DBRS Limited (DBRS Morningstar) confirmed all ratings of Coast Capital Savings Federal Credit Union (Coast Capital or the Credit Union), including the Credit Union’s Long-Term Issuer Rating of BBB (high) and Short-Term Issuer Rating of R-1 (low). The trends on all ratings are Stable. Coast Capital’s Support Assessment remains SA3, which reflects no expectation of timely support. The Credit Union is regulated by the Office of the Superintendent of Financial Institutions (OSFI) under the Bank Act. The Credit Union has the potential to access the Bank of Canada’s (BoC) Emergency Liquidity Assistance; although, this is subject to the BoC terms and conditions at the time of any application request for funding. Consequently, the Credit Union’s short-term ratings benefit from the exception granted to deposit- taking institutions on DBRS Morningstar’s short-term scale.
KEY RATING CONSIDERATIONS
The rating confirmations and Stable trends reflect Coast Capital’s strong franchise in its main footprint area in the lower mainland of British Columbia (BC or the Province; rated AA (high) with a Stable trend by DBRS Morningstar). This position is bolstered by the importance of credit unions in the Province, which count 39% of the provincial population as members (including Coast Capital members). Furthermore, the Credit Union successfully moved to a federal charter in 2018 with little impact on its funding. The ratings also consider the concentration risk of operating primarily in the Greater Vancouver Area, which makes Coast Capital more susceptible to a potential real estate market correction. Moreover, expanding operations outside the Province could pose challenges for Coast Capital, particularly in terms of operational risk.
Over the longer term, ratings would be upgraded if the Credit Union is able to strengthen its franchise through an increase in member share of wallet leading to a sustained improvement in earnings, including a higher proportion of noninterest income.
Alternatively, the ratings would be downgraded if there is a sustained deterioration in asset quality, especially from deficiencies in risk management. In addition, the ratings would be downgraded due to an inability to control costs or sustained pressure on funding.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
Coast Capital is the second-largest credit union in BC, with $22.1 billion in assets as at F2022. The Credit Union serves approximately 29% of the Province’s credit union system membership base through 45 branches in BC, providing an extensive retail and small business commercial product suite. The Credit Union also has both a growing digital presence and a national presence through its commercial leasing subsidiaries: Coast Capital Equipment Finance Ltd. and Coast Capital Auto & Equipment Finance Ltd. Coast Capital expects that its federal charter and strengthened digital capabilities will enable it to attract new members across Canada as well as deepen relationships with existing members.
Earnings Combined Building Block (BB) Assessment: Moderate
As a result of its value-based type of accounts and relatively younger membership, Coast Capital has one of the lowest revenue-per-member ratios among credit unions at $881 in F2022; although, this number has been on an upward trajectory since Coast Capital achieved federal continuance as the costlier deposits the Credit Union attracted prior to its federal continuance rolled off, in addition to the expansion of fee-based products. Coast Capital has also been investing in its technology infrastructure for the last few years in order to have the capabilities to support expansion nationally, particularly digitally versus opening branches. Consequently, the efficiency ratio stood at 77% in F2022; however, Coast Capital expects its efficiency ratio to revert to its historical level of 75% over the next few years because of continued positive operating leverage. Although the Credit Union now has access to prospective new members outside BC, DBRS Morningstar cautions that digital deposit acquisitions might come at a higher cost than expected, particularly given the highly competitive dynamic for deposit gathering that includes the large banks, other online platforms, and other local credit unions.
Risk Combined Building Block (BB) Assessment: Strong/Good
Coast Capital continued to grow its loan book in F2022 with residential mortgages up 0.4% year-over-year (YOY) to $12.2 billion while commercial loans, including equipment finance, increased by 4% YOY to $5.6 billion. Impairments remain at very manageable levels and losses have been modest as economic growth has yet to slow down and unemployment remains at low levels despite higher interest rates. As a result, gross impaired loans stood at only 0.07% of gross loans as at December 31, 2022. Nevertheless, DBRS Morningstar expects impaired loans to trend upward as credit conditions normalize with a potential weaking of the economy because of inflation and other global pressures. Furthermore, DBRS Morningstar remains cautious about Coast Capital’s commercial construction loans, which comprise 10% of its total portfolio, a proportion that is relatively high for credit union peers. Such loans may be disproportionately affected in the event of a real estate market correction.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
The Credit Union has managed to progressively grow its deposits despite now being under the federal Canada Deposit Insurance Corporation scheme, which is less generous than the BC deposit insurance scheme that provides an unlimited deposit guarantee. Total deposits were up 3% YOY to $18.6 billion in F2022. In addition, Coast Capital had around $1.8 billion in wholesale funding at the end of F2022, which included secured borrowing through the Canada Mortgage Bond program, deposit notes, short-term commercial paper, and subordinated debt. On May 3, 2023, Coast Capital redeemed all of its outstanding series 1 $200 million subordinated notes and on May 2, 2023, the Credit Union issued $100 million in nonviability contingent capital (NVCC) Subordinated Debt, in line with other OSFI-regulated institutions. Coast Capital also maintains healthy levels of liquidity, and, unlike provincial credit unions, it has access to some of the BoC contingency liquidity programs that the Credit Union tested during the Coronavirus Disease (COVID-19) pandemic.
Capitalization Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views the Credit Union’s capital levels as good, with Coast Capital’s Common Equity Tier 1 ratio at 11.7% as at December 31, 2022. At this level, it provides the Credit Union with a capital cushion of $510 million more than the minimum regulatory requirement to absorb potential losses in the stressed environment.
ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) CONSIDERATIONS
Social (S) Factors
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 rating or trend. As a credit union, Coast Capital 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 or Governance factors 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 (May 17, 2022) in its consideration of ESG factors.
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
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, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
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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