DBRS Confirms Ratings for BlueShore Financial Credit Union at BBB (high)/R-1 (low), Stable Trends

DBRS Limited (DBRS) confirmed BlueShore Financial Credit Union’s (BlueShore Financial or the Credit Union) Long-Term Issuer Rating at BBB (high) and Short-Term Issuer Rating at R-1 (low). All trends are Stable. BlueShore Financial’s Support Assessment remains at SA2, reflecting the expectation of timely systemic external support from the Province of British Columbia (B.C.; rated AA (high) with a Stable trend by DBRS) through Central 1 Credit Union (rated A (high) with a Stable trend by DBRS), particularly in the form of liquidity. This implicit support is factored into the Credit Union’s short-term ratings.

KEY RATING CONSIDERATIONS
The ratings reflect BlueShore Financial’s franchise position as a provider of mid-market private banking services to an affluent West Coast credit union customer segment. The Credit Union’s emphasis on branding and quality of service should enable it to defend and grow its market niche. In this context, DBRS would view a greater share of fee-based income positively. Although the net interest margin (NIM) is under pressure from higher rates on term deposits, reliance on such deposits also lowers interest rate and liquidity risks for BlueShore Financial. Asset quality remains sound, as metrics have improved significantly over time. However, concentration risk associated with the Credit Union’s retail and wholesale credit risk exposures in the Greater Vancouver Area (GVA) is significant. Lastly, DBRS views BlueShore’s liquidity position as appropriate and capital buffers as sound and sufficient to absorb potential losses in a normal business environment.

RATING DRIVERS
BlueShore Financial is well placed in its rating category. Over the intermediate term, ratings could be positively affected by a significant and sustained improvement in the proportion of fee-based income. In addition, maintaining positive operating leverage, resulting in a substantial improvement in the efficiency ratio, could also benefit ratings. Conversely, an inability to sustain membership growth or maintain the existing membership base could exert downward pressure on the ratings. A substantial increase in risk appetite, specifically with respect to unsecured consumer and construction lending or significant losses in the loan portfolio because of unforeseen weakness in the underwriting and/or risk management process could pressure ratings.

RATING RATIONALE
Underpinning BlueShore Financial’s franchise strength is its position as a niche player within B.C.’s credit union industry. Specifically, the Credit Union provides mid-market private banking financial services to its relatively affluent members, who require a credit union that provides traditional banking services along with personalized private banking, wealth management and financial planning services. This strategy provides BlueShore Financial with a competitive position that is defensible. BlueShore Financial has also increased its market share of loans and deposits in B.C. to over 5% of the credit union system’s loans and deposits in 2018 for each category. Furthermore, BlueShore Financial generates top-tier revenue per member compared with its Canadian credit union peers, which DBRS views positively.

BlueShore Financial has generated solid recurring earnings that are reflective of its strong franchise and its comprehensive suite of products (retail banking, commercial banking, cash management, insurance, leasing and wealth management). Despite this comprehensive product offering, including a growing contribution from asset management, about 80% of operating revenue is derived through rate-sensitive spread income with the remainder coming from more stable fee- and commission-based income. Since BlueShore Financial relies mainly on term deposits, the ongoing compression in yield between rates on term deposits and loans could pressure the NIM. Further improvements in the ratio of fee-based revenue-to-total operating revenue and operating efficiency would be viewed positively by DBRS.

BlueShore Financial is primarily exposed to credit risk through its residential and commercial lending activities. In DBRS’s assessment, BlueShore Financial exhibits strong underwriting practices, maintains conservative risk management policies and has an experienced risk management team. As a credit union, its operations are confined to B.C. and, more specifically, to the GVA, which represents significant concentration risk. As such, BlueShore Financial’s asset quality is susceptible to a sustained weakness in the local economy resulting from elevated levels of unemployment potentially leading to a sharp correction in real estate prices. Asset quality metrics have improved significantly over time, and net write-offs have averaged only 4 basis points for BlueShore Financial, which is well below levels exhibited by its B.C. credit union peers.

BlueShore Financial is funded primarily from deposits generated through its branches or sourced from institutional relationships, including municipalities, universities, schools and hospitals. DBRS assesses BlueShore Financial’s deposit base as relatively stable and subject to low flight risk and its funding structure as well aligned with its lending activities. The Credit Union’s liquidity position is sufficient. DBRS notes that, over the last five years, demand deposits have declined to 16% of funding from 23% of funding while term deposits have increased to 78% of funding from 73% of funding as at F2018. Although demand deposits for BlueShore Financial account for a smaller proportion of funding in comparison with its credit union peers, the termed nature of the deposit base provides BlueShore Financial with greater certainty regarding the flow of funds, allowing it to better manage interest rate risk and liquidity. However, this leads to a pricier and a more volatile cost of funds.

In DBRS’s view, BlueShore Financial has a sound capital position, which, together with its relatively lower risk balance sheet, provides for a sufficient capital buffer to absorb losses under a normal operating environment. DBRS notes that capital ratios for BlueShore Financial are at the lower end compared with its rated credit union peers in Canada. In 2018, BlueShore Financial’s total capital ratio improved marginally to 12.6% and was ahead of both the regulatory minimum of 10% and its internal capital target. Furthermore, based on its Internal Capital Adequacy Assessment Process, conducted on an annual basis, BlueShore Financial had sufficient capital to absorb heightened levels of provisioning expense.

Notes:
The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018), which can be found on our website under Methodologies & Criteria.

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 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.

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