DBRS Limited (DBRS Morningstar) changed the trend on BlueShore Financial Credit Union’s (BlueShore Financial or the Credit Union) ratings to Stable from Negative and confirmed its Long-Term Issuer Rating at BBB (high) and Short-Term Issuer Rating and Short-Term Instruments rating at R-1 (low). BlueShore Financial’s Support Assessment is SA2, reflecting the expectation of timely systemic external support from the Province of British Columbia (B.C. or the Province; rated AA (high) with a Stable trend by DBRS Morningstar) through Central 1 Credit Union (Central 1; rated A (high) with a Negative trend by DBRS Morningstar), particularly in the form of liquidity. The SA2 designation does not result in any uplift to the ratings.
KEY RATING CONSIDERATIONS
The trend change to Stable from Negative reflects BlueShore Financial’s better-than-expected financial and loan performance in F2020. DBRS Morningstar recognizes that much of BlueShore Financial’s loan portfolio is secured and benefits from a significant buffer to absorb potential losses given conservative loan-to-value ratios associated with its residential mortgage and commercial portfolios. Moreover, B.C.’s economy is beginning to show signs of gradual recovery in 2021, following the adverse impact of the Coronavirus Disease (COVID-19) pandemic, amid the backdrop of a global economic recovery and the accelerated deployment of vaccines.
The ratings reflect BlueShore Financial’s franchise position as a provider of midmarket private banking services to an affluent credit union customer segment in the Greater Vancouver Area (GVA) and Sea-to-Sky corridor. The Credit Union has generated relatively good recurring earnings; however, DBRS Morningstar would view a greater share of fee-based income positively. Although the net interest margin is under pressure from higher rates on term deposits, reliance on such deposits also lowers interest rate and liquidity risks for BlueShore Financial. Asset quality also remains sound but is susceptible to some deterioration in the event of a real estate market downturn given BlueShore Financial’s concentration risk associated with its retail and wholesale credit risk exposures, the majority of which are in the GVA.
Over the intermediate term, BlueShore Financial’s ratings would be upgraded if the Credit Union achieves a significant and sustained improvement in earnings while maintaining sound credit metrics and a conservative risk profile.
A material and sustained weakness in loan performance resulting in significant loan losses and earnings pressure would result in a downgrade of BlueShore Financial’s ratings.
Underpinning BlueShore Financial’s franchise strength is its position as a niche player within the Province’s credit union industry. Specifically, the Credit Union provides midmarket private banking and wealth management services to its relatively affluent members. Benefitting from its higher-net-worth membership, BlueShore Financial has grown wealth assets to $1.7 billion from $1.0 billion over a five-year time frame. Furthermore, the Credit Union has held its market share of loans and deposits in the Province relatively steady at 5.7% of residential mortgages, 5.4% of deposits, and 6.8% of commercial loans. Furthermore, BlueShore Financial generates top-tier revenue per member compared with its Canadian credit union peers, which DBRS Morningstar views positively.
BlueShore Financial has generated solid recurring earnings that are reflective of its strong franchise and its comprehensive suite of products (retail banking, commercial banking, cash management, insurance, leasing, and wealth management). Despite this comprehensive product offering, including a growing contribution from asset management, about 80% of operating revenue is derived through rate-sensitive spread income with the remainder coming from more stable fee- and commission-based income. The Credit Union continues to improve its efficiency ratio, currently at 72.9% on an adjusted basis, which DBRS Morningstar views positively considering that BlueShore Financial’s cost base has been rising as a result of ongoing investments in technology, branches, and banking systems. The Credit Union doubled its level of provisioning during the year, which was in line with other financial institutions and is expected to moderate as the B.C. economy recovers from the pandemic. The Credit Union also reported a one-time gain of $9.4 million owing to the transition of a new statutory liquidity structure.
Asset quality metrics have historically been very sound; however, DBRS Morningstar notes that the pandemic has created a challenging economic environment. Accordingly, the ratio of gross impaired loans to gross loans has been trending upward and more than doubled in 2020 to a still sound 0.54%. Positively, BlueShore Financial has exhibited relatively low levels of net write-offs compared with its credit union peers in the Province. Moreover, there are no outstanding loans accessing payment relief in the form of deferred or interest-only payments. DBRS Morningstar remains cautious of the Credit Union’s substantial exposure to commercial real estate loans, which are more susceptible to underperformance in the current environment relative to residential mortgage loans.
BlueShore Financial is funded primarily through deposits generated through its branches or sourced from institutional relationships, including municipalities, universities, schools, and hospitals. DBRS Morningstar assesses BlueShore Financial’s deposit base as relatively stable and subject to low flight risk. In addition, the Credit Union’s funding structure is well aligned with its lending activities. BlueShore Financial’s deposit base has a higher proportion of term deposits compared with its credit union peers, reflecting a higher-net-worth membership. The termed nature of the deposit base provides BlueShore Financial with greater certainty when managing interest rate risk and liquidity, but at a higher cost.
On January 1, 2021, the Liquidity Requirement Regulation under the Financial Institutions Act was amended by the BC Financial Services Authority to enable the legal segregation of a credit union’s Mandatory Liquidity Pool into a bare trust structure. As part of this transition, BlueShore Financial replaced its statutory liquidity deposits of $361 million with an equivalent amount of high-quality liquid assets, which are now held in a trust with Central 1 as the trustee and Credential Qtrade Securities Inc. as the investment manager.
In DBRS Morningstar’s view, BlueShore Financial has a sound capital position. In F2020, BlueShore Financial’s total capital ratio improved 126 basis points to 14.0% and was ahead of both the regulatory minimum of 10% and its internal capital target. This improvement in the capital ratio puts BlueShore Financial more in line with its rated credit union peers in Canada. Furthermore, based on its Internal Capital Adequacy Assessment Process, conducted annually, BlueShore Financial had sufficient capital to absorb heightened levels of provisioning expense.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
The Grid Summary Grades for BlueShore Financial Credit Union are as follows: Franchise Strength – Good; Earnings Power – Good/Moderate; Risk Profile – Good; Funding & Liquidity – Good; Capitalization – Good/Moderate.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020; https://www.dbrsmorningstar.com/research/362170). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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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