DBRS Morningstar Confirms Coast Capital at BBB (high); Trend Stable

DBRS Limited (DBRS Morningstar) confirmed all ratings of Coast Capital Savings Federal Credit Union (Coast Capital or the Credit Union), including the Credit Union’s Long-Term Issuer Rating of BBB (high) and Short-Term Issuer Rating of R-1 (low). The trend on all ratings is Stable. Coast Capital’s Support Assessment remains SA3, which reflects no expectation of timely support. The Credit Union is regulated by the Office of the Superintendent of Financial Institutions under the Bank Act. The Credit Union has the potential to access the Bank of Canada’s (BoC) Emergency Liquidity Assistance, although this is subject to the BoC terms and conditions at the time of any application request for funding. Consequently, the Credit Union’s short-term ratings benefit from the exception granted to deposit-taking institutions on DBRS Morningstar’s short-term scale.

KEY RATING CONSIDERATIONS
The ratings confirmations and Stable trends reflect Coast Capital’s strong franchise in its main footprint area in the lower mainland of British Columbia (B.C. or the Province; rated AA (high) with a Stable trend by DBRS Morningstar). This position is bolstered by the importance of credit unions in the Province, which count 40% of the provincial population as members (including Coast Capital members). Furthermore, the Credit Union successfully moved to a federal charter with little impact on its funding. Conversely, the ratings also consider the concentration risk of operating primarily in the Greater Vancouver Area, which makes Coast Capital more susceptible to a potential real estate market correction. Moreover, expanding operations outside the Province could pose challenges for Coast Capital, particularly in terms of operational risk.

RATING DRIVERS
DBRS Morningstar views Coast Capital as well placed in its rating category. Over the longer term, ratings would be upgraded if the Credit Union is able to further strengthen its franchise through a sustained increase in member share of wallet and/or a sustained improvement in earnings, including a higher proportion of non-interest income.

Alternatively, a material and sustained weakness in loan performance resulting in a significant increase in loan losses would lead to a rating downgrade. In addition, the ratings would be downgraded due to an inability to control costs or a sustained reduction in internal capital generation.

RATING RATIONALE
Coast Capital is the second-largest credit union in B.C., with $20.9 billion in assets as at F2020. The Credit Union serves approximately 29% of the Province’s credit union system membership base through 50 branches in B.C. The Credit Union has an extensive retail and small business commercial product suite and has both a growing digital presence as well as a national presence through its commercial leasing subsidiaries: Coast Capital Equipment Finance Ltd. and Travelers Finance Ltd. Since gaining its federal charter in 2018, Coast Capital has continued to strengthen its digital capabilities and enhance its product offerings with the objective of deepening its relationships with existing members while attracting members across Canada.

As a result of its value-based type of accounts and relatively younger membership, Coast Capital has one of the lowest revenue per member ratios among credit unions at $723 in F2020. Although revenue in F2020 increased a modest 1% year-over-year (YOY) to $430 million, expenses remain above historical levels as the Credit Union continued to absorb costs related to federal continuance as well as ongoing technology investments made to drive its strategic transformation and national growth. As a result, the efficiency ratio remained elevated at 84% in F2020 although management expects the efficiencies derived from its investments to help lower this ratio back to its historical level of 76% over the next few years. Although Coast Capital now has access to prospective new members outside B.C., DBRS Morningstar is cautious that digital deposit acquisition might come at a higher cost than expected, particularly given the highly competitive dynamic for deposit gathering that includes the large banks, other online platforms, and other local credit unions.

Coast Capital continued to grow its loan book in F2020, with residential mortgages up 3% YOY to $11.9 billion, while commercial loans, including equipment finance, increased 4% YOY to $5.4 billion. Impairments remain at manageable levels and losses have been modest as government stimulus and aid has provided substantial mitigation throughout F2020. As a result, gross impaired loans stood at only 0.09% of gross loans as at December 31, 2020. Nevertheless, DBRS Morningstar expects impaired loans to trend upward as a result of prolonged business shutdowns put in place to respond to the ongoing pandemic, especially given the increased prevalence of coronavirus variants. Furthermore, DBRS Morningstar remains cautious of Coast Capital’s commercial construction loans, which comprise 11% of its total portfolio, a proportion that is relatively high for credit union peers. Such loans may be disproportionately affected in the event of a real estate market correction.

The Credit Union has managed to progressively grow its deposits despite now being under the federal Canada Deposit Insurance Corporation scheme, which is less generous than B.C.’s deposit insurance scheme that provides an unlimited deposit guarantee. Total deposits were up 6% YOY to $17.5 billion in F2020. In addition, Coast Capital has around $1.8 billion in wholesale funding, which includes secured borrowing through the Canada Mortgage Bond program, deposit notes, short-term commercial paper, and subordinated debt. Coast Capital also maintains healthy levels of liquidity and, unlike provincial credit unions, it has access to some of the BoC contingency liquidity programs that the Credit Union tested during the pandemic.

DBRS Morningstar views the Credit Union’s capital levels as good, with Coast Capital’s Common Equity Tier 1 ratio at 11.6% as at December 31, 2020. At this level, this provides the Credit Union with a capital cushion of $471 million over the minimum regulatory requirement.

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.

The Grid Summary Grades for Coast Capital are as follows: Franchise Strength – Good; Earnings Power –Moderate; Risk Profile – Good; Funding and Liquidity – Strong/Good; and Capitalization – Good/Moderate.

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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