DBRS Morningstar Confirms Credit Union Central of Saskatchewan at R-1 (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed Credit Union Central of Saskatchewan’s (SaskCentral or the Credit Union) Short-Term Issuer Rating and Short-Term Instruments rating at R-1 (low) with Stable trends. The ratings for SaskCentral reflect DBRS Morningstar’s Intrinsic Assessment of the Saskatchewan credit union system (the System) and a Support Assessment of SA2. This support designation reflects the expectation of timely systemic external support from the Province of Saskatchewan (rated AA, Under Review with Negative Implications by DBRS Morningstar), particularly given that SaskCentral has been designated as a Provincially Systemically Important Institution.

KEY RATING CONSIDERATIONS
SaskCentral’s rating is driven by the strength of the System, which collectively owns SaskCentral. However, DBRS Morningstar notes that the freeze in business activity resulting from the Coronavirus Disease (COVID-19) pandemic and the oil price shock could have severe implications for the financial health of the System. This negative outlook is driven by the System’s substantial exposure to commercial loans (the System has about a 40% provincial market share). These loans are mostly to small and medium-sized enterprises that are likely to experience stress given the impact on Saskatchewan’s economy from business closures resulting from the coronavirus pandemic and the sharp decline in oil prices. Furthermore, Concentra Bank represents a contingent risk to the System through SaskCentral, and at F2019, Concentra’s total assets represented 36% of System assets. As such, a material deterioration in Concentra’s financial performance or liquidity position could have a negative impact on the System.

RATING DRIVERS
Although unlikely over the intermediate term, positive ratings pressure could arise from a meaningful improvement in System membership growth, particularly within the younger demographic. Increased efficiency and a greater proportion of operating revenues being generated through fee-based income could also benefit the ratings.

Negative ratings pressure could result from a reduction in the assessment of the likelihood of provincial support. A material and sustained weakness in System loan performance, resulting in a significant increase in loan losses, resulting from the oil price shock and a longer than expected adverse impact of coronavirus, could pressure ratings for SaskCentral. Also, significant and sustained financial weakness at majority-owned Concentra could also negatively affect the rating.

RATING RATIONALE
In confirming the ratings for SaskCentral, DBRS Morningstar considers the continued solid performance of SaskCentral as the statutory liquidity manager for credit unions in Saskatchewan and a conduit through which the credit unions can access clearing and settlement, daily cash flow management, and emergency liquidity support. As a central entity, SaskCentral also provides certain solutions to the System for regulatory compliance support. SaskCentral is collectively owned by the 40 credit unions in Saskatchewan.

Although the System is experiencing a difficult operating environment, it remains a crucial provider of financial services in Saskatchewan. In F2019, credit union membership represented 41% of the provincial population, while the System held 37% of provincial deposits, 24% of residential mortgages, and 45% of commercial loans. The System generates solid recurring earnings and its profitability metrics are top-tier compared with peers. DBRS Morningstar views the System’s asset quality as generally good, with the gross impaired loans ratio at a manageable level of 1.5% at F2019; however, loan impairments have been rising and are expected to rise further with the current unprecedented economic environment. Positively, net write-offs remain low given the mostly secured nature of the loan book. In DBRS Morningstar’s view, the System’s funding profile remains strong, given that the loan book is largely funded through relatively sticky insured deposits while its capital cushion is sufficient to absorb higher credit losses resulting from a sustained economic downturn.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019).

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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