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Canadian Credit Unions and Centrals: Despite Heightened Volatility, Funding is Stable and Unrealized Losses Are Limited

Recent heightened volatility in the banking sector has led to investor skepticism about interest rate and liquidity risk management at smaller financial institutions and their overall financial resiliency towards the current economic challenges. DBRS Morningstar has released a commentary discussing the funding and resilience of Canadian credit unions (CUs), Desjardins Group (Desjardins), and credit union centrals (Centrals).

Key highlights include:

-- We view the Canadian CUs, Desjardins, and Centrals as resilient to recent financial sector volatility.

-- Compared with commercial banks, deposit funding at the rated Canadian CUs and Desjardins is generally more stable and sticky, and many CUs also benefit from an unlimited deposit guarantee provided by the provinces.

-- Higher interest rates have resulted in unrealized losses in the bond portfolios of the Centrals and CUs, including Desjardins; however, the impact on their capital levels is minimal, illustrating the capacity of these institutions to absorb such losses in the unlikely event that they are realized.

“Credit unions, including Desjardins have stable funding, sufficient liquidity, good risk/liquidity management, and capital buffers that should make them resilient to the current market turbulence,” said Shokhrukh Temurov, Vice President, North American Financial Institutions at DBRS Morningstar. “Although Centrals are highly exposed to interest and liquidity risk, their investment portfolios comprise primarily very low risk, highly liquid assets with a limited duration gap in relation to their liabilities.”