DBRS Limited (DBRS Morningstar) confirmed Vancouver City Savings Credit Union’s (Vancity or the Credit Union) Short-Term Issuer Rating and Short-Term Instruments rating at R-1 (low) with Stable trends. The Credit Union has a Support Assessment of SA2 reflecting DBRS Morningstar’s expectation of timely systemic external support from the Province of British Columbia (B.C.; rated AA (high) with a Stable trend by DBRS Morningstar) through Central 1 Credit Union (rated A (high) with a Stable 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 ratings reflect Vancity’s solid franchise as the largest credit union in B.C. by total assets and the second-largest by membership. The Credit Union’s footprint is predominately in the Greater Vancouver Area (GVA), where it holds strong market shares driven by its large and growing membership base. At the end of F2020, Vancity’s market shares for residential mortgages and deposits stood at about 4% and 5%, respectively, while its members represented just less than 11% of the provincial population. Conversely, the ratings also consider Vancity’s below-peer profitability metrics, a high reliance on net interest income and a significant exposure to commercial real estate, primarily in the GVA, which makes Vancity more susceptible to a potential real estate market correction in DBRS Morningstar’s view.
DBRS Morningstar views Vancity’s rating as well placed in its rating category. Over the longer term, DBRS Morningstar would upgrade its ratings if the Credit Union is able to further strengthen its franchise through a sustained increase in member share of wallet resulting in a material improvement in earnings, including a higher proportion of non-interest income and improved operating leverage.
Alternatively, DBRS Morningstar would downgrade the ratings in the event of a material and sustained weakness in loan performance resulting in a significant increase in loan losses. In addition, DBRS Morningstar would downgrade the ratings if the Credit Union were unable to control costs or experience a sustained reduction in internal capital generation.
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 $25.6 billion at Q2 2021. The Credit Union maintains significant market shares in B.C. for commercial/business loans (7.0%), residential mortgage loans (4.4%), and deposits (5.4%). Furthermore, the Credit Union is solidifying its franchise by deepening its product suite and strengthening its sustainability product niches, while making investments in its digital infrastructure. These are important factors that are driving membership growth for Vancity, which DBRS Morningstar views positively.
Vancity generates solid recurring earnings; however, a modest 18% contribution from non-interest income relative to total revenue is viewed as a constraint on its ratings. Net income before distributions declined by 23% to $54 million in F2020 as the low-interest-rate environment pressured net interest income while provision for credit losses (PCL) doubled to $46 million on a year-over-year basis as a result of the negative economic impact caused by the Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar notes that Vancity continues to invest in its digital infrastructure and processes in an effort to enhance its operational efficiency. As such, DBRS Morningstar would view a sustained improvement in operating leverage positively.
Vancity has historically generated some of the strongest asset quality metrics among its Canadian peers and continues to demonstrate sound risk management as illustrated by its history of low loan losses. As total loans grew by 2% to $20 billion in F2020, impairments remained manageable, forming 0.45% of gross loans, and losses have been modest as government stimulus and aid to the economy provided substantial mitigation throughout F2020. DBRS Morningstar expects impaired loans to trend upward as government aid programs expire and businesses and employment start to recuperate from the forced closures experienced over the past year, which could be thwarted by renewed lockdowns given the increased prevalence of coronavirus variants.
The Credit Union is mainly funded through stable branch-raised retail deposits that benefit from its strong member relationships and an unlimited provincial deposit guarantee. DBRS Morningstar views this favourably and notes that funding sources are well aligned to the Credit Union’s lending activities, given that most of Vancity’s clients tend to be deposit-holding members. As per DBRS Morningstar’s calculations, Vancity’s liquidity ratio improved to 18.8% in 2020 from 14.4% in the previous year and its liquidity position is top tier in comparison with its Canadian credit union peers. Furthermore, Vancity can access liquidity through its lines of credit with Central 1, as well as from the major Canadian banks.
DBRS Morningstar notes that as of January 1, 2021, the BC Financial Services Authority amended the Liquidity Requirement Regulation under the Financial Institutions Act to enable the legal segregation of a credit union’s Mandatory Liquidity Pool into a bare trust structure. As part of this transition, Vancity replaced its statutory liquidity deposits of $1.0 billion with an equivalent amount of high-quality liquid assets, which are now held in a trust with Central 1 as the trustee.
In DBRS Morningstar’s assessment, Vancity’s capitalization remains strong with the Credit Union’s total capital ratio, which primarily comprises equity, at 14.7% as of December 31, 2020. This ratio is comparable with Canadian credit unions that have similar risk profiles. At this level, based on DBRS Morningstar’s calculation, Vancity has a capital cushion of $540 million above regulatory requirements to help absorb potential losses.
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.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (https://www.dbrsmorningstar.com/research/381742; July 19, 2021). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (https://www.dbrsmorningstar.com/research/373262; February 03, 2021).
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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