DBRS Morningstar Confirms Vancouver City Savings Credit Union at R-1 (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed Vancouver City Savings Credit Union’s (Vancity or the Credit Union) Short-Term Issuer Rating and Short-Term Instruments rating at R-1 (low) with Stable trends.

The Credit Union has a Support Assessment (SA) of SA2, reflecting DBRS Morningstar’s expectation of timely systemic external support from the Province of British Columbia (B.C.; rated AA (high) and R-1 (high) with Stable trends by DBRS Morningstar) through Central 1 Credit Union (Central 1; rated A (high) with a Stable trend by DBRS Morningstar), particularly in the form of liquidity.

KEY RATING CONSIDERATIONS
The ratings reflect Vancity’s solid franchise in the Greater Vancouver Area (GVA) where it has strong market shares driven by its large and growing membership base. Overall, Vancity is the largest credit union by assets in British Columbia and in Canada overall. In DBRS Morningstar’s view, the Credit Union’s ongoing efforts to enhance its suite of digital banking products should deepen existing relationships while attracting younger members. In addition, Vancity’s ratings are supported by strong underwriting, ample deposit funding and a sound capital position. The ratings also consider Vancity’s below-peer profitability metrics, a high reliance on net interest income and a significant exposure to commercial real estate, which DBRS Morningstar views as more susceptible in the event of a downturn.

RATING DRIVERS
DBRS Morningstar views Vancity’s short-term ratings as well placed. Over the longer term, sustained membership growth, especially among younger members, and a material increase in revenues per member could benefit ratings. Additionally, a sustained improvement in operating leverage; and a higher proportion of operating revenues from fee-based sources could benefit ratings.

Conversely, ratings could be negatively impacted in the event of material losses in the loan portfolio, particularly as a result of unexpected weakness in risk-management processes, or a material increase in out-of-province exposures.

RATING RATIONALE
Vancity maintains a solid franchise in the GVA through its offering of community-based banking services and ranks as the largest credit union in B.C., with total assets of $22.9 billion at Q2 2019. The Credit Union maintains significant market shares in B.C. for commercial/business loans (7.9%), residential mortgage loans (4.9%) and deposits (6.2%). Furthermore, the Credit Union is solidifying its franchise by deepening its product suite while making investments in its digital infrastructure. These are important factors that are driving membership growth for Vancity, which DBRS Morningstar views positively.

Vancity generates solid recurring earnings; however, a modest contribution from non-interest income relative to total revenues is viewed as a constraint on its ratings. Net income adjusted for gains on sale of investments and dividend distributions increased by a solid 21.8% to $94.5 million in 2018, driven by a higher net interest margin and growth in net loans. DBRS Morningstar notes that Vancity continues to invest in its digital infrastructure and processes in an effort to enhance its operational efficiency. As such, a sustained improvement in operating leverage would be viewed positively by DBRS Morningstar.

Supportive of its ratings, Vancity has generated some of the strongest asset quality metrics amongst its Canadian peers and continues to demonstrate sound risk management as illustrated by its history of low loan losses. In F2018, the ratio of gross impaired loans to gross loans increased slightly to a still very low five basis points (bps) while the ratio of net write-offs to average net loans was unchanged at just seven bps. Although current asset quality metrics remain pristine, DBRS Morningstar notes that a sustained deterioration in economic conditions could significantly increase asset impairment and delinquencies for Vancity, given its extensive exposure to commercial real estate across the GVA, where real estate prices and consumer indebtedness remain elevated.

Vancity is mainly funded through stable branch-raised retail deposits that benefit from its strong member relationships and an unlimited provincial deposit guarantee. DBRS Morningstar views this favourably and notes that funding sources are well aligned to the Credit Union’s lending activities, given that most of Vancity’s clients tend to be deposit-holding members. Vancity’s liquidity ratio improved to 15.5% in 2018 from 14.2% in the previous year and its liquidity position is top tier in comparison with its Canadian credit union peers. Furthermore, Vancity can access liquidity through its lines of credit with Central 1, as well as from the major Canadian banks.

DBRS Morningstar views Vancity’s capitalization as strong given its risk profile. Reflecting its sizable cushion to absorb potential losses, Vancity’s total capital ratio improved to 14.8% in F2018 from 14.1% in the previous year. DBRS Morningstar notes that internally generated equity is the main source of loss absorbing capital for Vancity, and, although the Credit Union generates good levels of internal equity, it lags compared with Canadian credit union peers.

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

The applicable methodology is 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.

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