DBRS Morningstar Changes Trend on Affinity Credit Union to Stable; Confirms Ratings at R-1 (low)

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

KEY RATING CONSIDERATIONS
The trend change reflects Affinity’s better-than-expected financial and loan performance in F2020. However, DBRS Morningstar notes that uncertainty remains surrounding the extent to which small and medium-size enterprises (SMEs) will recover following the removal of the extraordinary government support related to the Coronavirus Disease (COVID-19) pandemic, particularly in the absence of Saskatchewan’s economy returning to its prepandemic economic potential. Nonagricultural SME loans accounted for 30% of Affinity’s gross loans at the end of F2020, with significant single-party exposures.

RATING DRIVERS
DBRS Morningstar views Affinity as well placed in its rating category. Over the longer term, Affinity’s ratings would be upgraded if the Credit Union can sustain membership growth, particularly in the younger demographic, as well as further deepen market shares. A significant increase in the proportion of revenue from fee-based income would also lead to a ratings upgrade. Conversely, material and sustained weakness in financial performance or a substantial deterioration in asset quality metrics would lead to a downgrade.

RATING RATIONALE
Affinity maintains a solid franchise in Saskatoon and has a growing presence in Regina, the two largest cities in Saskatchewan. At the end of F2020, 12% of the provincial population were members of Affinity. Furthermore, DBRS Morningstar recognizes that, despite a difficult operating environment in F2020, financial and credit risk performances have been relatively stable. However, this is likely in part because of the combination of federal and provincial government support aimed at supplementing lost income and supporting SMEs. Affinity is funded largely through member-sourced deposits, which DBRS Morningstar views as stable, although success in diversifying the funding mix would be viewed positively. The Credit Union's liquidity position is top-tier and improved as a result of strong deposit growth during the pandemic. Affinity’s capitalization also improved in F2020, but it could come under pressure should Saskatchewan's economy experience a drawn-out recovery. In DBRS Morningstar’s assessment, Affinity holds sufficient capital to absorb potential loan losses in a moderately stressed environment.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020; https://www.dbrsmorningstar.com/research/362170). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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