DBRS Limited (DBRS Morningstar) confirmed Conexus Credit Union 2006’s (Conexus or the Credit Union) Short-Term Issuer Rating and Short-Term Instruments at R-1 (low). DBRS Morningstar also changed the trend on both ratings to Stable from Negative. Conexus’ Support Assessment is SA2, which reflects DBRS Morningstar’s expectation of timely systemic external support from the Province of Saskatchewan (Saskatchewan or the Province; rated AA (low) with a Stable trend by DBRS Morningstar) through Credit Union Central of Saskatchewan (rated R-1 (low) with a Stable trend by DBRS Morningstar), particularly in the form of liquidity. In addition, Conexus has been designated a Provincially Systemically Important Financial Institution, which increases the likelihood that systemic external support will be forthcoming. At present, the SA2 designation does not result in any uplift for the Short-Term Instruments rating.
KEY RATING CONSIDERATIONS
The trend change reflects DBRS Morningstar’s expectation that Conexus’ financial performance and credit profile will remain resilient. Despite the economic impacts of the Coronavirus Disease (COVID-19) pandemic, the Credit Union showed improved financial performance through 9M 2021 as well as the reversion of asset quality metrics to pre-pandemic levels. Moreover, Saskatchewan’s economy showed signs of recovery through 2021, following the adverse impact of the pandemic, reflecting global economic recovery, vaccine rollouts, recovery in oil prices and demand, and improving consumer and business sentiment. DBRS Morningstar remains cautious of the medium-term volatility stemming from the pandemic and other macroeconomic factors, including commodity prices and the gradual withdrawal of government stimulus.
The ratings confirmation reflects Conexus’ solid franchise within its operating area and the benefits of its membership in the well-established credit union system in Saskatchewan. Over 40% of the Province’s population are members of its credit union system. Moreover, Conexus generates relatively stable earnings, which supports the rating. Conversely, DBRS Morningstar notes that the Credit Union is significantly exposed to commercial real estate-backed lending and automotive finance, which are sectors that can experience higher levels of delinquencies during periods of economic stress.
DBRS Morningstar views Conexus as well placed in its rating category. Over the longer term, Conexus’ ratings would be upgraded if the Credit Union were 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 noninterest income and improved operating leverage. Conversely, a material and sustained weakness in financial performance or a substantial deterioration in asset quality metrics, would lead to a ratings downgrade.
Conexus Credit Union, is the largest member-owned financial institution in Saskatchewan by assets, providing a full suite of retail, consumer, and commercial banking products to about 11% of the provincial population through 30 branches and mobile representatives. Conexus generated good levels of recurring earnings, and net income has shown improvement through 9M 2021 as their net interest margin expanded, owing to improved spreads, and provisioning expense has slowly declined. Moreover, the Credit Union’s asset quality metrics have improved to pre-pandemic levels, and loan loss levels have remained low and manageable. The Credit Union is primarily funded through member-sourced retail deposits, but it also utilizes wholesale funding by securitizing residential mortgages and auto loan receivables. Funding sources are well aligned with Conexus’ activities, and its liquidity position remains solid. Conexus’ capitalization improved modestly as of 9M 2021, which DBRS Morningstar views as providing a sizable cushion over regulatory requirements to 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 (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).
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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