DBRS Confirms First West Credit Union at R-1 (low), Stable Trend

DBRS Limited (DBRS) confirmed the Short-Term Issuer Rating and Short-Term Instruments rating of First West Credit Union (First West or the Credit Union) at R-1 (low). The trend on all ratings is Stable.

The Support Assessment (SA) for First West is SA2, which 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 First West’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.

KEY RATING CONSIDERATIONS
The ratings reflect First West’s position as the third-largest credit union in B.C. and the fifth-largest in Canada, with assets of $10.1 billion as at June 30, 2018. The Credit Union has a well-established market position through its community-based brand identities, which contribute to its successful product diversification. The ratings are also supported by First West’s strong earnings power, which is underpinned by an above-average revenue per member as well as a higher contribution from non-interest income compared with its peers.

The ratings also consider First West’s relatively higher efficiency ratio compared with its peers as well as the Credit Union’s growing commercial loan portfolio with a large component of commercial mortgages, which makes First West more susceptible to adverse changes in the Vancouver real estate market that could have an impact on neighbouring regions in B.C.

RATING DRIVERS
Although DBRS views First West as well-placed within its rating category, over the longer term, enhanced market share through sustained membership growth, especially among younger members, could benefit the ratings. A significant strengthening in earnings through sustained revenue growth as well as a material improvement in First West’s efficiency ratio could have positive implications on the ratings. Conversely, material losses in the loan portfolio, particularly as a result of unexpected weakness in underwriting and/or risk management processes, could have a negative impact on the ratings. An inability to control costs or a sustained reduction in internal capital generation could also pressure the ratings.

RATING RATIONALE
First West has a diversified revenue base, largely reflecting a higher contribution from fee-based products such as wealth management and insurance, resulting in the Credit Union having one of the best revenue per member ratios among the large credit unions in B.C. However, the Credit Union exhibits a higher operating expense ratio than other credit unions in B.C. In 2017, First West generated strong net income of $42.2 million, which was up 45% compared with the prior year. This increase was largely driven by overall loan growth of $733 million, or 9.8%, higher interest rates and increased fee-based revenue particularly in investment revenue, wealth management commissions and lending fee revenue.

First West’s asset quality remains strong, reflecting a solid track record of credit performance, with most credit metrics remaining at relatively low and manageable levels. The majority of the loan portfolio comprises residential mortgages, which have performed well during a period of economic growth; however, First West has a relatively large commercial mortgage portfolio compared with its peers, which DBRS views as higher-risk, particularly in the event of a real estate market downturn. In addition, First West’s geographic concentration in certain areas of B.C. that neighbour Vancouver also remains a key source of risk.

First West is well-funded, mainly through relatively stable retail and institutional deposits, which funded 88% of assets as at Q2 2018. The stability of these deposits is further enhanced by the provincial 100% guarantee provided by the Credit Union Deposit Insurance Corporation. In addition, First West’s liquidity position is strong as it benefits from a mandatory liquidity pool that is externally managed by Central 1 for all credit unions in B.C.

With a sizable capital buffer relative to regulatory minimums and high-quality capital, First West’s capitalization levels are viewed by DBRS as strong. While strong, First West’s capital adequacy ratio of 12.5% has trended down from a high of 14.2% in FY2015, primarily reflecting growth in risk-weighted assets. Positively, earnings retention allows for solid internal capital generation that is sufficient to support the Credit Union’s growth. This also reflects First West’s low dividend payout ratio relative to its peers as well as the decision by the B.C. Provincial government to make the tax exemption of credit unions permanent, which will enable First West to continue to retain a large portion of its earnings.

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 applicable methodology is Global Methodology for Rating Banks and Banking Organisations (July 2018), 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: Robert Colangelo, Senior Vice President, Canadian Banking Financial Institutions
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA 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.