DBRS Confirms Vancity’s Short-Term Rating at R-1 (low) with Stable Trend
August 28, 2015 - DBRS Limited (DBRS) has today confirmed Vancouver City Savings Credit Union’s (Vancity or the Credit Union) Short-Term Instruments rating at R-1 (low) with a Stable trend. The rating remains supported by Vancity’s relatively low-risk core business, good penetration in its geographic market and its mutually beneficial relationship with Central 1 Credit Union (Central 1).
Vancity benefits from a strong franchise as a large credit union well positioned in its provincial market with a healthy membership base. While its asset quality, liquidity and capitalization remain solid, its financial results continue to be pressured by stagnant revenues and high expense levels. Even with modest asset growth, margin compression caused by low interest rates has constrained revenue growth. Vancity’s operating expense-to-operating income ratio has deteriorated materially in the past four years as Vancity has not been able to reduce expenses due, in part, to the costs of its information technology upgrade. Its return on equity, measured after community donations and member patronage, declined to 5.5% in 2014 from 6.6% in 2013. Asset quality is currently strong, reflecting conservative lending policies, the real estate-secured nature of most of the loan book and the sustained increase in real estate values. Liquidity levels are acceptable and funding is primarily member deposits, albeit with some wholesale deposits and funding. Capital ratios are well above regulatory requirements and the quality of capital is strong, with almost 100% retained earnings.
As with most Canadian lenders, Vancity has notable exposure to the residential mortgage market. Any slowdown in this market may slow earnings generation, while a downturn in the residential mortgage market could hurt asset-quality indicators and ultimately have an impact on provisioning levels.
The Ministry of Finance in British Columbia is in the process of reviewing the B.C. Financial Institutions Act and the related Credit Union Incorporation Act, which may result in changes to regulatory liquidity and capital requirements for credit unions in British Columbia. Such changes are most likely to be consistent with those being introduced by the Office of the Superintendent of Financial Institutions to address Basel III requirements at the federal level. There is also discussion about the possibility of reducing the 100% deposit guarantee provided by the B.C. government. Although a reduction in the guarantee could result in some outflows of deposits, it would almost certainly be phased in over a period of time, reducing the potential impact from deposit outflows or increased funding costs.
Under the DBRS support assessment criteria, Vancity is assessed at SA2, reflecting the expectation of timely systemic external support from Central 1 for liquidity. DBRS currently rates Central 1’s Medium & Long-Term Senior Notes & Deposits at A (high) and its Short-Term Instruments at R-1 (middle); all trends are Stable. Support assessments for credit unions are unique in that the supporting organization is partially owned by the supported one, rather than the other way around. As in prior years, DBRS has not assigned an intrinsic assessment to Vancity as a result of the difficulty in viewing a credit union as a stand-alone entity without taking into account its support from the provincial central.
There are various factors which could reasonably have a positive or negative influence on the credit strength of Vancity. Among these, increased core profitability and non-interest income diversification would have the potential to be positive while any further deterioration in earnings, internal capital generation, funding and/or liquidity would top the list of negative influences. DBRS also believes that any change in the support assessment for Vancity could have further negative implications on the rating.
Notes:
All figures are in Canadian dollars unless otherwise noted.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com .
The applicable methodologies are Rating Canadian Credit Union Centrals and Desjardins Group (December 2014), Global Methodology for Rating Banks and Banking Organisations (June 2015) and DBRS Criteria: Support Assessment for Banks and Banking Organisations (March 2015), which can be found on DBRS’s website under Methodologies.
This rating is endorsed by DBRS Ratings Limited for use in the European Union.
DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com