interest and may result in SaskCentral’s consolidating Concentra into its financial statements.

RATING DRIVERS
While there is limited upside potential for the rating, meaningfully reversing declining System membership numbers or a sustained increase in System internal capital generation could result in positive rating implications. Conversely, a significant deterioration in System asset quality could put downward pressure on the rating, especially if it indicated weakness in credit underwriting or risk management. The rating could also come under pressure as a result of financial weakness at Concentra or a reduction in the assessment of likelihood of provincial support.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016) and DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), which can be found on our website under Methodologies.

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

Lead Analyst: Maria-Gabriella Khoury
Rating Committee Chair: Roger Lister

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.