DBRS Comments on Desjardins’ Proposed Acquisition of Western Financial Group

DBRS has today reviewed the announcement that Desjardins Group (Desjardins or the Group) has offered to acquire Western Financial Group (Western) for $443 million. The acquisition, should it be completed, is a modest step toward reducing Desjardins’ concentration in Québec, although it does entail some risk. However, given that the price represents just 3.4% of the Group’s equity, there are no rating implications for Caisse centrale Desjardins, Capital Desjardins inc. or Desjardins Group at this time.

Desjardins intends to acquire Western through Desjardins Financial Corporation Inc., which houses its insurance subsidiaries. The transaction, which is subject to regulatory and shareholder approvals, is expected to close in the second quarter of 2011.

Based in Alberta, Western provides insurance, banking and other financial services. Western’s largest business is in property and casualty insurance (63% of operating income in the first three quarters if 2010 as defined by Western, but excluding corporate expenses and other operations). It also operates Bank West, a virtual bank focused on commercial, agricultural, recreational vehicles and other consumer lending (6%); Western Life, which focuses on individual life, group health and credit insurance (14%); and Western Financial Insurance, which provides pet insurance (17%).

The acquisition primarily augments Desjardins’ property and casualty insurance business, which represented 7% of the Group’s surplus earnings before member dividends in the first three quarters of 2010. It also augments the Group’s life insurance business (19% of surplus earnings).

Approximately 55% of Bank West’s $379 million loan portfolio (gross) is in consumer loans, with the rest spread between residential and commercial mortgages, commercial loans, credit cards and leases. While DBRS has some concerns with respect to the quality of the Bank West portfolio, its size relative to Desjardins’ capital base means that risk is limited.

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

The applicable methodology is Rating Canadian Provincial Credit Union Centrals, Credit Unions and Desjardins Group (April 2010), which can be found on our website under Methodologies