DBRS Confirms Vancouver City Savings Credit Union’s Short-Term Instruments Rating at R-1 (low), Stable Trend

DBRS Limited (DBRS) has today confirmed Vancouver City Savings Credit Union’s (Vancity or the Bank) Short-Term Instruments rating at R-1 (low). The trend remains Stable. The confirmation follows a detailed review of Vancity’s operating results, financial fundamentals and future prospects.

Under the DBRS’s support assessment criteria, Vancity is assessed as a SA2, reflecting the expectation of timely systemic external support from the provincial government through Central 1 Credit Union (Central 1), particularly in the form of liquidity, which is reflected in the Bank’s short-term rating. DBRS currently rates Central 1’s Medium & Long-Term Senior Notes & Deposits at A (high) and its Short-Term Instruments at R-1 (middle), both with Stable trends.

In confirming the rating, DBRS recognizes Vancity’s lower risk community banking business model and its dominant position in the Credit Union (CU) space, as the largest CU in Canada, as well as a market share leader in the Vancouver area. However, this also implies limited opportunities to diversify a Vancouver-centric asset and revenue base. Vancity’s lower-risk business model is predicated on providing basic banking services that are centred around servicing retail customers with emphasis on mortgage financing, small business lending, trust and wealth management, credit card services and insurance. Small business is a target growth area for Vancity, but it will likely be restricted to within the community banking space, a traditionally low-risk area. As at Q2 2016, Vancity had total assets of $21.0 billion and adjusted net income for the six-month period to June 2016 of $36.2 million, up 18.9% over the prior year.

DBRS views Vancity’s low level of revenue diversification, given its high reliance on relatively cyclical net interest income, as a constraint on the rating. Negative operating leverage and a high operating cost structure, which are typical of credit unions, also limit the rating. Positively, DBRS notes that Vancity has made progress in growing fee-based revenues, which comprised 16.3% of operating revenues in 2015, up from 14.0% in 2013.

Given the significant house price appreciation seen in the Vancouver area and Vancity’s reliance on real estate lending, representing 79% of the total loan portfolio as at Q1 2016, which is similar to some Canadian peers, DBRS is of the view that a material downturn in real estate values could potentially contribute to large losses, if such a correction were to take place. However, impaired loans have been declining, remain at low levels and compare favourably to peers.

In DBRS’s opinion, Vancity benefits from a sticky retail deposit base, allowing it to fund loan assets largely through deposits. While longer-term institutional deposits that tend to be more rate sensitive form a significant portion of funding, these deposits help reduce the asset-liability duration mismatch for Vancity. Moreover, refinance risk is low given the Bank’s minimal reliance on market funding. The Bank’s liquidity position is strong in comparison to peers, and bolstered by availability of additional liquidity from Central 1 together with lines of credit from major banks.

Vancity has sufficient loss absorption capacity to withstand loan losses under a normal credit cycle. Specifically, Vancity’s B.C. capital adequacy ratio was a strong 13.2% at Q1 2016. DBRS notes that sources of new capital are limited to internal equity generation, which has been stable, and to the issue of investment shares to members.

RATING DRIVERS
While DBRS believes there is little upside potential to the rating in the short term, delivering sustained positive operating leverage and greater geographic diversification in the loan portfolio could result in positive rating implications. Conversely, increased reliance on wholesale and agent deposits that are rate sensitive and subject to higher flight risk and a sharp price correction in the Vancouver housing market leading to a rise in delinquencies 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 methodologies are 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 the DBRS website under Methodologies.

Lead Analyst: Sohail Ahmer
Rating Committee Chair: Roger Lister

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.