DBRS Morningstar Confirms Conexus Credit Union at R-1 (low), Trends Remain Negative

DBRS Limited (DBRS Morningstar) confirmed Conexus Credit Union’s (Conexus or the Credit Union) Short-Term Issuer Rating and Short-Term Instruments at R-1 (low). The trends on all ratings remain Negative. Conexus’ Support Assessment is SA2, which reflects DBRS Morningstar’s expectation of timely systemic external support from the Province of Saskatchewan (Saskatchewan or the Province; 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, Conexus 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 ratings confirmations and Negative trends reflect the uncertainty surrounding the extent to which small and medium sized enterprises (SMEs) will recover following the removal of the extraordinary government support, particularly in the absence of Saskatchewan’s economy returning to its pre-pandemic economic potential. Non-agricultural SME loans accounted for 33% of Conexus’s gross loans at the end of F2020 with significant single party exposures.

RATING DRIVERS
Given the Negative trends, an upgrade of Conexus’s ratings is unlikely at this time. The trend would revert to Stable if sound asset quality metrics are sustained. Conversely, a material and sustained weakness in loan performance resulting in a significant increase in loan losses due to a longer than expected adverse impact of the Coronavirus Disease (COVID-19) pandemic would lead to a ratings downgrade.

RATING RATIONALE
Conexus Credit Union, is the largest member-owned financial institution in Saskatchewan by assets, providing a full suite of retail, consumer, and commercial banking products to about 11% of the provincial population through 30 branches and mobile representatives. Although Conexus generates good levels of recurring earnings, net income has come under pressure over the last two years. Net income in F2020 declined by 35% to $18.7 million primarily because of an increase in provisions for credit losses, which rose to $22 million from $15 million in F2019, combined with continued net interest margin pressure reflecting the low interest rate environment. At about 10% of the loan portfolio, DBRS Morningstar views the construction, office leasing, and hospitality loans as a source of concentration risk as these sectors could come under more pressure if the recovery is prolonged or muted. The Credit Union is primarily funded through member-sourced retail deposits, but it also utilizes wholesale funding by securitizing residential mortgages and auto loan receivables. Funding sources are well aligned with Conexus’ activities and its liquidity position remains solid. Although Conexus holds sufficient capital relative to its risk profile and maintains an appropriate capital buffer to absorb losses in a moderately stressed environment, capital ratios could come under pressure should Saskatchewan's economy experience a drawn-out recovery.

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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