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 rating confirmations 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 noninterest 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. Moreover, DBRS Morningstar considers the Credit Union’s retail 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 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 and weakened financial performance.
Franchise Combined Building Block (BB) Assessment: Moderate
With total assets of $13.4 billion (assets and assets under management of $17.4 billion) as at June 30, 2022, First West has a well-established position, with strong market shares in deposits and loans in BC’s Low Mainland, Okanagan, and Vancouver Island regions. First West operates through four community-based brand identities, which also contributes to its successful product diversification. The Credit Union’s membership growth has been relatively stable growing by a modest 0.75% in 2021. Meanwhile, First West continues to work toward federal continuance after the majority of the members voted in favor of the Credit Union applying to become federally regulated.
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 relative to its credit union peers. In F2021, First West’s net income grew 8.6% to $66.9 million, primarily because of an increase in net interest income and a reversal of provisions for credit losses. Supported by a strong loan growth and decline in cost of funds, the net interest margin improved to 1.98% in F2021 compared with 1.76% in the prior year. Noninterest expenses also increased by 11.0% in 2021 year over year (YOY), as the Credit Union resumed many strategic initiatives in F2021, including those paused in F2020 as a result of the Coronavirus Disease (COVID-19) pandemic. As a result, the operating efficiency ratio normalized toward historical levels in F2021, increasing to 77.5% from 73.9% in F2020.
Risk Combined Building Block (BB) Assessment: Good
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. Gross impaired loans (GIL) as a percentage of gross loans decreased to just 0.12% in F2021, from 0.49% result in F2020. This was largely driven by lower write-offs in the commercial lending portfolio as well as some loans returning to performing status. Overall, gross write-offs as a percentage of total loans decreased to 0.12% in 2021 from 0.26% in the prior year. The majority of the loan portfolio is composed of residential mortgages, which have performed well. However, First West has a relatively large commercial mortgage and construction and development lending portfolio when compared with its credit union peers, which DBRS Morningstar views as higher-risk, particularly in the event of a real estate market downturn.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
The majority of First West's funding is provided through branch-raised deposits with core member deposits representing 87% of the $11.0 billion total deposits in F2021. 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 Bond 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. The liquidity ratio is normalizing toward the historical levels as deposit growth slowed and loan growth remained strong in F2021. Accordingly, First West's liquid assets fell to 12.5% of total assets in F2021 from an all-time high of 19.6% in F2020.
Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views First West’s capitalization as good, with the Credit Union holding a sizable capital buffer above regulatory minimums. In F2021, the capital adequacy ratio was 14.6%, down 130 basis points compared with 15.9% in the prior year. Despite increased total capital, the reduction in capitalization reflects higher risk-weighted assets associated with growth in commercial loans. Nevertheless, the capital position of First West remains sound and compares favorably with the regulatory minimum of 8.0% of total risk-weighted assets and the supervisory level of 10.0%. In addition, capital is largely composed of members’ equity and retained earnings. The Credit Union's dividend payout ratio is relatively low, allowing First West to use a greater proportion of retained earnings 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/403041.
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, First West 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.
There were no Environmental/Governance factor(s) that had a significant or relevant effect on the credit analysis.
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 (May 17, 2022).
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).
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.
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