DBRS Morningstar Confirms Alberta Central’s Long-Term Ratings at “A,” Changes Trend to Negative

DBRS Limited (DBRS Morningstar) confirmed Credit Union Central Alberta Limited’s (Alberta Central or the Credit Union) Long-Term Issuer Rating and Long-Term Senior Debt rating at “A” as well as its Short-Term Issuer Rating and Short-Term Instruments rating at R-1 (low). DBRS Morningstar changed the trend on all long-term ratings to Negative from Stable and maintained the Stable trend on all short-term ratings. Under DBRS Morningstar’s support assessment (SA) criteria, Alberta Central is assessed as SA2, which reflects expectation of timely systemic external support from the Province of Alberta (the Province; rated AA (low) with a Negative trend by DBRS Morningstar). This results in a one-notch uplift to “A” from the Alberta credit union system’s (the System) Intrinsic Assessment of A (low).

KEY RATING CONSIDERATIONS
The Negative trend reflects the anticipated adverse impact on the System from (1) deterioration in Alberta’s economy caused by the sharp decline in oil prices and (2) the Coronavirus Disease (COVID-19) pandemic that is causing an abrupt and severe drop in economic activity. Alberta relies heavily on oil production and there is considerable uncertainty surrounding when, and to what extent, oil prices will recover. In addition, uncertainty also surrounds the duration of business closures instituted to halt the spread of the coronavirus. The short-term impact on the System’s liquidity will likely remain manageable, given the System’s low reliance on wholesale market funding and its significant liquidity buffers.

RATING DRIVERS
Given the Negative trend, an upgrade is unlikely at this time. The trend could revert back to Stable if Alberta’s economy is able to reopen and the Province’s economic potential approaches precrisis levels. Conversely, a material and sustained weakness in System loan performance resulting in a significant increase in loan losses, due to the oil price shock and a longer-than-expected adverse impact of the coronavirus, or a reduction in DBRS Morningstar’s assessment of the likelihood of provincial support could result in a ratings downgrade.

RATING RATIONALE
Although System profitability, credit risk, and liquidity will likely deteriorate, the System has proven to be resilient to past economic shocks; however, the abruptness and severity of the coronavirus-driven economic downturn is unparalleled. DBRS Morningstar notes that credit unions in Alberta compete effectively against ATB Financial, the banking arm of the provincial government, and Canada’s large banks. In 2019, the System’s market shares were 9.3% for deposits, 7.2% for residential mortgages, and 6.8% for commercial loans. With a proportionally higher exposure to commercial loans, which represented 31% of gross loans at F2019, System profitability is at the higher end of the scale compared with its Canadian credit union peers; however, there is the potential for higher credit impairment, particularly in the current economic environment. DBRS Morningstar views the System’s funding and liquidity positions as strong, given the credit unions’ solid retail deposit franchises and low reliance on confidence-sensitive market funding. The regulatory framework governing System capitalization and risk appetite are robust while its ratio of capital cushion plus loss reserves to risk-weighted assets is top tier. Credit unions continue to perform an important role in providing financial services across Alberta, which underpins DBRS Morningstar’s view of the likelihood of support from the Province for the System and Alberta Central, if necessary.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Global Methodology for Rating Banks and Banking Organisations (June 2019).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.dbrsmorningstar.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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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