DBRS Morningstar Confirms Credit Union Central Alberta Limited’s Long-Term Ratings at “A,” Trend Remains 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). The trend on all long-term ratings is Negative while the trend on all short-term ratings is Stable. The ratings for Alberta Central reflect DBRS Morningstar’s Intrinsic Assessment of the Alberta credit union system (the System) and a Support Assessment (SA) of SA2, which reflects the 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 System’s Intrinsic Assessment of A (low).

KEY RATING CONSIDERATIONS
The Negative trend continues to reflect the adverse impact on the System from the deterioration in the Province’s economy as a result of the Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar notes that while oil prices have recovered somewhat from the sharp decline experienced at the onset of the pandemic, Alberta relies heavily on oil production and there is considerable uncertainty surrounding when, and to what extent, volatility in energy markets will subside, and if investment in the sector will recover to prepandemic levels. In addition, there still remains some economic uncertainty about the duration of business closures that were instituted to halt the spread of the coronavirus. Positively, the impact on the System’s liquidity remains manageable given its low reliance on wholesale market funding as well as its significant liquidity buffer. Credit unions have also benefitted from higher deposit levels as clients build up savings to deal with the pandemic, although this may be partially due to the various government supports that have been put in place, which are expected to expire in the near term.

RATING DRIVERS
Given the Negative trend, a ratings upgrade is unlikely at this time. The trend on the long-term ratings would change to Stable if the impact of the current pandemic on the System earnings and credit quality metrics remains limited. Conversely, ratings would be downgraded if there were material losses in the System's loan portfolio and/or a longer than expected adverse impact due to the coronavirus pandemic. A reduction in DBRS Morningstar’s assessment of the likelihood of provincial support would also result in a ratings downgrade.

RATING RATIONALE
Credit unions in Alberta are important providers of retail and commercial banking services to the province’s population, of which 14% were members of a local credit union in 2020. This role underpins DBRS Morningstar’s view of the likelihood of support from the Province for the System and Alberta Central, if necessary. The System continues to maintain strong market shares despite competing against ATB Financial, the banking arm of the provincial government, as well as the large Canadian banks. In F2020, credit unions had a market share of 8.7% in deposits, 6.9% in residential mortgages, and 7.1% in commercial loans. Commercial loans represented approximately 32% of gross loans at the end of F2020, which results in System profitability that is at the higher end of the scale compared with its Canadian credit union peers. Conversely, this proportionately higher exposure to commercial loans also may result in higher impairments, particularly given the current economic environment. While DBRS Morningstar expects the pandemic to negatively impact System profitability, the System has weathered past economic downturns including the 2014–15 oil price shock, although the magnitude of the current crisis remains unparalleled.

The System’s asset quality in F2020 has come under pressure due to the pandemic, largely reflecting its higher exposure to commercial loans, which remain highly sensitive to economic activity. The ratio of nonperforming loans (NPL) to gross loans for the System in F2020 increased to 1.00% from 0.81% in the prior year. Moreover, the ratio of NPL commercial loans to gross loans increased to 2.18% in F2020 from 1.50% in F2019. Despite higher delinquencies, write-offs have remained manageable, reflecting the quality of the collateral and generally solid underwriting practices of the System. However, DBRS Morningstar notes that government stimulus and support programs have also provided substantial mitigation.

The System’s funding and liquidity profiles remain strong reflecting the solid retail deposit franchises of the credit unions in Alberta and their low reliance on market-sensitive wholesale funding. System liquidity is represented by deposits at Alberta Central, with the statutory component of these deposits placed in high-quality liquid assets composed largely of bank and provincial debt that is rated AA or higher. The ratio of liquid assets to total assets for the System improved substantially to 14.3% at the end of F2020 from 11.2% in the previous year, although this level was lower than the average of its Canadian credit union system peers. Nevertheless, DBRS Morningstar assesses liquidity levels as sufficient, given the low risk business model of credit unions together with the existence of an unlimited deposit guarantee that is explicitly backed by the provincial government of Alberta.

The System’s capital position remained stable in F2020 and is among the strongest of other DBRS Morningstar-rated Canadian credit union systems. The System maintains capital buffers that are sufficient for credit unions to absorb losses under normal operating conditions. However, DBRS Morningstar notes that sources of new capital are limited to capital generated internally and the issuance of subscription shares, which is a constraint on the ratings. While the capital ratio remained stable at 17.2% in F2020, members' equity as a percentage of total assets declined slightly to 9.5%.

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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