DBRS Confirms Coast Capital Savings Credit Union at BBB (high); Trend Stable

DBRS Limited (DBRS) confirmed the ratings of Coast Capital Savings 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 trend for all ratings is Stable.

Coast Capital’s Support Assessment remains at SA2, which reflects DBRS’s expectation of timely systemic external support from the Province of British Columbia (the Province; rated AA (high)/R-1 (high) with Stable trends by DBRS) through Central 1 Credit Union (Central 1; rated A (high) with a Stable trend by DBRS), particularly in the form of liquidity, as implied in the Credit Union’s short-term ratings.

KEY RATING CONSIDERATIONS
The ratings reflect Coast Capital’s important franchise in its footprint area of Metro Vancouver, Fraser Valley, Vancouver Island and Okanagan. This position is bolstered by the strong position of credit unions in British Columbia, with 41% of the provincial population as members. The ratings also consider the concentration risk of operating primarily in the Vancouver area, which makes Coast Capital more susceptible to a potential real estate market correction. Moreover, the Credit Union’s move to a federal charter could pose challenges in the areas of funding and operational risk.

RATING DRIVERS
Ratings could be positively affected by the successful transition to a federal charter that would not adversely affect Coast Capital’s funding and liquidity positions. Additionally, sustained membership growth, especially among younger members, or a significant improvement in earnings through the growth of non-interest income and/or improved efficiency, could also improve the ratings. 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, an inability to control costs or a sustained reduction in internal capital generation could also have a negative impact on the ratings.

RATING RATIONALE
Coast Capital is the second-largest credit union in the Province, with $17.1 billion in assets as of YE2017. The Credit Union serves 28% of the Province’s credit union system membership base through both retail and small business commercial offerings. Coast Capital has 52 branches in its footprint area in addition to a digital presence. Moreover, 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 (OSFI). This was followed by provincial approval from the Financial Institutions Commission of British Columbia and the Credit Union Deposit Insurance Corporation (CUDIC) in August 2017. The Credit Union is currently working with all counterparties with the aim of finalizing its federal charter application by the end of 2018.

In DBRS’s opinion, while Coast Capital has significant strengths in its fundamentals, the proposed conversion to a federal credit union raises significant uncertainties about its prospects, most importantly around funding. With federal continuance, Coast Capital’s previously unlimited deposit coverage under CUDIC would be replaced by deposit insurance of up to $100,000 per account provided by the Canada Deposit Insurance Corporation, a federal Crown 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 than expected given the highly competitive dynamics in Ontario that includes the large banks, other online platforms, as well as local credit unions.

In preparation for federal continuance, Coast Capital has strengthened its digital capabilities as well as enhanced its product offerings. These initiatives helped Coast Capital grow its assets and net interest income by approximately 14% in 2017. Overall, earnings have continued their upward trajectory, benefiting from solid asset growth as well as good expense control. Owing to its no frills type of accounts and relatively younger members, Coast Capital has one of the lowest revenue per member ratios among credit unions at $733 for 2017, while its non-interest income to total revenues of 22% also trails peers.

Coast Capital’s asset growth in 2017 was predominantly in residential mortgages which made up 70% of the $14.8 billion loan portfolio. Commercial loans, which make up 28% of the Credit Union’s book, experienced an increase of 15% in 2017, to reach $4.2 billion. Although asset quality metrics have been favourable with gross impaired loans at only 0.09% of gross loans, in DBRS’s view Coast Capital is likely to see higher delinquencies in the event of a real estate market correction given the rising house prices in the Greater Vancouver Area. In the meantime, with the conversion to a federal charter, Coast Capital is in the process of reviewing its policies and procedures to comply with OSFI’s more robust guidelines. Enhanced risk management frameworks would be viewed positively by DBRS.

Commercial and retail deposits fund 79% of Coast Capital’s assets. The stability of credit union deposits is enhanced by the CUDIC; therefore, federal continuance could see deposit outflows. In order to ensure an adequate funding and liquidity buffer, Coast Capital recently raised $200 million in a private subordinated debt issuance. In addition, Coast Capital has various credit lines with financial institutions, including facilities with Central 1and has significantly grown term deposits during 2018 thus far.

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 14.7% in 2017, implying a capital cushion of $539 million over the minimum regulatory requirement. 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.

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 on the issuer page at www.dbrs.com.

The principal methodology is 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 NA FIG, Global FIG

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

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