DBRS Confirms Caisse centrale and Desjardins Group at AA and R-1 (high); Capital Desjardins at AA (low)

DBRS has today confirmed the ratings of Desjardins Group (Desjardins or the Group) and its related entities, Caisse centrale Desjardins (Caisse centrale or CcD) and Capital Desjardins inc. (Capital Desjardins), including the Group’s long-term debt at AA and short-term debt at R-1 (high). The trends are Stable. The ratings remain supported by the Group’s leading market positions in the province of Québec and diversified business base, with an emphasis on low-risk retail lines. Key challenges remain the Group’s concentration in Québec and high cost structure.

The Group continues to maintain strong asset quality metrics, which improved modestly in 2010 and were stable to modestly improving in the first quarter of 2011. The Group’s funding profile remains a positive factor in its rating, with a substantial portion of its funding through core retail deposits, which are considered the most stable source of funding.

While the individual attributes of Caisse centrale and Capital Desjardins are important to their respective ratings, the strength of the Group as a whole is the most critical factor since the funding activities of the two rated entities are integral to the Group’s operations.

The Group’s senior long-term debt rating of AA is composed of an intrinsic assessment of AA (low) and a support assessment of SA2, which results in a final rating one notch higher than the intrinsic assessment. DBRS views Desjardins as systemically important to Québec, and although Desjardins is provincially regulated, the SA2 rating reflects the expectation of systemic and timely external support by the federal government in line with that expected for the large Canadian banks.

Earnings before member dividends and unusual items increased to $1.5 billion in 2010 from $1.15 billion in 2009 (under previous Canadian Generally Accepted Accounting Principles (GAAP)); in Q1 2011, Desjardins recorded earnings before member dividends (under International Financial Reporting Standards (IFRS)) of $351 million, down 4% from the $365 million profit (restated into IFRS) in the first quarter of 2010.

In 2010, CcD did its first medium-term note (MTN) issue in the U.S. market, with a US$1 billion fixed-rate MTN, and in March 2011, it had its first covered bond issuance, also for US$1 billion in the U.S. market. The initiation of the U.S. MTN and covered bond programs further expands the funding flexibility of Desjardins.

In April 2011, Desjardins acquired 94.1% of Western Financial Group (Western) and is in the process of acquiring the remaining shares for a total cost of about $443 million. Alberta-based Western is primarily involved in the insurance business, but it also provides some banking and other financial services.

In June 2011, Desjardins exited Toronto-based Desjardins Credit Union (DCU) when DCU amalgamated with Meridian Credit Union. DCU was not material to the Group at less than 1% of assets.

Notes:
Typically, DBRS issuer ratings apply to all general senior unsecured obligations of the issuer in question. The issuer ratings in this case represent DBRS's opinion on the overall strength of the Group from a theoretical perspective because Desjardins Group is not a legal entity and cannot issue debt.

All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Canadian Provincial Credit Union Centrals, Credit Unions and Desjardins Group; Global Methodology for Rating Banks and Banking Organisations; and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on the DBRS website under Methodologies.