The ratings outlook for the provincial credit union centrals should remain stable despite shifting, and increasingly complex, liquidity profiles, says Dominion Bond Rating Service Ltd.

The rating agency says that the funding and liquidity profiles of the centrals may shift somewhat as a result of an anticipated greater use of wholesale markets. Also, DBRS believes the growth of the large credit unions will result in increasing complexity in the centrals’ liquidity and funding programs.

In a report issued Monday, DBRS states it believes funding growth with limited ability to access capital markets will be one of the overall system’s larger financial challenges in coming years, although one that will be adequately addressed. “While Canada’s credit unions do not face growth pressures from equity investors, because they are co-operatives, they must still continue to grow to maintain adequate market share and to continue to provide competitive products, services, and access to their members,” says Robert Long, a DBRS analyst and the study’s author.

DBRS expects wholesale funding to be a growing necessity as the trend of loan growth surpassing deposit growth will likely continue for the industry as a whole, albeit at a slower pace than in the recent past.

As a group, the credit union system has generated a reasonable level of growth, particularly in recent years as mortgage originations expanded, it notes. Historically, the credit unions have funded this growth with retail deposits.

“Canada’s credit unions are far from a homogenous group, with differing levels of market penetration, size, sophistication, asset-growth expectations, and deposit-gathering ability,” says Long. “Provincial credit union centrals have historically done a good job in re-allocating excess funding from the credit unions that have it to the ones that need it, although to the extent asset growth exceeds deposit growth for the system as a whole, wholesale funding is required. Wholesale funding at the individual credit union level is not practical except for a select few large credit unions; most wholesale funding activities are carried out at the provincial central level.”

While liquidity is under pressure, DBRS expects all the centrals it rates to continue to maintain adequate liquidity. “The rapid growth in some provinces in recent years has resulted in some reduction in liquidity measures, though the liquidity profiles of the provincial centrals continue to support comparatively high short-term ratings,” it says.

Finally, DBRS notes that asset growth has also resulted in moderately lessened capital ratios and other leverage measures, although all rated entities remain adequate. Despite some anticipated modest stress on the systems as a result of growth, DBRS expects leverage ratios to remain acceptable.

Capital funding at the credit union level is adequate, it says. Although a portion of equity growth has been accomplished through the issuance of investment shares, which DBRS views as lesser-quality capital. “Equity growth at the provincial central level is more of an allocation decision than the result of internal capital generation as most potential equity growth is usually returned to the system through patronage allocations or other distributions,” says Long.