DBRS Limited (DBRS Morningstar) confirmed Conexus Credit Union 2006’s (Conexus or the Credit Union) Short-Term Issuer Rating and Short-Term Instruments rating at R-1 (low). The trend on all ratings is Stable. 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 (SaskCentral; rated R-1 (low) with a Stable trend by DBRS Morningstar), particularly in the form of liquidity. In addition, Conexus has been designated a Provincial Systemically Important Financial Institution (P-SIFI), which increases the likelihood that systemic external support would be forthcoming. At present, the SA2 designation does not result in any uplift for the ratings.
KEY RATING CONSIDERATIONS
The rating confirmations reflect Conexus’ solid franchise within its operating area and the benefits of its membership in the well-established credit union system in Saskatchewan. More than 40% of the Province’s population are members of its credit union system. Moreover, Conexus generates relatively stable earnings, which support the ratings. Conversely, DBRS Morningstar notes 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, 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. Conversely, a material and sustained weakness in financial performance or a substantial deterioration in asset quality, especially from deficiencies in risk management, would lead to a ratings downgrade.
Conexus is the second-largest credit union in the Province, with total assets of $6.7 billion as of December 31, 2021. The Credit Union provides banking services to its members, who represent approximately 11.3% of Saskatchewan’s population, through 30 branches in its footprint area. The Credit Union has grown its membership base over the last five years, with over 133,000 members in F2021; however, market shares of loans and deposits within the provincial credit union system have also seen modest declines.
In DBRS Morningstar’s assessment, Conexus generates good profitability and recurring earnings that can cover heightened levels of provisioning expenses. Conexus’ revenue per member of $1,690 in F2021 remains one of the highest among all DBRS Morningstar-rated credit unions. Additionally, the Credit Union continues to enjoy one of the highest net interest margins (2.58% in 2021) among its peers, driven by improving spreads and a shift in member preference toward demand deposits. The efficiency ratio also showed strong improvement in F2021, improving to 65.1% from 76.7% in F2020; however, the ratio is expected to deteriorate in the near term as the Credit Union invests in its digital capabilities. Provision for credit losses increased by 37% in 2021 to $30.4 million, from $22.1 million in the previous year, to form 38.7% of income before provisions and taxes.
Net loans declined 3% year over year as members used excess savings to pay down loans and reduced their demand for auto loans. While Conexus exhibits a good risk profile, it has significant exposures to higher-risk commercial real estate lending. Accordingly, DBRS Morningstar notes 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. Overall, impairment levels declined to 2.22% of gross loans from 2.34% in 2020, which can largely be attributed to positive credit migration and the resolution of commercial loans. Furthermore, net write-offs remain manageable, forming 0.38% of average net loans, given that the majority of the loan book is secured through real estate or government guarantees.
Conexus is largely funded through stable retail and business deposits, which contributed to 91% of total funding in F2021. DBRS Morningstar views Conexus’ funding structure as well aligned with its lending activities. The stability of local deposits is supported by the unlimited deposit guarantee provided by the Credit Union Deposit Guarantee Corporation (CUDGC). The Credit Union also has access to wholesale funding in the form of brokered deposits and securitized borrowings via the National Housing Act Mortgage Backed Securities program, the Canada Mortgage Bonds program, and auto loan securitizations. As with other financial institutions, Conexus saw outsized deposit growth during the Coronavirus Disease (COVID-19) pandemic and could face some core deposit runoff in the near term, in line with the continued economic recovery. However, the Credit Union has various sources of liquidity, including credit facilities with SaskCentral, and reported a solid liquidity coverage ratio of 158% in F2021, well above the regulatory minimum of 100%.
Conexus maintains good capitalization that is sufficient to absorb potentially higher levels of provisioning and loan losses over the normal course of business. The CET1 capital ratio, which is based on Basel III requirements, improved 110 basis points to 14.8% in F2021 from 13.7% in the prior year. As a P-SIFI, Conexus is subject to stronger oversight by CUDGC, which requires a 1% capital conservation buffer that DBRS Morningstar also views positively.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS
DBRS Morningstar views the Social Impact of Products and Services ESG subfactor as relevant to the credit rating, but it does not affect the assigned ratings or trends. As a credit union, Conexus 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 (https://www.dbrsmorningstar.com/research/398692; June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.
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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