Morningstar DBRS Confirms Coast Capital Savings Federal Credit Union's LT Issuer Rating at BBB (high); Trends Stable

DBRS Limited (Morningstar DBRS) confirmed the credit 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 trends on all credit ratings are Stable. Coast Capital's Support Assessment is SA3, which reflects no expectation of timely systemic 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 credit ratings benefit from the exception granted to deposit-taking institutions on Morningstar DBRS' short-term scale.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings confirmation and Stable trends reflect Coast Capital's strong franchise in its main footprint area in the lower mainland of British Columbia (BC or the Province; rated AA (high) with a Stable trend). Its member base of nearly 600,000 represented 11% of the provincial population in F2023. Furthermore, the Credit Union's liquidity and funding position remains strong after successfully moving to a federal charter in 2018. The credit 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. Having a relatively large construction exposure at 13% of total loans adds to this concern. Lastly, expanding operations outside the Province could pose challenges for the Credit Union, particularly in terms of operational risk.

CREDIT RATING DRIVERS
Over the longer term, credit ratings would be upgraded if the Credit Union is able to strengthen its franchise through an increase in active members and member share of wallet leading to a sustained improvement in earnings, including a higher proportion of noninterest income.

Conversely, the credit ratings would be downgraded if sustained weaker earnings metrics become more commensurate with lower rated peers. In addition, the credit ratings would be downgraded if there is a sustained deterioration in asset quality.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Good/Moderate
Coast Capital is the second-largest credit union in BC by total assets, with $21.7 billion in assets as at F2023. The Credit Union serves approximately 11% of the provincial population through 45 branches in BC, providing an extensive retail and small business commercial product suite. The Credit Union also has both a growing digital presence and a national presence through its commercial leasing subsidiaries: Coast Capital Equipment Finance Ltd. and Coast Capital Auto & Equipment Finance Ltd. The Credit Union has been investing in its technology infrastructure for the last few years in order to have the capabilities to support expansion nationally, particularly digitally versus opening branches. It expects that its federal charter and strengthened digital capabilities will enable it to attract new members across Canada as well as deepen relationships with existing members.

Earnings Combined Building Block (BB) Assessment: Moderate
Coast Capital's revenue contracted by 8% in 2023 driven by a decrease in net interest income, partially offset by the growth in noninterest income. The decrease in net interest income was as a result of interest expense negatively affected by a change in deposit mix because of a shift away from lower rate demand deposits and toward higher rate fixed-term deposits. As a result, net income declined to $58 million, representing an Return on Assets of 0.27%. Positively, supported by updated product offerings, noninterest income grew 2% in 2023, and accounted for 23% of total revenue. The efficiency ratio stood at 82% because of lower total revenue in F2023; however, Coast Capital expects its efficiency ratio to move to the mid-70s over the next two years supported by positive operating leverage.

Risk Combined Building Block (BB) Assessment: Good
Coast Capital continued to grow its loan book to $18.4 billion in F2023, supported by a 6.3% year-over-year (YOY) expansion in commercial loans, including equipment finance, partially offset by 2% YOY contraction in residential mortgages. In a challenging operating environment, the asset quality of the Credit Union remained good with loan losses at manageable levels. Gross impaired loans ratio marginally deteriorated to 0.21% as at December 31, 2023, in part driven by the equipment finance portfolio as underlying assets remained under pressure because of lower demand, increased supply and continued increase in operating expenses. Overall, Morningstar DBRS expects impaired loans to trend upward as credit conditions continue to normalize with a potential weakening of the economy.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
Coast Capital 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 coronavirus pandemic. Total deposits were down 2.7% YOY to $18.1 billion in F2023. In addition, Coast Capital had around $1.7 billion in wholesale funding at the end of F2023, which included secured borrowing through the Canada Mortgage Bond program, deposit notes, short-term commercial paper, and subordinated debt.

Capitalization Combined Building Block (BB) Assessment: Good/Moderate
Morningstar DBRS views the Credit Union's capital levels as good, with Coast Capital's Common Equity Tier 1 ratio at 12.5% as at December 31, 2023. At this level, it provides the Credit Union with a CET1 capital cushion of $598 million over the minimum regulatory requirement to absorb potential losses in the stressed environment.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/432768.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Social (S) Factors
Morningstar DBRS finds that the Social Impact of Products and Services ESG subfactor was relevant to the credit rating but does not affect the assigned credit rating or trend. As a credit union, Coast Capital operates a membership-based community banking model where the social aspect of its activities strengthens its franchise. As a result, this factor is incorporated into the Credit Union's Franchise Strength grid grades.

There were no Environmental/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (April 15, 2024; https://dbrs.morningstar.com/research/431155). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

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 https://dbrs.morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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