Morningstar DBRS Confirms Conexus Credit Union 2006's Short-Term Credit Ratings at R-1 (low), Stable Trends, Following Affirmative Member Vote on Merger

DBRS Limited (Morningstar DBRS) confirmed Conexus Credit Union 2006's (Conexus) Short-Term Issuer Rating and Short-Term Instruments credit rating at R-1 (low). The trend on all credit ratings is Stable. Conexus' Support Assessment of SA2 reflects Morningstar DBRS' expectation of timely systemic external support from the Province of Saskatchewan (Saskatchewan or the Province; rated AA (low) with a Stable trend) through Credit Union Central of Saskatchewan (SaskCentral; rated R-1 (low) with a Stable trend), particularly in the form of liquidity. In addition, Conexus has been designated a Provincial Systemically Important Financial Institution (P-SIFI), which increases the likelihood that systemic external support would be forthcoming. The SA2 designation does not currently result in any uplift to Conexus' credit ratings. This credit rating action follows the June 18, 2025, announcement that the members of Conexus, Cornerstone Credit Union Financial Group Limited (Cornerstone), and Synergy Credit Union Ltd. (Synergy) voted to merge these three credit unions, subject to the required regulatory approvals.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation and Stable trends reflect the relative improvement in Conexus' post-merger franchise from a larger membership and asset base as well as its wider reach across the Province, but also recognizes that the combined entity will remain smaller than several of its similarly rated credit union peers. In Morningstar DBRS' view, the economies of scale resulting from the merger should allow the combined credit union to achieve cost synergies, increase efficiency, and be better positioned to make the technological investments necessary to remain competitive with large banks and fintech companies. However, costs may increase in the near term as the combined entity works to integrate the systems and members of three separate credit unions.

The credit ratings also consider that the combined entity will have a broadly similar risk profile to that of Conexus as risk metrics for Synergy and Cornerstone are generally in line with those of Conexus; however, operational risk may be heightened following the merger, given the integration risk and complexities of combining three entities. Cornerstone and Synergy also exhibit similar funding, liquidity, and capitalization profiles to Conexus. All three credit unions are primarily funded by stable member deposits with liquidity coverage ratios and capital levels well above the regulatory minimums as well as high-quality capital that is largely composed of retained earnings.

Additionally, Morningstar DBRS is concerned about Canada's ongoing trade conflicts with the U.S. and China, which have introduced significant macroeconomic uncertainty and could result in a combination of economic recession, rising unemployment, and pockets of higher inflation, ultimately leading to higher-than-expected loan losses and tepid loan growth.

CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS would upgrade its credit ratings if Conexus is able to strengthen its franchise through a sustained increase in membership resulting in a material and sustained improvement in earnings, while maintaining a similar risk profile.

Conversely, Conexus' credit ratings would be downgraded if there were significant integration issues with the merger. A sustained weakness in financial performance or a significant deterioration in asset quality would also lead to a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Strength
The merger would add approximately 55,000 members, 27 branches, and $4.1 billion in assets to Conexus' balance sheet, resulting in a combined entity that would serve about 200,000 members through 57 branches, with a total asset base of $11.5 billion as of December 31, 2024, making it the eighth-largest credit union in Canada and the largest in the Province. The operating regions of Cornerstone (primarily in east-central Saskatchewan) and Synergy (primarily in west-central Saskatchewan) are largely complementary to those of Conexus, with no direct overlap in branch locations; as such, no branch closures are planned. All three credit unions offer similar banking services, including personal, commercial, and wealth management solutions.

Earnings Power
Cornerstone and Synergy will be positive earnings contributors, with a total pro forma 2024 net income for the combined entity (before patronage allocation for Synergy) of $49.0 million--nearly double Conexus' earnings result--and both credit unions generated generally stronger profitability metrics than Conexus in 2024. Increased earnings capacity, which should grow over the longer term because of cost synergies and improved efficiency, better positions the merged credit union to face rising costs related to technology investments and increasing regulatory demands. Like its peer credit unions, the combined entity will remain highly reliant on net interest income, with noninterest income forming just 20% of total revenue for pro forma 2024, slightly lower than Conexus' standalone 21%.

Risk Profile
The combined entity will have a broadly similar risk profile to that of Conexus, albeit moderately riskier in Morningstar DBRS' view given a higher exposure to commercial loans, particularly commercial real estate, where Morningstar DBRS remains concerned that the challenging operating environment could result in asset quality deterioration. Gross impaired loans averaged 1.1% of gross loans in 2024 for Cornerstone and Synergy compared with 1.6% for Conexus. Write-offs were manageable at an average 26 basis points (bps) for the two credit unions, approximately double Conexus' write-offs.

Funding and Liquidity
Like Conexus, Cornerstone and Synergy are primarily funded by member deposits while Conexus also uses securitization, which makes up about 7% of its total funding. All three credit unions have liquidity coverage ratios (LCRs) well above the regulatory minimum of 100%, with LCRs of 165% for Cornerstone and 288% for Synergy compared with 239% for Conexus in 2024. All three credit unions have available credit facilities with SaskCentral, and Synergy and Conexus have additional facilities with Concentra Bank (rated BBB (high) with a Stable trend) and Desjardins Group (rated AA with a Stable trend), respectively.

Capitalization
All three credit unions have good capitalization levels, although Synergy's CET1 ratio fell nearly 200 bps year over year to 13.09% because of growth in risk-weighted assets, partially attributable to regulatory changes, while Cornerstone and Conexus remained relatively stable, ending 2024 at 14.58% and 16.32%, respectively. As a P-SIFI, Conexus has more stringent capital requirements, including a minimum total capital ratio of 11.5%, compared with 10.5% for Cornerstone and Synergy; however, Morningstar DBRS expects the combined entity will have an ample buffer above this higher minimum requirement.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Social (S) Factors
The following Social factor had a relevant effect on the credit analysis: Morningstar DBRS views the Social Impact of Products and Services ESG subfactor as credit positive for the credit ratings, but it does not affect the assigned credit ratings or trends. As a credit union, Conexus 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 Franchise Strength grid grades.

There were no Environmental/Governance factors 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 Factors in Credit Ratings (May 16, 2025) at https://dbrs.morningstar.com/research/454196.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (May 23, 2025), https://dbrs.morningstar.com/research/454637. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025), https://dbrs.morningstar.com/research/454196 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 rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' trends 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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