KBRA Affirms Ratings for Global Credit Union and Revises Outlook to Negative
15 Nov 2023 | New York
KBRA affirms the deposit and senior unsecured debt ratings of BBB, the subordinated debt rating of BBB-, and the short-term deposit and debt ratings of K3 for Anchorage, Alaska-based Global Credit Union (“Global” or “the credit union”). The Outlook for all long-term ratings is revised to Negative from Stable.
Key Credit Considerations
The change to Negative Outlook is due to the slippage within earnings, reflected by zero profitability (0.00% ROAA) for 9M23, driven by higher provision expense to offset rising credit costs and lower levels of noninterest income, along with NIM compression. The credit union has had a diversified revenue stream complemented by solid fee revenue with noninterest income to total revenue historically representing 40%; however, the impact of the Durbin Amendment, combined with the decline in mortgage originations, has caused noninterest income to decline to 25% of total revenue, weighing on overall earnings. Furthermore, robust loan growth (+$3.4 billion from 2021-2022) in a lower rate environment and rising deposit costs given a higher component of share certificates, have resulted in NIM compression of 21 bps from the peak (3.28% for 4Q22) to 3.07% for 3Q23. Should a more challenging credit environment arise, the company’s weakened earnings profile provides limited ability to absorb rising credit costs. NCOs and NPAs typically run higher than similarly rated banks due to the inherent nature of the credit union model with Global’s 5-year average NCO (0.31%) and NPAs (0.74%), which are adversely impacted by the auto and unsecured loans in the portfolio. In recent periods, asset quality has slightly worsened, though remains within historical levels, and we note that the loan portfolio is highly granular with an average loan size of just $25,615, reducing the possibility for idiosyncratic loan losses. Also, the company adopted CECL in 1Q23, increasing the LLR to an adequate level of 1.10% at 3Q23. The credit union has boosted its loan-to-deposit ratio to 101%, up from 86% in 4Q19. Despite the increased balance sheet leverage, Global still maintains a net worth ratio (NWR) of 10.2% due to the inclusion of $110 million in subordinated debt contributing to the 320 bp buffer over the minimum for well-capitalized. Additionally, Global’s strong consumer banking profile is a key driver in its funding base which is ~80% core funded by member shares. The credit union maintains a healthy balance of NIB deposits at 25% of total deposits with ample sources of liquidity.
A return to Stable Outlook could occur from a stabilized credit environment, combined with noninterest income tracking closer to historical levels and NIM expansion that results in improved profitability to more normalized levels. Given the Negative Outlook, a rating downgrade is possible, which could result from material deterioration in credit that further weakens the profitability of the company, negatively impacting the credit union’s ability to maintain solid capital levels.
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