DBRS Confirms R-1 (low) Short-Term Issuer Rating of Coast Capital Savings Credit Union; Stable Trend

DBRS Limited (DBRS) confirmed the Short-Term Issuer Rating and Short-Term Instruments rating of Coast Capital Savings Credit Union (Coast Capital or the Credit Union) at R-1 (low). All trends are Stable.

The Credit Union’s Support Assessment of SA2 is unchanged. Coast Capital’s SA2 reflects DBRS’s expectation of timely systemic external support from the provincial government through Central 1 Credit Union (Central 1), particularly in the form of liquidity, which is reflected in the Credit Union’s short-term ratings. DBRS currently rates Central 1’s Short-Term Instruments at R-1 (middle) with a Stable trend. DBRS also rates the Province of British Columbia’s (B.C. or the Province) Issuer Rating and Long-Term Debt rating at AA (high) and its Short-Term Debt rating at R-1 (high) with Stable trends.

DBRS’s ratings reflect Coast Capital’s important franchise in its footprint area of Metro Vancouver, the Fraser Valley, Vancouver Island and the Okanagan. This position is bolstered by the strong position of credit unions in the Province, which account for about 18% of residential mortgages in B.C. and a 23% market share of small business loans. The ratings also consider the concentration risk of operating primarily in the Vancouver area, which makes the Credit Union more susceptible to a potential real estate market correction. Moreover, Coast Capital’s revenues per member trails its credit union peers.

With $15 billion in assets as of December 31, 2016, Coast Capital is the second-largest credit union in B.C. and counts 28% of the Province’s credit union system membership base as its members. With 52 branches and a digital presence, Coast Capital predominantly serves retail and small business commercial clients in the Province. In addition, the Credit Union has a small national presence through its commercial leasing subsidiaries: Coast Capital Equipment Finance Ltd. and Travelers Finance Ltd.

In December 2016, Coast Capital members voted in favour of pursuing federal continuance, which would see the Credit Union fall under the supervision of the Office of the Superintendent of Financial Institutions. The Credit Union is in the process of obtaining all required provincial and federal approvals and could convert to a federal credit union by 2018.

In DBRS’s opinion, while Coast Capital has significant strengths in its fundamentals, its proposed conversion to a federal credit union raises significant uncertainties about its prospects, most importantly around funding. With federal continuance, Coast Capital would lose the unlimited deposit coverage provided by the Credit Union Deposit Insurance Corporation (CUDIC), a statutory corporation that fully guarantees all deposits, and would be limited to the $100,000 deposit insurance provided by the Canada Deposit Insurance Corporation. Thus, the Credit Union could potentially experience deposit outflows, especially large retail and institutional deposits. Furthermore, although a federal charter would provide Coast Capital with access to prospective new members or retail customers, especially through online platforms, remote deposit acquisition might come at a higher cost because of competition with banks and local credit unions.

Positively, earnings continued to improve as a result of asset growth, with net interest income reaching $280 million in 2016, up 6% year over year (YOY). Owing to its no frills type accounts and relatively younger members, Coast Capital has one of the lowest revenue per member ratios among credit unions at $661 for 2016. In addition, non-interest income to operating revenue stood at 22%, which is below peer average. The efficiency ratio, on the other hand, is better than other B.C. credit unions at 77%.

In DBRS’s opinion, Coast Capital enjoys a good risk profile with overall positive credit performance. In 2016, the $12.9 billion loan portfolio was composed of 70% mortgage loans, 23% commercial loans, 5% leases and 2% other personal. Asset quality metrics have been favourable, with gross impaired loans at only 0.17% of gross loans. Nevertheless, DBRS notes that given the rising house prices in the Greater Vancouver Area, Coast Capital is likely to see higher delinquencies in the event of a real estate market correction.

Coast Capital is primarily funded by deposits, with commercial and retail deposits funding 87% of assets. The stability of credit union deposits is enhanced by the CUDIC. In addition, Coast Capital uses mortgage securitizations to access wholesale funding. DBRS considers Coast Capital’s liquidity to be good, with various credit lines, including facilities with Central 1.

Capitalization levels are good in DBRS’s view, as there is a sizable cushion over regulatory minimums to absorb potential losses. Coast Capital’s total capital ratio stood at 15.58% in 2016, almost double the regulatory minimum of 8%. The Credit Union generates sufficient capital to support balance sheet growth, which is a positive given its future goals of providing services on a national scale under a federal charter.

RATING DRIVERS
Although unlikely over the intermediate term, ratings could be positively affected by sustained membership growth, especially among younger members, or a significant improvement in revenue through the growth of non-interest income and/or improved efficiency. Alternatively, ratings could come under pressure should
Coast Capital be unable to manage funding as it moves to a federal charter and deposit insurance coverage is reduced causing deposit outflows. Furthermore, significant losses in the loan portfolio as a result of unforeseen weakness in the underwriting and/or risk-management process, inability to control costs or a sustained reduction in internal capital generation could also have a negative impact on the ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on dbrs.com under Methodologies.

Lead Analyst: Maria-Gabriella Khoury, Vice President, Canadian Financial Institutions Group
Rating Committee Chair: Michael Driscoll, Managing Director, Head of North American Financial Institutions Group

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.