DBRS Confirms Ratings of Credit Union Central Alberta Limited at “A,” Stable Trend

DBRS Limited (DBRS) confirmed Credit Union Central Alberta Limited’s (Alberta Central or the Credit Union) Long-Term Issuer Rating and Long-Term Senior Debt at “A.” DBRS also confirmed the Credit Union’s Short-Term Issuer Rating and Short-Term Instruments at R-1 (low). All trends remain Stable. Under DBRS’s support assessment (SA) criteria, Alberta Central is assessed as SA2, which reflects DBRS’s expectation of timely systemic external support from the provincial government. This results in a one-notch uplift from the Intrinsic Assessment of Alberta’s credit union system (the System) of A (low), resulting in a final rating of “A.”

KEY RATING CONSIDERATIONS
Alberta Central’s ratings reflect the System’s significant share of loans and deposits in Alberta and its important economic role in the province, particularly in rural communities and small towns. DBRS notes that the competitive landscape remains challenging for credit unions in Alberta, particularly with respect to growing their membership base. Positively, the System’s asset quality remains solid, exhibiting low and manageable levels of write-offs, and it is making some progress on improving its efficiency. The System also benefits from strong levels of liquidity and capitalization.

RATING DRIVERS
DBRS views Alberta Central’s ratings as well placed. The ratings are driven by DBRS’s assessment of the System’s operating and financial performances. Over the longer term, a significant expansion in the System’s membership base, along with material improvements in the System’s market shares, could have positive rating implications. Conversely, a material weakness within the System’s loan portfolio suggesting structural issues related to loan underwriting practices, including a sustained decline in its market shares and revenues per member, or a reduction in DBRS’s assessment of the likelihood of provincial support could result in negative rating pressure.

RATING RATIONALE
Credit unions in Alberta are important providers of retail and commercial banking services to the province’s population, of which 14.5% were members of a local credit union in 2018. The operating environment, however, remains highly competitive, particularly given the presence of the Alberta-government-owned ATB Financial (ATB), which competes directly with credit unions. Consequently, the System’s shares of loans and deposits have been relatively stagnant over the last five years, averaging about 7.0% for residential mortgage loans, 7.5% for commercial loans and 9.5% for deposits. The System is dominated by two large credit unions: Servus Credit Union, with assets of $16.1 billion, and Connect First Credit Union, with assets of $5.7 billion. These credit unions collectively represent over 80% of System assets. The number of credit unions in the System declined by four to 18 in 2018 mainly as a result of consolidations, which have been largely driven by rising regulatory and technology costs. Positively, this should generate economies of scale and contribute towards improving the competitive position of Alberta’s credit unions.

The System continues to generate relatively stable recurring earnings even with a provincial economy that is weakened by low oil prices. System net income increased by 7.2% year over year in F2018 to $179 million. System operating efficiency has improved over the last four years to 67.4% in F2018 from 72.7% in F2014, with the System delivering generally stronger efficiency ratios relative to peers. Loan loss provisioning increased to $39 million in F2018 from $22 million in the previous year, which largely reflected some credit unions bringing their credit card portfolios in house. However, provisions as a proportion of income before provisions and taxes remains manageable at 15.4%.

Asset quality of the System remains solid, although under some pressure from the negative impact of low Canadian oil prices on the provincial economy. The combination of a small number of commercial loan delinquencies and some credit unions bringing their credit card portfolios in house mostly contributed to the increase in the ratio of non-performing loans to gross loans. This ratio increased to 81 basis points (bps) in 2018 from 54 bps in the previous year. Positively, despite 90-day delinquencies increasing across all loan categories over the last four years, write-offs have not exceeded 20 bps, which reflects the quality of the collateral and generally solid underwriting practices of the System.

The System derives most of its funding from relatively stable retail, commercial and institutional (including municipalities, universities, schools, and hospitals) deposits. These deposits are branch generated and relationship based, which represents relatively low flight risk. DBRS notes that deposit growth remains challenging for the System given strong competition from ATB with its focus on the millennial market, a relatively stagnant share of members to the provincial population and an aging trend across the membership base. In DBRS’s opinion, although the ratio of liquid assets to total assets declined marginally to 11.2% in F2018 from 11.5% in F2017, the System holds sufficient liquidity, given the stability of its deposit base and minimal exposure to market risk.

System capitalization improved in F2018 and remains top tier compared with DBRS-rated Canadian credit union systems. However, DBRS notes that sources of new capital are limited to capital generated internally and the issuance of subscription shares, which are a constraint on the ratings. Internal equity growth was unchanged at 4.5% in F2018, compared with F2017, and compares well with the five-year average of 4.2%. In DBRS’s view, the System maintains a capital buffer that is sufficient to absorb losses under normal operating conditions.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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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