DBRS Assigns AA Long-Term Issuer Rating to Fédération des caisses Desjardins du Québec, Negative Trend

DBRS Limited (DBRS) has today assigned a Long-Term Issuer Rating of AA, a Senior Debt, Deposits and MTNs rating of AA, a Subordinated Debt rating of AA (low) and a Short-Term Instruments rating of R-1 (high) to Fédération des caisses Desjardins du Québec (FCDQ). All trends are Negative.

The rating action is based on FCDQ’s important role supporting Desjardins Group’s (the Group; rated AA with a Negative trend) caisses. A capital maintenance agreement between FCDQ and the Group is already in place as per FCDQ’s capital stock by-laws. Moreover, as of the effective date of the proposed new structure referred to below, FCDQ will have an agreement in place with the Group in which the Group will maintain FCDQ’s capitalization levels in excess of regulatory minimums. As such, FCDQ has a support assessment of SA1, which implies strong and predictable support, if needed. As a supported rating with an SA1 designation, the ratings for FCDQ would likely move in tandem with the Group’s rating.

The Negative trend mirrors the Negative trend for the Group. Specifically, the Negative trends reflect 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 the Group. 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 domestic systemically important banks as designated by the Office of the Superintendent of Financial Institutions, DBRS expects the likelihood of systemic support for Desjardins to also eventually decline to reflect the evolution of banking legislation.

Under a proposed new structure, FCDQ will become liable for all outstanding obligations of La Caisse centrale Desjardins du Québec (CcD) in addition to its own rights and obligations. Going forward, FCDQ will take over functions performed by CcD, will replace CcD as the issuer of debt, and will take over CcD’s role in dealing with clearing houses and payments associations. The proposed structure is expected to be in place effective January 1, 2017, and is still subject to receiving necessary regulatory approvals, including approval by the Autorité des marchés financiers (AMF). The proposed structure is not expected to have any impact on FCDQ’s credit ratings.

RATING DRIVERS
As a supported rating with an SA1 designation, the ratings for FCDQ would likely move in tandem with the Group’s rating. Any weakness in the cohesiveness of the Group structure may have negative rating implications, and any decline in either the willingness or the ability of the Group to support FCDQ could also put downward 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 on the issuer page at www.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) and Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on the DBRS website under Methodologies.

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

Lead Analyst: Sohail Ahmer
Rating Committee Chair: William Schwartz