DBRS Limited (DBRS Morningstar) confirmed First West Credit Union’s (First West or the Credit Union) Long-Term Issuer Rating at BBB (high) and both the Short-Term Issuer Rating and the Short-Term Instruments rating at R-1 (low). The trends on all ratings are Stable. The Support Assessment (SA) for First West is SA2, which reflects DBRS Morningstar’s expectation of timely systemic external support from the Province of British Columbia (BC 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 Stable trend by DBRS Morningstar), particularly in the form of liquidity. The SA2 designation does not result in any uplift to First West’s ratings.
KEY RATING CONSIDERATIONS
The ratings reflect First West’s ranking as the third-largest credit union in the Province and the fifth-largest credit union in Canada. The ratings are also supported by First West’s strong earnings power, as well as solid liquidity and capital positions. The Credit Union has generated solid recurring earnings that are underpinned by a higher contribution from non-interest income relative to its credit union peers as well as above-average revenue per member.
Asset quality remains sound with metrics at relatively low and manageable levels; however, First West has a larger commercial mortgage and construction and development lending portfolio relative to its credit union peers. DBRS Morningstar considers these exposures to be susceptible to a potential housing downturn in Canada, given that all mortgages are originated in BC, which has experienced dynamic growth in the real estate market in recent years. While the Credit Union’s residential mortgage lending is not focused on the City of Vancouver proper, the extensive price appreciation seen in this market has pressured neighbouring markets that are within First West’s footprint.
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 membership and member share of wallet resulting in a material improvement in earnings, while maintaining a conservative risk profile.
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.
Franchise Combined Building Block (BB) Assessment: Moderate
With total assets of $12.5 billion (assets and assets under management of $16.2 billion) as at June 30, 2021, First West has a well-established market position, with strong market shares in deposits and loans in BC’s lower mainland and Vancouver Island. First West operates through four community-based brand identities, which also contribute to its successful product diversification. Meanwhile, the Credit Union is contemplating applying for a federal charter to grow and gain access to markets beyond BC and will be asking members for permission to apply to become federally regulated by the Office of the Superintendent of Financial Institutions (OSFI) later this year.
Earnings Combined Building Block (BB) Assessment: Good/Moderate
First West has generated solid recurring earnings that reflect its comprehensive suite of banking and wealth management products. Given its diverse product offering, the Credit Union has a higher contribution from fee-based products, making it less sensitive to spread income compared with credit union peers. In F2020, First West’s net income declined by 30% from the previous year to $61.6 million, as the provision for credit losses (PCL) increased by 52% to $25 million on a year-over-year basis as a result of the negative economic impact caused by the Coronavirus Disease (COVID-19) pandemic. Nonetheless, First West continues to generate some of the best returns among credit union peers, with a return on average member equity of 7.7% in F2020.
Risk Combined Building Block (BB) Assessment: Good/Moderate
Overall, asset quality at First West remains strong, reflecting the Credit Union’s conservative risk profile and solid track record of credit performance with most credit metrics remaining at relatively low and manageable levels. A majority of the loan portfolio comprises residential mortgages, which have performed well; however, First West has a relatively large commercial mortgage and construction and development lending portfolio compared with its credit union peers, which DBRS Morningstar views as higher-risk, particularly in the event of a real estate market downturn. In addition, 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.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
A majority of First West's funding is provided through branch-raised deposits with core member deposits representing 85% of the $10.5 billion total deposits in F2020. DBRS Morningstar assesses the Credit Union’s deposit base as stable and subject to relatively low flight risk as deposits are 100% guaranteed by the Credit Union Deposit Insurance Corporation. In addition to its deposit funding, First West has also participated in securitizations through the Canada Mortgage Bonds Program. Moreover, First West's liquidity position is strong, benefitting from access to 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, First West replaced its statutory liquidity deposits with an equivalent amount of high-quality liquid assets, which are now held in a trust with Central 1 as the trustee.
Capitalisation Combined Building Block (BB) Assessment: Good
DBRS Morningstar views First West’s capitalization as strong, with the Credit Union holding a sizable capital buffer above regulatory minimums. In F2020, the capital adequacy ratio was 15.9%, up 170 basis points compared with the prior year and well above the minimum and supervisory limits of 8.0% and 10.0%, respectively. In addition, capital is largely comprised of members’ equity and retained earnings. When compared with other credit union peers, the Credit Union's dividend payout ratio is considered low, allowing First West to use a higher earnings retention ratio to fund investments and support growth plans.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/384928.
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 (July 19, 2021; https://www.dbrsmorningstar.com/research/381742). 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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