DBRS Confirms Vancouver City Savings Credit Union at R-1 (low), Stable Trend

DBRS Limited (DBRS) 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). The trend on all ratings remains Stable.

The Support Assessment for the Credit Union of SA2 is unchanged. Vancity’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 Vancity’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), all with Stable trends.

Vancity’s ratings reflect its stable community banking business model, strong member relationships and a market leadership position as the largest credit union in the Greater Vancouver Area (GVA). DBRS notes that Vancity aims to deepen its relationships with existing members and attract new members through a new core banking platform along with its digital banking and online marketing strategies. Also, in DBRS’s opinion, changes to the B-20 guidelines governing uninsured mortgages (effective January 1, 2018) potentially provides Vancity with an opportunity to acquire members. As at Q3 2017, Vancity had total assets of $21.4 billion and adjusted income before provisions and taxes for the nine-month period to September 30, 2017, of $92.6 million, which was up 14% over the prior year.

DBRS views Vancity’s high reliance on net interest income as a constraint on the rating, given that fee-based income is viewed as being more stable. Positively, DBRS notes that over the last two years, including the nine-month period ending September 30, 2017, Vancity has exhibited good cost containment, which has contributed to positive operating leverage. Moreover, the successful implementation of its Banking Application Renewal strategy could result in a growing share of non-interest income, which would be viewed favourably by DBRS.

Vancity has demonstrated a history of low loan losses driven by its solid underwriting expertise and conservative single-party limits, but DBRS remains cautious given Vancity’s extensive exposure to residential and commercial real estate across the GVA where house prices are elevated and consumers, particularly more recent entrants to the mortgage market, are likely to be highly leveraged. In the event of a significant decline in house prices accompanied by a substantial increase in unemployment levels, Vancity could face rising delinquency levels and higher loan losses, particularly for more leveraged borrowers. Positively, DBRS notes that relative to peers, Vancity had the lowest ratio of gross impaired loans to gross loans of just three basis point in 2016.

Vancity is funded largely through relatively stable branch-raised retail deposits. DBRS views this favourably and notes that funding sources are well aligned with lending activities, given that most of Vancity’s clients tend to be deposit-holding members. DBRS views positively Vancity’s reduction of its reliance on shorter-term market funding, from 7.5% of total funding in 2012 to 2.5% in 2016, in favour of longer-term securitizations. Other sources of funding include institutional and broker deposits, which help diversify the funding base but can be less stable and more expensive, especially in times of stress. Overall, DBRS assesses Vancity’s liquidity position as strong in comparison to peers, which is bolstered by the availability of additional liquidity from Central 1 along with access to lines of credit from the major Canadian banks.

Capital remains sound with sufficient loss absorption capacity. Specifically, Vancity reported a capital ratio of 13.4% at June 30, 2017. As a credit union, DBRS notes that sources of new capital are limited to internal equity generation and the issue of investment shares to members. As at June 30, 2017, Vancity’s capital ratio was stable at 13.4%.

RATING DRIVERS
DBRS views Vancity’s short-term ratings as well placed in the ratings category. However, over the longer term, ratings could be positively affected by an increasing share of non-interest income in operating revenues and the continued generation of positive operating leverage. Conversely, ratings could be negatively impacted should there be increased reliance on wholesale and broker deposits that are rate-sensitive and subject to higher flight risk, and also should a sharp correction in the Vancouver housing market combined with a sizable increase in unemployment lead to a significant rise in delinquencies and loan losses.

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 our website under Methodologies.

The primary sources of information used for this rating include company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Sohail Ahmer, Vice President - Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG

Initial Rating Date: 1 November 2004
Most Recent Rating Update: 2 August 2017

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.

For more information on this credit or on this industry, visit www.dbrs.com.