Press Release

DBRS Confirms Affinity Credit Union at R-1 (low); Trend Stable

Banking Organizations
August 15, 2017

DBRS Limited (DBRS) confirmed Affinity Credit Union (ACU or the Credit Union)’s Short-Term Issuer Rating and Short-Term Instruments at R-1 (low). ACU is assigned a Support Assessment (SA) of SA2, which is based on DBRS’s expectation of timely systemic external support from the provincial government through Credit Union Central of Saskatchewan (SaskCentral), particularly in the form of liquidity, which is reflected in the Credit Union’s short-term ratings. DBRS currently rates SaskCentral’s Short-Term Instruments at R-1 (low) with a Stable trend. DBRS also rates the Province of Saskatchewan’s Issuer Rating and Long-Term Debt rating at AA and its Short-Term Debt rating at R-1 (high) with Stable trends.

ACU’s ratings reflect its prominent position in the Saskatchewan economy as the second-largest credit union in the province by assets while it is the largest in terms of the membership base and total deposits. The Credit Union is based out of Saskatoon, the largest city in Saskatchewan and its commercial hub. DBRS recognizes the intense level of competition within ACU’s captive market, particularly from the large banks; consequently, ACU has concentrated its efforts on small businesses (50 employees or less) that are underserved by the big banks. In DBRS’s opinion, the key challenge facing ACU is acquiring new members, particularly within the lower age bracket, while successfully cross-selling its services to gain a larger share of the member’s wallet.

Because of ongoing competitive pressures combined with the low interest rate environment, ACU’s net interest margin (NIM) has compressed pressuring profitability. In DBRS’s opinion, the Credit Union generates relatively stable recurring earnings driven by a low-risk basic banking model; however, earnings growth is likely to remain under pressure, which may limit ACU’s ability to reinvest in the business. DBRS recognizes that, though provisioning expense spiked in 2016, earnings are sufficient to absorb periodic deteriorations in asset quality.

Historically, asset quality has been strong for ACU; however, because of a few large commercial loan delinquencies, impairments increased sharply in 2016. Nonetheless, given the secured nature of these loans, DBRS expects any potential losses to remain manageable. Overall, DBRS notes that about 83% of ACU’s loan portfolio is secured by mortgages. Meanwhile, evidence of overbuilding in rental apartments and condominiums could give rise to impairments if some related accounts become delinquent. Positively, DBRS notes that credit unions in Saskatchewan are required by the provincial regulator to be closely aligned with federal underwriting guidelines issued by the Office of the Superintendent of Financial Institutions (OSFI), which helps to mitigate some credit risk.

ACU funds its operations largely through member-sourced retail deposits with low flight risk and has very limited reliance on less-stable broker-sourced deposits; however, because most of the deposits are short term in nature, there exists significant interest-rate mismatch between assets and liabilities that could be costly in the event of rapid rate increases. DBRS believes that ACU’s funding sources are well aligned with lending activities and expects future securitization activity to add new sources of funds. The provincial regulator’s liquidity requirements are in line with regulations issued by OSFI. DBRS recognizes that ACU’s liquidity position has strengthened over the last five years and is superior in comparison with peers.

DBRS’s considers ACU’s capital cushion as sufficient to absorb potential loan losses, given the low level of impairments; however, the ability to generate internal equity has weakened in part because of competitive pressures and the low interest-rate environment. DBRS also recognizes that, as a credit union, ACU’s sources of external capital are limited. Positively, DBRS notes that the regulatory capital framework for credit unions in Saskatchewan is closest to Basel III and OSFI guidelines in comparison with other credit union systems in Canada.

RATING DRIVERS
Though unlikely over the intermediate term, ratings could be positively affected if ACU delivers sustained membership growth, particularly in the younger demographic, while increasing the proportion of revenues generated from fee-based sources. Conversely, ratings could come under pressure following the loss of market share in the small business segment and a continued sustained decline in the margin or if asset quality continues to deteriorate in the commercial lending portfolio, evidencing a higher risk profile than anticipated.

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 methodology is the Global Methodology for Rating Banks and Banking Organizations (May 2017), which can be found on dbrs.com under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Sohail Ahmer
Rating Committee Chair: Michael Driscoll

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.

Ratings

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