Morningstar DBRS Downgrades Vancouver City Savings Credit Union's Short-Term Credit Ratings to R-2 (high) From R-1 (low); Changes Trends to Stable From Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on Vancouver City Savings Credit Union (Vancity or the Credit Union), including the Credit Union's Short-Term Issuer Rating to R-2 (high) from R-1 (low). Morningstar DBRS also changed the trends for all credit ratings to Stable from Negative. The Credit Union has a Support Assessment of SA2, reflecting Morningstar DBRS' expectation of timely systemic external support from the Province of British Columbia (B.C. or the Province; rated AA (high) with a Negative trend) through Central 1 Credit Union (rated A (high) with a Negative trend), particularly in the form of liquidity. The SA2 designation does not result in any uplift to the credit ratings.

KEY CREDIT RATING CONSIDERATIONS
The credit rating downgrades reflect Vancity's weak earnings performance, relative to its historical levels, which could affect the Credit Union's capacity to absorb potential credit losses and generate capital internally. Based on Morningstar DBRS' calculations, Vancity has historically reported weaker levels of earnings metrics compared with most credit unions rated by Morningstar DBRS, and earnings pressure further increased after mid-2022. Morningstar DBRS expects continued weakness in earnings in the short to medium term as the Credit Union executes its multiyear strategy to rebuild and grow the entity. Margin pressures will likely remain as interest rates have been declining markedly since their peak levels in early 2024. Moreover, operating expenses are likely to stay elevated, driven by investments and initiatives as part of the strategy revamping. Additionally, as with other banking organizations, Morningstar DBRS expects provision for credit losses (PCL) to rise, considering the uncertain operating environment associated with tariff threats and a weakening economy. This could create additional challenges for Vancity's earnings recovery.

The credit ratings also incorporate Vancity's material exposure to commercial real estate, primarily in the Greater Vancouver Area (GVA), which makes the Credit Union susceptible to a potential real estate market correction in Morningstar DBRS' view.

Supporting the credit ratings and the Stable trends is Vancity's moderate franchise as the largest credit union in B.C. by total assets and the second-largest by membership. The Credit Union's footprint is predominantly in the GVA, where it holds strong market share, driven by its large and growing membership base. The announced merger with a smaller B.C. credit union, First Credit Union, is expected to further expand its membership and asset base in the Province. Furthermore, the Credit Union maintains sound balance sheet fundamentals, including stable funding sources, high liquidity levels, and a good capital cushion.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade the credit ratings if the Credit Union were to demonstrate a sustained improvement in financial performance while maintaining a similar risk profile.

Morningstar DBRS would downgrade the credit ratings in the event of further sustained deterioration in earnings, resulting in a sustained reduction in loss-absorbing capacity and internal capital generation. In addition, Morningstar DBRS would downgrade the credit ratings if there were substantial deterioration in asset quality.

CREDIT RATING RATIONALE

Franchise Combined Building Block Assessment
Vancity maintains a solid franchise in the GVA through its offering of community-based banking services and ranks as the largest credit union in B.C. with total assets of $28.4 billion as of December 31, 2024. Vancity banks about 20% of Vancouver's population, which is a strong indicator of its competitive position within its geographical footprint. Over the past year, the Credit Union's membership base remained broadly stable, lagging the average B.C. population growth of 2.5%. In early 2025, the Credit Union launched a 10-year Vancity 2.0 strategy to rebuild and grow. Furthermore, in February 2025, Vancity announced its intention to merge with First Credit Union with $673 million total assets as of December 31, 2024, which is expected to further expand its franchise in B.C.

Earnings Combined Building Block Assessment
Since Q3 2022, Vancity's financial performance has been under pressure because of a sharp increase in interest rates, which have resulted in increased funding costs and margin compression. Although they recovered modestly in 2024, earnings remained weaker compared with historical levels. Net income before distributions, as calculated by Morningstar DBRS and including the one-off gain from the sale of properties, recovered to $9 million in 2024 from $2 million the prior year, compared with $80 million in 2022 and $124 million in 2021. The marginal improvement in 2024 was driven by higher net interest income (up 4.0%) and noninterest income (up 8.9%), partially offset by impairment expense on financial instruments of $17 million in 2024 vs $4 million in 2023. Vancity's operating expenses were flat year over year (YOY), as a result of the organizational restructuring initiated in 2024. Morningstar DBRS expects earnings to continue improving modestly in 2025 and 2026 but remain below historical levels. Meanwhile, an uncertain operating environment, associated with the U.S. tariff threats and a potential economic recession, can create additional challenges for Vancity's earnings recovery.

Risk Combined Building Block Assessment
Vancity has historically generated some of the strongest asset quality metrics among its Canadian peers and continues to demonstrate sound risk management as demonstrated by its history of low loan loss levels. With total loans contracting marginally at 0.2% YOY in 2024, impaired loans were low and manageable at 0.48% of gross loans in 2024 compared with 0.18% in the prior year. The net charge-offs ratio stood at a very low 6 basis points for the same period. Nevertheless, in Morningstar DBRS' view, Vancity is likely to experience higher-than-expected asset quality deterioration in 2025 (similar to other banking organizations) amid economic challenges associated with tariff threats and a weakening economy. Furthermore, the Credit Union's exposure to residential and commercial real estate, primarily in the GVA, could make Vancity susceptible to a potential real estate market correction.

Funding and Liquidity Combined Building Block Assessment
Vancity's funding remains good with prudent levels of liquidity. The Credit Union is funded largely through member-sourced deposits, which Morningstar DBRS views as stable. Consistent with total loan contraction, total member deposits shrank 1.1% YOY to $24.9 billion in 2024. Meanwhile, term deposits were reduced by 2.4% while demand deposits grew marginally by 0.5%. As a result, term deposits represented 52% of total funding at the end of 2024 compared with 53% in the prior year. Together, demand and term deposits accounted for about 94% of total funding in 2024. Liquid assets, as calculated by Morningstar DBRS, decreased to 11.7% of total assets in 2024 compared with 13.3% in the prior year.

Capitalization Combined Building Block Assessment
Vancity's capitalization is good with a sufficient capital cushion to absorb losses in a stressed environment. The total capital ratio remained relatively stable at 14.2% in 2024 compared with 2023, above the minimum regulatory requirement of 8.0%. The Credit Union's capital quality is strong, with about 89.3% of total capital composed of Tier 1 capital.

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, Vancity 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 or 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) 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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