DBRS Confirms Central 1 Credit Union at A (high) and R-1 (middle) with Stable Trends

DBRS Limited (DBRS) has today confirmed Central 1 Credit Union’s (Central 1) Issuer Rating at A (high) as well as its Short-Term Instruments rating at R-1 (middle), Medium and Long-Term Senior Notes & Deposits rating at A (high) and Subordinated Debt rating at “A.” The trends on all ratings remain Stable.

Central 1 provides services to the credit unions of British Columbia (the B.C. System) and almost all credit unions in Ontario (the Ontario System; collectively, the System), particularly liquidity management, clearing and settlement. The System financials are the combined financials of the individual credit unions, which own Central 1 and account for it on a cost basis. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The ratings of Central 1 consider the fundamental strengths of the B.C. and Ontario Systems. Specifically, the ratings reflect the intrinsic assessment (IA) of “A” for the B.C. System and the IA of BBB (high) for the Ontario System. DBRS’s assessment of the B.C. System reflects its satisfactory franchise strength, its passable earnings power and its satisfactory risk profile combined with its generally strong funding and liquidity and capitalization profiles. DBRS considers the Ontario System business franchise to be passable as well as its earnings power and satisfactory risk profile, funding and liquidity and capitalization. Central 1 itself has generally sound fundamentals that contribute to the two systems.

Reflecting the importance of the credit unions in these provinces and the role of Central 1, implicit support from the provincial governments for Central 1 is considered likely and is reflected in the support assessment of SA2 for Central 1. Reinforcing the importance of Central 1’s role, the B.C. Financial Institutions Commission, the provincial regulator, named Central 1 as a Domestic Systemically Important Financial Institution within the Canadian credit union system with an enhanced regulatory and supervisory framework for Central 1. With a rating of AA (high) for British Columbia and a rating of AA (low) for Ontario, the provinces are considered capable of providing such support, if needed. This expectation of systemic and timely external support adds a one-notch uplift from the IA of the Systems, resulting in the final rating of A (high) for Central 1.

The cohesiveness of both systems is underpinned by the credit unions’ ownership, funding and control of Central 1 as well as the critical services offered by Central 1 to the credit unions. This cohesiveness is enhanced by deposit insurance programs, which are administered by the Credit Union Deposit Insurance Corporation (CUDIC; unlimited amounts for all deposits) for B.C. credit unions and the Deposit Insurance Corporation of Ontario ($100,000 maximum or unlimited for registered plans) for Ontario 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 that their fiduciary and other responsibilities allow.

Regulatory regimes are under review in both British Columbia and Ontario, which may result in changes to liquidity and capital requirements for both Systems and Central 1. In British Columbia, there is also discussion about the possibility of changing the coverage of the deposit guarantee provided by CUDIC. The potential implementation of a reduction in coverage of the guarantee could result in some outflows of deposits, although DBRS expects that it would be phased in over time, giving the credit unions time to manage their funding profiles.

DBRS views Central 1’s earnings power as satisfactory considering its primary role as the liquidity and service provider for the two systems as approximately 87% of revenues come from non-interest income, which stood at $70.6 million in H1 2016. In addition, Central 1’s $15.7 billion balance sheet is considered low risk, given the bulk of it is in high-quality government issued liquid securities. Central 1 has a loan portfolio of $1.4 billion that is used to support credit unions, especially in cases of commercial loans where size could be an impediment. This portfolio has been performing well with small loan loss provisions, net of recoveries, over the past three years with negligible impaired loans since 2013. Modest earnings that provide some capital for growth are acceptable, given that Central 1 can require credit unions to top up its capital when required (a capital call).

RATING DRIVERS
While there is limited potential upside for the rating, material strengthening of System franchises, ideally with growth in both the number of members and revenue per member as well as improved System earnings, either through revenue growth or reduced expenses, would strengthen the rating while a significant deterioration in credit performance, especially if it implies weakness in underwriting or risk management, a sustained reduction in System internal capital generation or a reduction in the assessment of likelihood of provincial support could put downward pressure on the rating.

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 methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016) and DBRS Criteria: Support Assessment for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital (February 2016), which can be found on our website at www.dbrs.com.

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.