Morningstar DBRS Confirms Credit Ratings on Desjardins Group at AA; Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the credit ratings on Desjardins Group (Desjardins or the Group) and the Fédération des caisses Desjardins du Québec (FCDQ), including the Long-Term Issuer Ratings at AA and Short-Term Issuer Ratings at R-1 (high). The trend on all credit ratings is Stable. Desjardins' Intrinsic Assessment (IA) was maintained at AA (low) while its Support Assessment is SA2, reflecting the expectation that the Government of Canada (rated AAA with a Stable trend) would assist the Province of Québec (Québec; rated AA (low) with a Stable trend) in providing timely support to Desjardins, which is designated as a domestic systemically important financial institution in Québec. The SA2 designation results in a one-notch uplift to Desjardins' IA, resulting in a Long-Term Issuer Rating of AA.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings and Stable trends reflect Desjardins' strong franchise in Québec where it has dominant market shares across a number of businesses. Additionally, the Group's diversified business model includes a sizable contribution from its insurance business, including a Property and Casualty (P&C) Insurance business that holds top-tier market shares in Québec and ranks among the top five in Canada. In a challenging operating environment, Desjardins continues to generate good levels of recurring earnings from its well-managed risk exposures and its balance sheet fundamentals remain resilient, including stable funding sources, high liquidity levels, and a very solid capital cushion.

The credit ratings also consider Desjardins' material exposure in its loan book to small and medium-size enterprises (SMEs) and the agriculture sector along with a significant concentration in Québec and a relatively high-cost structure in comparison with the large Canadian banks. In addition, Morningstar DBRS is concerned about heightened economic and geopolitical uncertainty, particularly as it relates to the U.S. trade policy and tariffs, which has increased the likelihood of a recession in Canada. A sustained decline in economic activity and/or a notable and prolonged uptick in unemployment could lead to an adverse impact on the Group's profitability and asset quality.

Desjardins' IA of AA (low) has been assigned at the midpoint of the IA Range, as Morningstar DBRS views the Group's credit fundamentals and performance as commensurate with those of similarly rated peers.

CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS would upgrade the credit ratings if the Group continued building the scale and diversity of its franchise, resulting in a sustainable improvement in earnings, while maintaining a similar risk profile.

Conversely, Morningstar DBRS would downgrade the credit ratings if there were a significant and sustained deterioration in profitability or asset quality. Moreover, a credit ratings downgrade would also occur if Morningstar DBRS believed the likelihood of timely systemic support were reduced.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Strong
Desjardins is the seventh-largest banking institution in Canada by total assets with a large branch network in Québec (Canada's second-largest province by population and GDP), where it holds leading market shares for both residential mortgage loans and deposits (39% and 36%, respectively). Furthermore, the Group maintains sizable insurance businesses with leading franchises in Québec, where it is uniquely positioned to sell insurance products through its branches. This has been an important competitive differentiator for Desjardins compared with the large Canadian banks, which are prohibited from selling insurance through their bank branches. On June 2, 2025, Desjardins announced the appointment of Denis Dubois as its new president and chief executive officer (CEO), effective September 2, 2025. Morningstar DBRS expects that Desjardins' current strategy will not materially change in the near to medium term with the CEO transition and that the Group will continue to execute its strategic priorities. Denis Dubois has been with Desjardins since 2003 and served as the Executive Vice President of wealth management and life and health insurance since 2019, before which he was the Executive Vice President of P&C insurance.

Earnings Combined Building Block Assessment: Good/Moderate
Desjardins generates good levels of recurring earnings, supported by diverse revenue sources, including retail and commercial banking, insurance (life and general), wealth management, institutional asset management and trust services, and capital markets/investment banking. In Q1 2025, Desjardins reported surplus earnings before member dividends of $738 million, compared with $855 million for the same period in 2024, as a result of lower noninterest income, higher operating expenses, and higher provision for credit losses (PCL), partially offset by higher net interest income. Net interest margin (as calculated by Morningstar DBRS) expanded by 5 basis points (bps) year over year (YOY) to 1.75% in Q1 2025. Noninterest income reduced by 8.2% YOY in Q1 2025 to $1.6 billion, largely because of lower net insurance service income from the P&C Insurance segment. Constraining the credit ratings is Desjardins' operating efficiency ratio (i.e., productivity index), which remains high at about 66% as at Q1 2025. Morningstar DBRS notes that the Group is taking measures to improve its productivity index in the Personal and Business Services Segment, including reducing the number of full-time employees and downsizing the distribution network.

Risk Combined Building Block Assessment: Strong
About 70% of the loan book comprises retail loans, most of which are residential mortgages that have historically incurred low losses. However, the Group's commercial loans are skewed toward SMEs, which pose a higher risk in economic downturns. Gross loans and acceptances grew 10.2% YOY to $297.7 billion as at Q1 2025 on the back of expansions of 10.5% and 12.3% in residential mortgages and commercial loans, respectively. PCL increased by 9 bps YOY to 29 bps of average net loans in Q1 2025, largely reflecting a negative migration in credit quality and unfavourable economic outlook, related in particular to the impact of U.S. trade policy and tariffs on commercial loan portfolios. Meanwhile, gross impaired loans also increased marginally by 3 bps YOY to 0.83% of gross loans as at Q1 2025, driven largely by residential mortgages and commercial loans, including manufacturing and commercial real estate. Nevertheless, loan losses remained minimal with a net write-off ratio of 14 bps as at Q1 2025. As with other banking organizations, Desjardins is likely to experience higher-than-expected asset quality deterioration in F2025 as a result of the uncertain macroeconomic outlook for Canada.

Funding and Liquidity Combined Building Block Assessment: Strong/Good
Desjardins maintains a diverse funding mix that is largely composed of stable retail deposits, which are sourced from its network of Caisses and service centres across Québec. Personal deposits grew about 7.0% YOY to $164.7 million in Q1 2025, driven by both demand deposits and term deposits. Personal deposits represented about 53% of total deposits as at Q1 2025. Desjardins' personal deposits are supplemented by its active participation in both Canadian and international wholesale funding markets, where it issues covered bonds, securitization notes, medium-term notes, and short-term paper. However, the Group has a heavier reliance on wholesale funding (as indicated by net loans to total deposits ratio of 123.8% as at Q1 2025) than most large Canadian bank peers. Meanwhile, the Group maintains elevated liquidity levels with a liquidity coverage ratio of 172% for Q1 2025 and a net stable funding ratio of 131%, both well above the regulatory minimums.

Capitalization Combined Building Block Assessment: Strong
Morningstar DBRS views Desjardins' capital position as strong and sufficient to absorb losses in a stressed environment. Desjardins' capital levels are significantly higher than those of Canada's large banks while its risk profile is not materially different. As of Q1 2025, Desjardins reported Tier 1 and TLAC ratios at 22.4% and 33.1%, respectively, well above the regulatory requirements of 9.5% and 21.5%, respectively. As a cooperative institution, however, Desjardins is limited in its ability to raise fresh capital although it can source emergency capital through its Caisses network.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/458610

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
The following Environmental factor had a relevant effect on the credit analysis: Morningstar DBRS views the Climate and Weather Risks ESG subfactor as credit negative for the credit ratings, but it does not affect the assigned credit ratings or trends assigned to Desjardins. As part of its P&C product offering, Desjardins is exposed to weather-related losses from natural catastrophic events, such as wind, wildfire, hail, flooding, and other extreme weather events. These events can lead to earnings volatility, which Morningstar DBRS considered when assessing the Group's earnings. This factor appropriately reflects the Group's sizable P&C Insurance business and is incorporated into the Group's earnings grid grades.

Social (S) Factors
The following Social factor had a relevant effect on the credit analysis: Morningstar DBRS views the Social Impact of Products and Services ESG subfactor as credit positive for the credit ratings, but it does not affect the assigned credit ratings or trends. As a cooperative, Desjardins operates a membership-based community banking model where the social aspect of its activities strengthens its franchise. As a result, this factor is incorporated into the Group's Franchise Strength grid grades.

There were no Governance factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) at https://dbrs.morningstar.com/research/454196

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (May 23, 2025) https://dbrs.morningstar.com/research/454637. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

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 dbrs.morningstar.com

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website https://dbrs.morningstar.com/understanding-ratings

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are monitored.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Shokhrukh Temurov, Vice President
Rating Committee Chair: William Schwartz, Senior Vice President, Senior Sector Lead
Initial Rating Date: June 5, 1997

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

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