DBRS Confirms Credit Union Central Alberta Limited at “A,” Stable Trend

DBRS Limited (DBRS) has today confirmed Credit Union Central Alberta Limited’s (Alberta Central or the Credit Union) Issuer Rating and Senior Long-Term Debt rating at “A” and its Short-Term Instruments rating at R-1 (low). The trends remain Stable. Under DBRS’s support assessment criteria, Alberta Central is assessed as SA2; this reflects expectation of the provincial government’s timely systemic external support, which results in a one-notch uplift from the Credit Union’s Intrinsic Assessment (IA) of A (low) and a final rating of “A.” The ratings reflect DBRS’s assessment of the IA of the credit union system (the System) in Alberta.

Owned by the 22 credit unions of Alberta, Alberta Central is the central banking facility, service bureau and trade association for the System. Services provided to the credit unions range from financial and technological products and services, payment processing solutions, treasury and lending services to government relations as well as strategic planning.

In confirming Alberta Central’s rating, DBRS recognizes the System’s significant share of loans and deposits in Alberta and the important economic role it plays, particularly in the rural communities and small towns where the big Canadian banks have a limited presence. The System is dominated by two large credit unions, Servus Credit Union (assets of $14.8 billion) and Connect First Credit Union (assets of $4.3 billion), which account for over three-quarters of Alberta’s credit union membership base, deposits and assets. The remaining System assets are distributed over 20 smaller credit unions. DBRS also notes that the operating environment remains highly competitive, particularly given the presence of the Alberta government-owned ATB Financial (ATB), which competes directly with the System.

DBRS views the System’s earnings power as satisfactory, reflecting its low diversification in operating revenues while also noting an improving efficiency ratio and positive operating leverage. The current low-rate environment is challenging and loan growth is tepid, though recurring earnings remain sufficient to cover provisioning expenses.

In DBRS’s opinion, the System’s risk profile has improved over the last five years, despite a decline in asset quality in 2016 resulting from the Fort McMurray wildfire. The key risk facing the System is exposure to the real estate renting and leasing sector, which forms 13% of its loans and is susceptible to a sharp downward correction in oil prices or other potential economic pressures. DBRS estimates that the uninsured component of residential real estate exposure forms an estimated 35% to 40% of the System’s gross loans which, under stressed scenarios, could be a source of impairment as lenders do not have recourse to the borrower in Alberta. This risk is somewhat mitigated by low loan-to-value ratios on uninsured mortgages.

DBRS views the System’s funding profile as strong, given that the loan book is largely funded through relatively stable retail (demand) deposits mitigating some of the asset-liability mismatch risk. Deposit growth has been a challenge and could constrain loan growth going forward, given limited appetite for additional securitization. Liquidity declined marginally in 2016 but, in DBRS’s opinion, is sufficient because of the System’s low-risk cooperative banking structure.

DBRS views the System as well capitalized in comparison with peers with a sufficient cushion to absorb any losses incurred in the normal course of business. The quality of capital is strong although, because of the ownership structure, sources of new capital are restricted to internally generated equity and membership shares.

RATING DRIVERS
Ratings could be positively impacted should higher oil prices lead to increased business investment and job creation in Alberta leading to improved System franchise strength. Sustained improvement in operating efficiency could also benefit ratings. Conversely, ratings could come under pressure should a sharp correction in oil prices lead to stress in the commercial lending portfolio for the System. Also, a reduction in the assessment of the likelihood of provincial support could negatively impact ratings.

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 principal methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016) and DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2017), which can be found on dbrs.com under Methodologies.

Lead Analyst: Sohail Ahmer, Vice President – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG & Sovereign Ratings

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.

For more information on this credit or on this industry, visit www.dbrs.com.