DBRS Limited (DBRS Morningstar) confirmed Affinity Credit Union’s (Affinity or the Credit Union) Short-Term Issuer Rating and Short-Term Instruments rating at R-1 (low). All trends remain Stable. Affinity’s Support Assessment (SA) is SA2, which reflects DBRS Morningstar’s expectation of timely systemic external support from the Province of Saskatchewan (Saskatchewan; 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, Affinity has been designated a Provincial 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 rating confirmations and Stable trends reflect the expectation that Affinity will maintain its strong position in Saskatchewan, particularly in the city of Saskatoon, the Province’s largest city and business hub. Affinity is the largest credit union in the Province by assets and deposits. Affinity has demonstrated resilient financial performance and improved operating efficiency through investments in its operational infrastructure and branch rationalizations. Overall, the balance sheet has remained strong, with funding sourced mainly from core retail deposits, high liquidity levels, and solid capital cushion. The rating confirmations also consider relatively large single-party exposures that represent some concentration risk in the commercial loan portfolio.
DBRS Morningstar views Affinity as well placed in its rating category. Over the longer term, DBRS Morningstar may upgrade Affinity’s ratings if the Credit Union can sustain membership growth, particularly in the younger demographic, as well as further deepen market shares. DBRS Morningstar would also upgrade its ratings if the Credit Union were to further diversify its revenue mix with a material and sustainable increase in the level of noninterest income.
Conversely, a ratings downgrade would occur should there be significant losses in the loan portfolio or a perceived weakness in loan underwriting and/or risk management.
Affinity maintains a solid franchise in Saskatoon and has a growing presence in Regina, the two largest cities in Saskatchewan. At the end of F2021, Affinity served 12% of the provincial population through 56 advice centers across 47 communities in the Province. The Coronavirus Disease (COVID-19) pandemic has made it difficult for Affinity to grow its membership base since 2020, as the Credit Union membership declined slightly in the past two years; nevertheless, it maintains a significant market share of loans and deposits in Saskatchewan. Affinity continues to target membership growth in the younger demographic, particularly in Saskatoon, Canada’s youngest city. In its strategic plan for 2022–24, Affinity intends to expand its provincial market share by 12% by the end of 2024.
Affinity generates solid recurring earnings with almost 73% of its revenue composed of net interest income with the remainder composed of noninterest revenue. In 2021, net income grew 55% to about $64 million compared with the prior year. The stronger-than-expected performance, although unsustainable in the long term, was supported by higher net interest income and a recovery in provision of credit losses, while operating expenses increased only marginally. Reduced funding costs alongside gross loan growth of 5.0% helped the Credit Union maintain its net interest margin at 2.34%. Furthermore, cost control remains solid with operating efficiency improving to 60.0% in 2021 from 64.3% in the prior year on the back of stronger revenue performance.
Affinity has a good risk profile that is driven by its generally conservative underwriting policies and practices. DBRS Morningstar notes that asset quality metrics for the Credit Union are sensitive to concentration risk, particularly in the commercial segment where cyclical performance of Saskatchewan’s key industries can result in asset quality deterioration. Amid the pandemic-induced economic challenges, Affinity’s credit quality marginally declined in 2021 with overall gross impaired loans (GILs) rising by 11 basis points to form 1.62% of gross loans. As the government support programs ended in 2021, delinquencies in the commercial portfolio rose back to the pre-pandemic levels with the GIL ratio increasing to 2.31% in 2021 from 1.38% in the prior year. Nevertheless, net write-offs remain low at very manageable levels.
Affinity’s funding has been resilient throughout the pandemic and has maintained prudent levels of liquidity. The Credit Union is funded largely through member-sourced deposits, which DBRS Morningstar views as stable. Deposit flows started normalizing in 2021, growing by about 4% by year-end, after Affinity saw outsized deposit growth during the pandemic. These are primarily low-cost member deposits, which account for 97% of the Credit Union’s total deposits in 2021, with the remainder generated through broker channels. As with other financial institutions, Affinity could face some core deposit runoff in the near term in line with the continued economic recovery. Nevertheless, its strong liquidity position will provide buffers to meet increased liquidity needs.
Affinity maintains sound capitalization that provides a sufficient capital cushion for the Credit Union to absorb losses in a stressed environment with a total capital ratio of 15.47% at year-end 2021. Accordingly, Affinity held $125 million in excess capital above its Internal Capital Adequacy Assessment Process (ICAAP) requirements in 2021. DBRS Morningstar notes that the quality of Affinity’s capital is strong, with 97% of total capital being composed of Tier 1 capital, and internal capital generation compares favorably with peers.
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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