DBRS Morningstar Confirms First West Credit Union at BBB (high), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed First West Credit Union’s (First West or the Credit Union) Long-Term Issuer Rating at BBB (high) and both the Short-Term Issuer Rating and the Short-Term Instruments rating at R-1 (low). The trend on all ratings is Stable.

The Support Assessment (SA) for First West is SA2, which reflects DBRS Morningstar’s expectation of timely systemic external support from the Province of British Columbia (B.C. or the Province; rated AA (high) with Stable trend by DBRS Morningstar) through Central 1 Credit Union (Central 1; rated A (high) with Stable trend by DBRS Morningstar), particularly in the form of liquidity. This implicit support is reflected in First West’s short-term ratings.

KEY RATING CONSIDERATIONS
The ratings reflect First West’s well-established market position through its community-based brand identities, which contribute to its successful product diversification. The Credit Union is the third-largest credit union in the Province and the fifth largest in Canada, with assets of $10.7 billion as at June 30, 2019. The ratings are also supported by First West’s strong earnings power, which is underpinned by an above-average revenue per member and a higher contribution from non-interest income compared with its peers. Asset quality remains sound with metrics at relatively low and manageable levels; however, First West has a relatively larger portion of commercial mortgages and construction and development lending compared with its credit union peers, making it more susceptible to an adverse economic downturn. In addition, DBRS Morningstar remains concerned over the combination of highly leveraged consumers and elevated home prices, especially in the Greater Vancouver Area. While the Credit Union is not directly involved in residential mortgage lending in Metro Vancouver, the proximity of its footprint makes First West susceptible to a real estate downturn, as higher house prices in Vancouver have pressured neighbouring markets. The ratings also take into consideration the Credit Union’s solid liquidity and capital positions.

RATING DRIVERS
DBRS Morningstar views First West as well placed within its rating category. Over the longer term, positive ratings pressure could arise if First West continues to strengthen its franchise through sustained membership growth, especially among younger members, and significantly improves financial results while maintaining a conservative risk profile. Conversely, a material deterioration in asset quality, particularly as a result of deficiencies in risk management, could have a negative impact on the ratings. In addition, negative ratings pressure could arise if there is an inability to control costs or a sustained reduction in internal capital generation.

RATING RATIONALE
First West has generated solid recurring earnings that are reflective of its community-based brands and a comprehensive suite of products including insurance and wealth management. As a result, the Credit Union has a higher contribution from fee-based products, making it less sensitive to spread income compared with its credit union peers. Moreover, in F2018, First West generated solid returns with a return on average member equity of 9.0% and reported net income of $57.9 million. Earnings were up a strong 37%, or $15.7 million, compared with the prior year largely driven by loan growth of 4% or $356 million, and an improved net interest margin. Higher fee-based revenue, which included a gain of $6.8 million on the sale of an investment, and contained expense growth of just 1%, also contributed to the increase in earnings.

Overall, asset quality at First West remains strong, reflecting the Credit Union’s conservative risk profile and solid track record of credit performance with most credit metrics remaining at relatively low and manageable levels. A majority of the loan portfolio comprises residential mortgages, which have performed well during the current period of economic growth; however, First West has a relatively large commercial mortgage and construction and development lending portfolio compared with its credit union peers, which DBRS Morningstar views as higher-risk, particularly in the event of a real estate market downturn. In addition, a key source of risk is First West’s geographic concentration in certain areas of B.C. that neighbour Vancouver.

First West is mainly funded through branch-raised deposits or sourced from institutional depositors including municipalities, universities, schools and hospitals, which in B.C. tend to have a close relationship with credit unions. DBRS Morningstar views First West’s deposit base to be stable and subject to relatively low flight risk as these deposits are 100% guaranteed by CUDIC. As at Q2 2019, deposits funded 87% of total assets. Moreover, the Credit Union’s liquidity position is strong as it benefits from a mandatory liquidity pool that is externally managed by Central 1 for all credit unions in B.C. Moreover, First West’s liquidity position is above regulatory requirements.

DBRS Morningstar views First West’s capitalization as strong, reflecting a sizable capital buffer relative to regulatory minimums. In addition, the quality of capital remains strong given that it comprises members’ equity and retained earnings. Moreover, with a low dividend payout ratio relative to other credit union peers, earnings retention remains high and provides capital to support the Credit Union’s growth plans. Capital retention will also continue to benefit by the B.C. provincial government’s decision to pause a planned phase-out of the preferential tax rate for credit.

The Grid Summary Grades for First West are as follows: Franchise Strength – Good; Earnings Power – Good/Moderate; Risk Profile – Good; Funding & Liquidity – Strong/Good; Capitalization – Good.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies & Criteria.

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 rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada