DBRS Confirms Concentra Bank at A (low)/R-1 (low), Stable Trends

DBRS Limited (DBRS) confirmed Concentra Bank’s (Concentra or the Bank) Long-Term Issuer Rating and Long-Term Deposits rating at A (low) and its Short-Term Issuer Rating and Short-Term Instruments rating at R-1 (low). All trends are Stable. The Support Assessment has been revised from SA2 to SA1. This revision is a consequence of a change in Concentra’s ownership structure under which the voting interest of its parent, Credit Union Central of Saskatchewan (SaskCentral: rated R-1 (low) with a Stable trend by DBRS), has increased from 47% to 84%, which is now the same as SaskCentral’s 84% economic interest.

The increase in control became effective after Concentra Financial Services Association (CFSA) obtained a federal banking license and began operating as Concentra Bank on January 1, 2017. SaskCentral will begin reporting on a consolidated basis including Concentra in December 2017. As SaskCentral now has majority control and greater responsibility for Concentra’s business activities and strategy, DBRS considers Concentra to be a subsidiary of SaskCentral in determining its Support Assessment.

Concentra’s franchise position reflects its role in meeting certain wholesale banking and trust service needs of credit unions across Canada. This capacity is expected to be enhanced through Concentra’s bank charter. Concentra is indirectly owned by credit unions in other provinces through their Centrals, which own the majority of the remaining 16% stake. Prior to Concentra’s charter change, SaskCentral’s voting interest was constrained and the non-Saskatchewan-based Centrals had a majority voting interest in Concentra. CFSA was created in 2005 as a result of SaskCentral decoupling its wholesale services and transferring them to CFSA, while retaining the responsibility of managing the provincial credit union mandatory liquidity pool. Overall, Concentra serves credit unions nationally.

In confirming Concentra’s ratings, DBRS considered not only the change in control, but also Concentra’s continued solid performance. DBRS views the Bank’s recurring earnings as solid, but susceptible to some volatility through fair value adjustments in its investment book and occasional spikes in its provisioning expense related to commercial loan concentrations in energy and resource dependent provinces in Canada. DBRS notes that while there can be some volatility from quarter to quarter, annual results have been improving over the past several years despite the low interest rate environment. Most recently, Concentra reported Q2 2017 net income of $9.2 million, an 8.2% quarter over quarter increase despite stable revenues, resulting from gains booked on the sale of securities.

DBRS views Concentra’s asset quality as generally strong, but risk exposure is increasing in some smaller segments. The level of impaired loans remains low at 0.3% of gross loans in 2016 and provisioning has absorbed only 14% of income before provisions and taxes over the last five years. Contributing to this performance is the composition of the Bank’s balance sheet, with over half of total loans in low-risk, secured residential mortgages, which are predominantly funded through securitizations. Commercial lending, which Concentra supports through loan purchases from credit unions and by enabling credit unions to participate in larger deals, is also predominantly secured, contributing to low loss rates. DBRS notes that the Bank’s balance sheet risk is likely to be increasing, as its appetite for Alt-A residential mortgages and unsecured consumer lending has increased. Although these segments remain relatively small components of its overall balance sheet, Concentra sources these exposures from third parties, rather than credit unions. Thus, weakness in underwriting practices outside of the Bank’s control could lead to increased provisioning and loan losses.

Concentra obtains the majority of its funding from overnight deposits from the credit union system, broker sourced deposits and longer term securitizations. While broker deposits allows better management of duration risk, increasing reliance on these exposes Concentra to deposit outflows. In DBRS’s opinion, the Bank’s reliance on wholesale funding increases its susceptibility to liquidity events that could severely restrict access to market funding and stress liquidity. Positively, DBRS notes that there is limited duration mis-match and liquidity is solid.

DBRS considers that Concentra is reasonably capitalized and its capital cushion is sufficient to absorb losses in a stressed scenario. DBRS notes that Concentra’s capitalization dipped to 10.2% in 2016, from 11.6% in 2015, partly as a result of an increase in risk-weighted assets resulting from the Bank’s acquisition of an unsecured consumer loan portfolio. By Q2 2017, the Bank had improved its CET1 ratio back to 11.8% and intends to continue to strengthen its capital base through retained earnings. Given that Concentra’s owners are credit unions, DBRS notes that the primary source of new CET1 capital is limited to internal equity generation.

RATING DRIVERS
Though unlikely over the intermediate term, positive rating pressure could arise as a result of positive developments in the ratings of SaskCentral. Improvements in Concentra’s fundamentals could contribute to such developments and could be driven by greater fee based income and enhancement of current business lines. Conversely, ratings could be negatively impacted by an erosion in asset quality and increased exposure to riskier credits, sustained weakness in internal equity generation, increased reliance on brokered deposits, changes in the assessment of SaskCentral’s ability or willingness to provide support or increased purchases of non-relationship loans outside the credit union system.

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 Organisations (May 2017), which can be found on dbrs.com under Methodologies.

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

Lead Analyst: Sohail Ahmer, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG

Initial Rating Date: 02 August 2005
Most Recent Rating Update: 02 August 2017

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.

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