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

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). All trends remain Stable.

The Support Assessment of SA2 for the Credit Union is unchanged and reflects DBRS’s expectation of timely systemic external support from the Province of British Columbia (B.C. or the Province; rated AA (high) and 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.

KEY RATING CONSIDERATIONS
Vancity’s ratings reflect its stable community banking business model, strong member relationships and a leadership position as the largest credit union in British Columbia based on total assets. In DBRS’s view, the Credit Union’s ongoing efforts to enhance its digital banking offering should deepen existing relationships and attract younger members. Moreover, strong underwriting, deposit funding, and capital support the ratings. The ratings also consider Vancity’s high reliance on net interest income and modestly below-peer profitability metrics.

RATING DRIVERS
Although DBRS views Vancity’s short-term ratings as well placed in the ratings category, sustained membership growth, especially among younger members, and a material increase in revenues per member could benefit ratings. In addition, a sustainable improvement in operating efficiency; and a higher proportion of operating revenues from fee-based revenue could also benefit ratings. Conversely, ratings could be negatively impacted in the event of material losses in the loan portfolio, particularly as a result of unexpected weakness in underwriting and/or risk-management processes, or a material increase in out-of-province exposures.

RATING RATIONALE
Vancity maintains a well-established franchise in the Greater Vancouver Area (GVA) and operates a cooperative banking model that provides community-based banking services. Indicative of its established market position, Vancity has significant market shares in commercial / business loans (7.8%), residential mortgage loans (4.9%) and deposits (6.0%). In the increasingly competitive environment, DBRS considers it important for the Credit Union to continue to enhance its membership base and service offerings.

DBRS recognizes that Vancity generates solid recurring earnings. Income before provisions and taxes (IBPT) has grown at an average annual rate of 15% over the last three years and is sufficient to absorb provisioning expenses under a normal operating environment. Positively, DBRS notes that, over the last three years, Vancity has exhibited good cost control, which has contributed to positive operating leverage and an improvement in its efficiency ratio. DBRS views the modest contribution of non-interest income to the Credit Union’s revenues as a constraint on its ratings, given that fee-based income usually increases the diversity of revenues and can strengthen customer relationships.

Supportive of the ratings, Vancity has a history of low loan losses that demonstrates sound risk management. Moreover, the Credit Union continues to strengthen its underwriting practices, most recently by voluntarily adopting stricter underwriting guidelines and enhancing its ability to undertake risk-based pricing. However, DBRS remains cautious as a sustained deterioration in economic conditions could significantly increase asset impairment and delinquencies for Vancity, given its extensive exposure to residential and commercial real estate across the GVA where house prices are elevated and consumers, particularly more recent entrants to the housing market, are likely to be highly leveraged. In 2017, the ratio of gross impaired loans to gross loans declined to two basis points (bps) while the ratio of net write-offs to average net loans was unchanged at 7 bps. Vancity’s credit-quality metrics are in line with or better than its DBRS-rated credit union peers, which also supports its ratings.

Vancity is well funded, primarily through stable branch-raised retail deposits. DBRS views this favourably and notes that funding sources are well aligned with the Credit Union’s lending activities, given that most of its clients tend to be deposit-holding members. DBRS views positively the Credit Union’s reduced reliance on shorter-term market funding (just 2.6% of total funding), which was generally replaced with longer-term securitization funding. Positively, Vancity also reduced its reliance on institutional and broker-sourced funding in 2017. Although the ratio of liquid assets to total assets in 2017 declined to 14.2% from 15.2% in 2016, the liquidity buffer remains sufficient, given the Credit Union’s relatively low-risk activities and good access to stable funding. Also, Vancity’s liquidity position is supported by its ability to source liquidity from Central 1 as well as its access to lines of credit from the major Canadian banks. Overall, DBRS assesses the Credit Union’s liquidity position as strong in comparison with peers.

Capital remains sound with sufficient loss-absorption capacity. Specifically, Vancity reported a total capital ratio of 14.2% at September 30, 2018, which provides a significant cushion above the regulatory requirement of 8.0%. Maintaining a sizable capital cushion is important for Vancity as sources of new capital for credit unions are limited to internal equity generation and the issuance of investment shares to members.

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 dbrs.com under Methodologies.

Lead Analyst: Sohail Ahmer, 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.