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

DBRS Limited (DBRS) has today confirmed all ratings of Caisse centrale Desjardins, Capital Desjardins Inc. and Desjardins Group (Desjardins or the Group), including the Group’s Long-Term Issuer Rating at AA. The trend on all ratings remains Negative. Desjardins’ Long-Term Issuer Rating of AA is composed of an Intrinsic Assessment (IA) of AA (low) and a support assessment of SA2, resulting in a final rating that has a one-notch uplift to AA. Confirmation of the ratings follows a detailed review of the Group’s operating results, financial fundamentals and future prospects.

The maintenance of the Negative trends reflects DBRS’s view that anticipated changes in Canadian legislation and regulation mean that the potential for timely support for systemically important financial institutions is declining and is likely to eventually result in a change in DBRS’s support assessment to SA3 from SA2 for Desjardins. The legislation enacting the bank recapitalization, or bail-in, regime is moving forward, but DBRS does not yet have sufficient clarity on the details of the implementation to remove the benefit of systemic support from the affected ratings. While this legislation is only applicable to Office of the Superintendent of Financial Institutions-designated domestic systemically important banks, DBRS expects the likelihood of systemic support for Desjardins to also eventually decline to reflect the evolution of banking legislation.

DBRS’s support assessment of SA2 is based on the expectation that the Federal Government of Canada, rated AAA with a Stable trend by DBRS, would assist the Province of Québec, rated A (high) with a Stable trend by DBRS, in providing timely support for Desjardins because the Group is systemically important to the province. DBRS notes that the Québec regulator has designated Desjardins as a domestic systemically important financial institution that is subject to additional capital requirements.

Desjardins is a highly cohesive co-operative financial services group that comprises 313 caisses populaires and more than 20 subsidiaries. The Group has a strong central authority with combined treasury management, centralized strategic business planning, budgetary control, product development and responsibility for regulatory compliance as well as arrangements to allow Group resources to be transferable. Desjardins’ IA reflects the strengths and cohesiveness of the Group on a combined basis.

The Group’s strong franchise is reflected in its leading market positions in the province of Québec and its diversified business mix with an emphasis on retail business lines.

Earnings power is driven by stable and diverse earnings as well as substantial capacity to absorb credit costs during more challenging phases of the credit cycle for the Group as a whole, although its earnings profile could be improved by a lower cost structure. Desjardins reported H1 2016 earnings of $767 million, down 23% from a profit of $994 million in H1 2015. The higher earnings in 2015 were in part due to a gain on the acquisition of State Farm’s Canadian operations.

Overall, asset-quality metrics remain strong with gross impaired loans at 35 basis points (bps) of loans and net write-offs at 22 bps of net loans. DBRS notes that Desjardins is geographically concentrated in Québec, which exposes the Group to potential downturns in the Québec economy, which already tends to have higher consumer delinquencies and losses, in part reflecting the higher usage of consumer proposals than in other regions.

Desjardins’ funding profile benefits from its comparatively large retail deposit base and its lower utilization of wholesale funding than the Big 6 banks. This large and stable retail deposit base is augmented by wholesale funding accessed through Caisse centrale and, to a lesser extent, Capital Desjardins, accounting for an estimated 23.3% of funding at the end of Q2 2016.

DBRS considers Desjardins’ capital profile to be strong with good internal capital generation and sizable cushions above regulatory requirements. At the end of Q2 2016, the Group reported a very sound Tier 1A Capital Ratio (comparable with the Basel III Common Equity Tier 1 ratio) of 15.9%.

RATING DRIVERS:
While there is limited upside potential for the rating, material improvement in profitability through improved revenue generation and/or greater efficiency or a reduction in losses in the non-mortgage personal loan portfolio would strengthen the IA. Conversely, a reduction in the assessment of the likelihood of systemic support or a material deterioration in credit performance, especially if it indicated weakness in credit underwriting or risk management, could put pressure on the rating.

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

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 Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015) and Rating Bank Capital Securities Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on our website under Methodologies.

The Short-Term and Long-Term Issuer Ratings of Desjardins Group represent implied debt ratings based on the Group’s strengths as a whole. The Group is not a legal entity and cannot issue debt.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com.

Lead Analyst: Robert Long
Rating Committee Chair: Roger Lister
Initial Rating Date: June 5, 1997