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) and Capital Desjardins Inc. (Capital Desjardins). All trends are Stable. The ratings are supported by the Group’s leading market positions in the province of Québec and diversified business, with an emphasis on low-risk retail business lines. Although diversification outside of Québec has modestly improved with the expansion of wealth management and other efforts in recent years, key challenges persist due to the Group’s concentration in the province and its high cost base, partly attributable to Desjardins’ unique corporate structure. The Group maintains strong asset quality metrics, reflecting the retail lean of the loan portfolio and strength of the Canadian and Québec economies.

Desjardins’ funding profile remains a positive factor in its rating. Core retail deposits, considered the most stable source of funding, represent a large portion 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, although the funding activities of the two entities are integral to the Group’s operations.

Desjardins has been active in its efforts to diversify by building relationships with other cooperative institutions for mutual benefit, generally involving ways for it to distribute some of its products through the branches of partner institutions. Business line and geographic diversification was most recently bolstered by Desjardins’ planned acquisition of the Canadian operation of State Farm, which would make Desjardins the second-largest property and casualty insurer in Canada. The deal is expected to close in January 2015.

Margin pressures experienced by Desjardins’ personal and commercial banking segment in recent years continue to constrain earnings in the segment to below-2010 levels as the low interest rate environment persists. Given the relative size of the personal and commercial banking segment, representing slightly over half of 2013 earnings, the contraction of margins has caused a slight decline in some of the Group’s consolidated financial metrics, notably those tied to operating profit and operational efficiency. Despite the recent downward pressure, the absolute level of financial and asset quality metrics remain strong.

With approximately 65% of its loan portfolio concentrated in residential mortgages, Desjardins has a notable exposure to the Canadian residential mortgage market, particularly within the province of Québec. Any slowdown in this market may slow earnings generation, while a downturn in the residential mortgage market would likely hurt asset quality indicators and ultimately have an impact on provisioning levels.

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

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Canadian Credit Union Centrals and Desjardins Group (December 2013), Global Methodology for Rating Banks and Banking Organizations (June 2012) and Criteria: Support Assessment for Banks and Banking Organisations (January 2014), which can be found on DBRS’s website at www.dbrs.com under Methodologies.

The sources of information used for this rating include company documents. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.