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 predominantly in the Greater Vancouver Area (GVA), where it holds strong market shares driven by its large and growing membership base. At the end of 2021, Vancity’s market shares for residential mortgages and deposits in B.C. stood at about 4.5% and 5.1%, respectively, while its members represented about 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 material exposure to commercial real estate, primarily in the GVA, which makes Vancity somewhat more susceptible to a potential real estate market correction in DBRS Morningstar’s view.
Over the longer term, DBRS Morningstar would upgrade its ratings if Vancity is able to further strengthen its franchise through a sustained increase in members resulting in a material improvement in earnings, including a higher proportion of non-interest income and improved operating efficiency.
Alternatively, DBRS Morningstar would downgrade the ratings in the event of a material and sustained weakness in asset quality, especially from deficiencies in risk management. 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 $27.6 billion as of May 31, 2022. The Credit Union maintains significant market shares in B.C. for commercial/business loans (7.0%), residential mortgage loans (4.5%), and deposits (5.1%). Through its network of 54 branches, Vancity banks for about a quarter of the GVA’s population, which is a strong indicator of its competitive position within its geographical footprint. Over the past three years, the Credit Union’s membership base experienced an average growth rate of 1.6%, compared with the average growth rate of 1.4% for the B.C. population. 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.
Vancity generates solid levels of recurring earnings while continuing to invest in its franchise and processes. Nevertheless, its cost-to-income ratio is relatively high and profitability metrics remain below the average of its Canadian credit union peers. A modest 18% contribution from non-interest income relative to total revenue is viewed as a constraint on its ratings. Net income before distributions significantly increased to $124 million in F2021 from $55 million in F2020. The improved performance was largely driven by a recovery in provision for credit losses (PCL) as well as higher net interest income. Reduced funding costs alongside strong gross loan growth of 13.8% helped the Credit Union to improve its net interest margin by 8 basis points to 1.95% in F2021. Supported by its wealth management business, non-interest income continued to strengthen but remains lower relative to its Canadian peers.
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. With total loan growth of 13.8% in F2021, impairments remained low, forming 0.26% of gross loans compared with 0.45% in the prior year. Nevertheless, DBRS Morningstar remains cautious that its material exposure to commercial real estate, primarily in the GVA, could make Vancity susceptible to a potential real estate market correction. Although the retail credit portfolio has performed well, Vancity’s exposure to home equity lines of credit (HELOCs) remains another source of credit risk. In the event of a significant economic slowdown or recession that triggers significant job losses, Vancity’s members could accelerate drawing down on their HELOCs. The Credit Union’s exposure to stressed borrowers could rise and potentially result in higher loan impairments.
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 with the Credit Union’s lending activities, given that most of Vancity’s clients tend to be deposit-holding members. Overall member deposits grew 5.3% in F2021 and 0.8% in Q1 2022. Liquidity remains strong despite a decline in liquid assets to 12.5% in F2021 from 15.5% in F2020. Furthermore, Vancity can access liquidity through its lines of credit with Central 1 as well as through lines with major Canadian financial institutions.
In DBRS Morningstar’s assessment, Vancity’s capitalization remains strong with the Credit Union’s total capital ratio, which primarily comprises retained earnings, at 14.2% as of December 31, 2021. This ratio is comparable with those of Canadian credit unions that have similar risk profiles. At this level, based on DBRS Morningstar’s calculation, Vancity has a capital cushion of $536 million above regulatory requirements to help absorb potential losses in a stressed environment.
ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) CONSIDERATIONS
DBRS Morningstar finds 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, Vancity operates a membership-based community banking model where the social aspect of its activities strengthens its franchise. 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.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 23, 2022; https://www.dbrsmorningstar.com/research/398692).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.
Generally, 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.
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