DBRS Morningstar Confirms Conexus Credit Union 2006 at R-1 (low), Changes Trend to Negative

DBRS Limited (DBRS Morningstar) confirmed Conexus Credit Union 2006’s (Conexus or the Credit Union) Short-Term Issuer Rating and Short-Term Instruments at R-1 (low). DBRS Morningstar also changed the trend on both ratings to Negative from Stable. The Support Assessment (SA) for Conexus is SA2, which reflects DBRS Morningstar’s expectation of timely systemic external support from the Province of Saskatchewan (Saskatchewan or the Province; rated AA, Under Review with Negative Implications by DBRS Morningstar) through the Credit Union Central of Saskatchewan (rated R-1 (low) with a Stable trend by DBRS Morningstar), particularly in the form of liquidity. Conexus has been designated a Provincial Systemically Important Financial Institution (P-SIFI), which also increases the likelihood that systemic external support would be forthcoming. At present, the SA2 designation does not result in any uplift to the Short-Term Instruments rating.

KEY RATING CONSIDERATIONS
The Negative trend reflects the abrupt and severe economic disruption resulting from the Coronavirus Disease (COVID-19) pandemic, as well as the oil price shock, which are likely to weaken credit fundamentals. DBRS Morningstar notes that the Credit Union has a large exposure to commercial mortgage loans, comprising 33% of gross loans, as well as non-mortgage-related consumer loans at 14% of gross loans.

RATING DRIVERS
Given the Negative trend, an upgrade is unlikely at this time. The trend could revert back to Stable if Saskatchewan’s economy is able to reopen and the Province’s economic potential approaches pre-crisis levels. Material and sustained weakness in loan performance—resulting in a significant increase in loan losses because of a longer-than-expected adverse impact of the coronavirus and the oil price shocks—could result in a downgrade.

RATING RATIONALE
Conexus is the largest credit union in Saskatchewan by total assets, providing banking services to its members, who represent approximately 11% of the Province’s population. The Credit Union’s distribution network includes 30 branches and about a dozen mobile mortgage specialists. Although Conexus generates solid profitability and recurring earnings that can cover heightened levels of provisioning expenses, DBRS Morningstar thinks that if the current adverse environment persists, earnings could come under significant pressure. Furthermore, asset quality has been suffering, given the persistence of weak economic conditions in Saskatchewan, and will likely come under additional pressure. To date, loan losses have been low and manageable, but DBRS Morningstar expects deterioration. Positively, Conexus is largely funded through stable retail and business deposits, which benefit from a 100% deposit guarantee that is implicitly backed by Saskatchewan. In addition, Conexus maintains good capitalization that should be sufficient to absorb potentially higher levels of provisioning and loan losses, while its leverage ratio of 8.2% at the end of F2019 remains at the higher end of Canadian credit union peers.

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.

DBRS Morningstar notes that this press release was amended on July 6, 2020, to incorporate the link to the methodology.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 11, 2019; https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations).

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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