-- We believe that the Canadian banking sector is
encountering incremental pressure from headwinds facing the
Canadian economy, which is heightening economic risk in the
-- We also believe that industry risk for the Canadian
banking sector is increasing. We expect that intensifying
competition for loans and deposits will lead to pressure on
profitability growth, especially in banks' retail businesses.
-- We are lowering our long- and short-term issuer credit
ratings on Central 1 Credit Union to 'A/A-1' from 'A+/A-1',
following our revision of the stand-alone credit profile on the
bank to 'a' from 'a+'. The outlook is stable.
-- The stable outlook reflects our expectation that Central
1 Credit Union's credit fundamentals will remain consistent with
current ratings over the next 24 months.
On Dec. 13, 2012, Standard & Poor's Ratings Services lowered
its long- and short-term issuer credit ratings on Central 1
Credit Union to 'A/A-1' from 'A+/A-1'. The outlook is stable. In
addition, Standard & Poor's lowered its issue ratings on Central
1 Credit Union to 'A' and nondeferrable subordinated debt to
'A-' from 'A'.
The rating action follows our review of banking sector
industry and economic risks in Canada, taking into account the
headwinds facing the Canadian economy, Canadian consumers' high
debt levels, expectations of decelerating loan demand and
continued pressure on margins, particularly in the Canadian
retail sector, and areas of continuing weakness in the global
economy and financial system.
We believe banks and credit unions operating in Canada are
subject to an expanding set of potential stresses arising from
competitive pressure on growth and margins, while asset quality
is potentially vulnerable--in light of high consumer
indebtedness--to developments that may trigger general economic
deterioration in Canada. Consequently, we lowered our anchor
SACP, which is the starting point for our ratings on financial
institutions operating primarily in Canada, including Central 1,
to 'a-' from 'a'. This is reflected in our revision of Banking
Industry Country Risk Assessment (BICRA) for Canada to group '2'
from '1' and revised our industry risk score, a component of the
BICRA, to '2' from '1' (see "Various Rating Actions Taken On
Canadian Financial Institutions Due To Rising Industry and
Economic Risks," published Dec. 13, 2012, on RatingsDirect on
the Global Credit Portal).
We believe that the banks and credit unions are under
incremental pressure from the headwinds facing the Canadian
economy. The acceleration of household debt to record levels has
increased Canadian households' vulnerability to sudden shocks in
incomes, employment, or a spike in interest rates. Exposure to
the consumer sector accounts for nearly three-fifths of total
bank loans, and losses on banks' uninsured loan
portfolios--although recent performance levels have generally
been strong--may be driven higher in the event of a substantial
shock to household creditworthiness, though we expect effective
regulatory supervision to remain a positive influence on
Canadian bank credit quality.
Although we expect ongoing intensification of competitive
dynamics in the Canadian banking sector, we note that overall
Canada still remains positioned favorably vis-a-vis most of its
global peers. However, a slowing economy risks exacerbating the
already-intense competition between banks for loan and deposit
share and puts further pressure on the margin and profitability
of the Canadian financial institutions' retail and commercial
lending businesses, the cornerstone of Canadian banking and
largest contributor to revenues.
We also believe that Canadian financial institutions' risk
tolerances may increase to compensate for lower profitability by
reaching for yield through investments, more aggressive lending
in higher yielding loans such as personal loans and credit
cards, or potentially a pick-up in mergers and acquisitions
Furthermore, we expect that continuing industry conditions
will test banks' operational capabilities. Relative performance
in areas such as service standards, cost control, operational
effectiveness, underwriting discipline, and ability to integrate
acquisitions will likely contribute to changes in market
position and financial performance, and will have an impact on
the relative credit standing among industry participants.
Standard & Poor's bases its ratings on Central 1 on its
"moderate" business position with more limited domestic
geographical reach than the large Canadian banks; "very strong"
(revised from strong) capital and earnings based on a very
strong projected Standard & Poor's risk-adjusted capital (RAC)
ratio in the range of 26.9%-27.5% by year-end 2014 and strong
regulatory capital ratios at the individual credit unions;
"moderate" (revised from adequate) risk position reflecting a
high proportion of mortgage loans on the books with low loan
losses and heightened interest rate risk in a rising rate
environment; and "above average" funding and "strong" liquidity
reflecting Central 1's robust funding and liquidity position as
the liquidity provider to the British Columbia and Ontario
credit union systems. The SACP on Central 1 is 'a'.
The stable outlook reflects our expectation that Central 1
will continue to maintain its very strong capitalization and
funding and liquidity profiles. We also expect credit quality to
remain stable at both Central 1 and the B.C. and Ontario credit
The outlook and/or ratings could come under pressure if
asset quality were to deteriorate significantly, resulting in a
significant rise in loan losses, or if interest rate risk were
to result in material profit declines.
Conversely, a positive outlook or an upgrade would entail a
significantly stronger market position in mortgages and
commercial loans, as well as more diverse earnings and less