DBRS Limited (DBRS Morningstar) confirmed all ratings of BlueShore Financial Credit Union (BlueShore Financial or the Credit Union), including the Credit Union’s Long-Term Issuer Rating of BBB (high) and Short-Term Issuer Rating and Short-Term Instruments rating of R-1 (low). The trends on all ratings are Stable. 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 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 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 generates relatively good recurring earnings; however, earnings are primarily spread driven and DBRS Morningstar would view a greater share of fee-based income positively. Although the net interest margin may be pressured from higher rates on term deposits, reliance on such deposits also reduces 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 residential mortgage and commercial real estate credit exposures, the majority of which are in the GVA. 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 loan portfolios.
Over the longer term, DBRS Morningstar would upgrade BlueShore Financial’s 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.
A material and sustained deterioration in asset quality, especially from deficiencies in risk management, would result in a downgrade of BlueShore Financial’s ratings.
Franchise Combined Building Block (BB) Assessment: Moderate/Weak
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 $1.9 billion from $1.0 billion over a six-year time frame. In addition, the Credit Union has held its market share of loans and deposits in the Province relatively steady at 5.5% of residential mortgages, 5.5% of deposits, and 6.7% of commercial loans. Furthermore, BlueShore Financial generates top-tier revenue per member compared with its Canadian credit union peers, which DBRS Morningstar views positively.
Earnings Combined Building Block (BB) Assessment: Good/Moderate
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 fee- and commission-based income. The Credit Union’s efficiency ratio, adjusted for one-time gains, improved 469 basis points (bps) year over year (YOY) to 68.4%, 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’s efficiency ratio ranks favourably compared with its Canadian Credit Union Peers. Similar to other financial institutions, BlueShore Financial saw reversals of provision for credit losses of $2.7 million when forward-looking macroeconomic indicators began to show signs of improvement as the economic impact of the Coronavirus Disease (COVID-19) pandemic waned.
Risk Combined Building Block (BB) Assessment: Good
BlueShore Financial continued to grow its loan book in F2021 with net loans rising 5.7% YOY to $4.4 billion. 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 climbed 41 bps in 2021 to a still sound 0.95%, as a result of increased impairments in the commercial loan portfolio. 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 may be more susceptible to underperformance in the current environment relative to residential mortgage loans.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
BlueShore Financial is primarily funded through deposits generated through its branches or sourced from institutional relationships. In addition, BlueShore Financial’s funding structure is well aligned with its lending activities. The Credit Union’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, which DBRS Morningstar views as stable and subject to low flight risk, provides BlueShore Financial with greater certainty when managing interest rate risk and liquidity, but at a higher cost. The Credit Union also has access to wholesale funding in the form of securitized borrowings via the National Housing Act Mortgage-Backed Securities program and the Canada Mortgage Bonds program. BlueShore Financial also has strong liquidity levels which provide sufficient buffer to meet liquidity needs.
Capitalization Combined Building Block (BB) Assessment: Good/Moderate
In DBRS Morningstar’s view, BlueShore Financial has a sound capital position. In F2021, the Credit Union’s total capital ratio declined modestly by 30 bps to 13.7%, stemming from growth in risk-weighted assets; however, capital levels remain ahead of both the regulatory minimum of 10% and its internal capital target. Based on its Internal Capital Adequacy Assessment Process, conducted annually, BlueShore Financial has sufficient capital to absorb heightened levels of provisioning expense.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/398479.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors
DBRS Morningstar views that the Social Impact of Products and Services ESG subfactor was relevant to the credit rating but does not affect the assigned ratings or trends. As a credit union, BlueShore Financial operates a membership-based community banking model where the social aspect of its activities strengthens its franchise, albeit at the expense of profitability. As a result, this factor is incorporated into the Credit Union’s Franchise Strength grid grades.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929/).
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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577