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

DBRS Limited (DBRS) has today assigned Caisse centrale Desjardins (Caisse centrale or CcD) a Short-Term Instruments rating of R-1 (high) with a Negative trend. Simultaneously, DBRS has confirmed CcD’s Commercial Paper rating at R-1 (high) with a Negative trend and then discontinued this rating. The switch in the short-term ratings name has been made to ensure consistency with rating descriptions used for similar institutions. This Short-Term Instruments rating applies to the same instruments issued using the Commercial Paper description. DBRS also confirmed all other ratings of Desjardins Group (Desjardins or the Group) and its related entities, CcD and Capital Desjardins inc. (Capital Desjardins), as listed in the table below. The trends remain Negative.

On May 20, 2015, DBRS changed the trend on seven banking groups in Canada to negative, including Desjardins. That rating action reflected DBRS’s view that anticipated changes in Canadian legislation and regulation mean that the potential for timely systemic support for these systemically important institutions is declining and is likely to eventually result in a change in DBRS’s support assessment from SA2 to SA3 for these institutions. DBRS currently has an SA2 support assessment for Desjardins Group based on DBRS’s view of likely support from the Government of Canada for this institution, which is systemically important for Québec. As DBRS’s view of Canadian government support for the large banks shifts, so too will the potential for support for other deposit-taking institutions. While DBRS continues to view support for Desjardins Group as likely from the Province of Québec, a decline in support from Canada for the large banks and Desjardins may result in a change in the rating. Consequently, Desjardins Group rating trends were also changed to Negative in May 2015.

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 improved, particularly with the January 2015 acquisition of the Canadian operations of State Farm, which made Desjardins the third-largest property and casualty insurer in Canada, key challenges persist due to the Group’s concentration in Québec and its high cost structure. The Group maintains strong asset quality metrics, reflecting the retail concentration 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’ 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 currently reflects the expectation of systemic and timely external support by the federal government in line with that expected for the large banks, although that may change in the future, which is reflected in the Negative trends.

Desjardins has material exposure to the Canadian residential mortgage market. Any slowdown in this market may slow earnings generation, while a downturn in the residential mortgage market could hurt asset quality indicators and ultimately have an impact on provisioning levels.

There are various factors that could reasonably have a positive or negative influence on the credit strength of Desjardins and its related entities. Among these are material improvements in the fundamental business, including cost levels and improved diversification by business line, which have the potential to be positive; while removal of the SA2 support assessment, evidence of weakness in risk management, material deterioration in the economy or housing market, which would structurally weaken the Group, might have negative implications.

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

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 2014), Global Methodology for Rating Banks and Banking Organisations (June 2015) and DBRS Criteria: Support Assessment for Banks and Banking Organisations (March 2015), which can be found on DBRS’s website at www.dbrs.com.

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