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Caisse Centrale (11LC)

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Tuesday 04 March, 2014

Caisse Centrale

CCD MD&A

RNS Number : 2678B
Caisse Cent. Desjardins Du Quebec
28 February 2014
 



Caisse centrale Desjardins

management discussion and analysis

2013

 

 

 

 

 

Caisse centrale Desjardins (CCD), which is part of the Mouvement des caisses Desjardins (Desjardins Group), has the mandate to provide institutional funding for the Desjardins network and to act as financial agent, in particular by supplying interbank exchange services, including clearing house settlements. CCD's activities on the Canadian and international markets complement those of other Desjardins Group entities.

 

This Management's Discussion and Analysis (MD&A), dated February 25, 2014, presents the analysis of the results of and main changes in CCD's balance sheet for the year ended December 31, 2013, in comparison to previous fiscal years. CCD reports financial information in compliance with National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings issued by the Canadian Securities Administrators (CSA). A section on CCD's controls and procedures is presented in the "Additional information" section of this MD&A.

 

The MD&A should be read in conjunction with the Consolidated Financial Statements, including the Notes thereto, as at December 31, 2013.

 

Additional information on CCD, including CCD's Annual Information Form, is available on the SEDAR website at www.sedar.com. More information is available on CCD's website at www.desjardins.com/caissecentrale; however, none of the information presented on these sites is incorporated by reference into this report.

 

 

BASIS OF PRESENTATION OF FINANCIAL INFORMATION

 

The Consolidated Financial Statements have been prepared by CCD's management in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the accounting requirements of the Autorité des marchés financiers (AMF) in Quebec, which do not differ from IFRS. For further information about the accounting policies applied, see the Consolidated Financial Statements. CCD amended certain accounting policies in connection with the new standards that took effect on January 1, 2013. The retrospective application of these amendments resulted in certain changes in the Consolidated Financial Statements. For further information, see Note 3, "Changes in accounting policies, disclosures and reclassifications" to the Consolidated Financial Statements.

 

This MD&A was prepared in accordance with the regulations in force on continuous disclosure obligations issued by the CSA. Unless otherwise indicated, all amounts are presented in Canadian dollars ($) and are primarily from CCD's Consolidated Financial Statements.

 

To assess its performance, CCD uses IFRS measures and various non-IFRS financial measures. Non-IFRS financial measures, other than the regulatory ratios, do not have a standardized definition and are not directly comparable to similar measures used by other companies, and may not be directly comparable to any IFRS measures. Investors, among others, may find these non-IFRS measures useful in analyzing financial performance. They are defined as follows:

 

Productivity index

 

The productivity index is used to measure efficiency and is equal to the ratio of non-interest expense to total income, expressed as a percentage. A lower ratio indicates greater productivity.

 

 

REGULATORY CONTEXT

 

CCD's operations are governed in particular by the Act respecting financial services cooperatives and the Act respecting the Mouvement Desjardins. The AMF is the main government agency that oversees and monitors deposit-taking institutions (other than banks) that do business in Quebec, including CCD.

 

Moreover, CCD complies with the minimum regulatory capital requirements issued by the AMF, which are adapted to reflect the provisions of the Basel III Accord. CCD manages financial reporting in compliance with the AMF's Regulation 52-109 respecting Certification of Disclosure in Issuers' Annual and Interim Filings. CCD's financial and corporate governance are discussed in section 5.1 of this MD&A and in the cooperative governance section of CCD's 2013 Annual Report.

 

It should also be mentioned that Desjardins Bank, National Association, a subsidiary of CCD incorporated under U.S. federal laws, is supervised by the Office of the Comptroller of the Currency of the United States (OCC), and that CCD's operations in the United States, as a bank holding company, are subject to the supervisory and regulatory authority of the Board of Governors of the Federal Reserve System. Caisse centrale Desjardins U.S. Branch, the CCD branch operating in the State of Florida and incorporated under U.S. federal laws, is also supervised by the OCC.

 

 

CHANGES IN THE REGULATORY ENVIRONMENT

 

This section presents items related to changes in the regulatory environment that apply to Desjardins Group as a whole, including CCD.

 

Desjardins Group closely monitors changes in the regulatory environment as well as new developments in fraud, corruption, money laundering and terrorist financing and aims to comply with best practices for countering them.

 

In June 2013, the AMF determined that Desjardins Group met the criteria to be designated a domestic systemically important financial institution (D-SIFI), which would subject Desjardins Group to additional obligations. As a D-SIFI, beginning on January 1, 2016, Desjardins Group will be subject to an additional Tier 1a capital requirement corresponding to 1% of risk-weighted assets. Therefore, from January 1, 2016, Desjardins Group's Tier 1a capital target will be 8%. Other major obligations include that, based on the recommendations issued by the Enhanced Disclosure Task Force of the Financial Stability Board contained in the document "Enhancing the Risk Disclosures of Banks", Desjardins Group is continuing to develop its external disclosures and is currently working on integrating these recommendations into its risk management disclosure framework. Furthermore, Desjardins Group will be obliged to produce its living will, detailing the actions to be taken to restore its financial position in the event of a crisis. Note that the Office of the Superintendent of Financial Institutions (OSFI) has also determined that Canada's six major financial institutions meet the criteria for designation as domestic systemically important financial institutions.

 

Desjardins Group continues to monitor changes in capital and liquidity requirements under global standards developed by the Basel Committee on Banking Supervision (Basel III).

 

Regulations in the United States, which are constantly changing, represent an important part of the regulatory environment of financial institutions, even of foreign institutions, and place Desjardins Group under additional obligations. Following the adoption in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), many rules have come into force to implement the various parts of these regulations. Some of these rules apply to Desjardins Group as a foreign financial institution with U.S. operations, including those designed to implement provisions on swap trading and proprietary trading (the Volcker rule), as well as those concerning the submission of a resolution plan. Desjardins Group must also comply with requirements under the Foreign Account Tax Compliance Act (FATCA), which was designed to combat tax evasion in the United States. FATCA requires that financial institutions identify and qualify account holders who are U.S. taxpayers for disclosure to the competent authorities.

 

 

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

 

CCD's public communications often include oral or written forward-looking statements. Such forward-looking statements are contained in this MD&A, and may be incorporated in other filings with Canadian regulators or in any other communications. Forward-looking statements in this MD&A include, but are not limited to, comments about CCD's objectives regarding financial performance, priorities, operations, the review of economic conditions and markets, as well as the outlook for the Canadian, U.S., European and other international economies. These forward-looking statements include those appearing under section 1.0 "Changes in the economy and the industry", section 2.0 "Review of the financial results", section 3.0 "Balance sheet review" and section 5.0 "Additional information." Such statements are typically identified by words or phrases such as "believe", "expect", "anticipate", "intend", "estimate" and "may", words and expressions of similar import, and future and conditional verbs.

 

By their very nature, such statements involve assumptions, inherent risks and uncertainties, both general and specific. It is therefore possible that, due to many factors, these predictions, forecasts or other forward-looking statements as well as CCD's objectives and priorities may not materialize or may prove to be inaccurate and that actual results differ materially. CCD cautions readers against placing undue reliance on these forward-looking statements since actual results, conditions, actions and future events could differ significantly from the targets, expectations, estimates or intents in the forward-looking statements.

 

A number of factors, many of which are beyond CCD's control, could influence the accuracy of the forward-looking statements in this MD&A. These factors include those discussed in section 4.0 "Risk management," such as credit, market, liquidity, operational, strategic and reputation risk. Additional factors that could affect the accuracy of the forward-looking statements in this MD&A include risks related to the regulatory and legal environment, including legislative or regulatory developments in Quebec, Canada or globally, such as changes in fiscal and monetary policies, reporting guidance and liquidity regulatory guidance, or interpretations thereof, amendments to and new interpretations of capital guidelines, and environmental risk, which represents the risk that CCD incur financial, operational or reputational losses as a result of environmental impacts or problems, whether due to CCD's credit or investment activities or its operations.

 

Factors that could influence the accuracy of the forward-looking statements in this MD&A also include general economic and business conditions in the regions in which CCD operates, including short- and long-term interest rates, inflation, debt security market fluctuations, foreign exchange rates, the volatility of capital markets, including tighter liquidity conditions in certain markets, the strength of the economy, and the volume of business conducted by CCD in a given region, monetary policies, competition, amendments to standards, laws and regulations, to the accuracy and completeness of information concerning clients and counterparties, the accounting policies used by CCD, new products and services to maintain or increase CCD's market share, the ability to recruit and retain key management personnel, including senior management, the business infrastructure, geographic concentration and credit ratings.

 

Other factors that could influence the accuracy of the forward-looking statements in this MD&A include amendments to tax laws, unexpected changes in consumers' spending and savings habits, technological developments, the ability to implement CCD's disaster recovery plan within a reasonable time, the potential impact of international conflicts or natural disasters, and CCD's ability to anticipate and manage the risks associated with these factors properly, despite a disciplined risk environment.

 

 

 

It is important to note that the above list of factors that could influence future results is not exhaustive. Other factors could have an adverse effect on CCD's results. Additional information about these and other factors is found in section 4.0, "Risk management." Although CCD believes that the expectations expressed in these forward-looking statements are reasonable, it cannot guarantee that these expectations will prove to be correct. CCD cautions readers against placing undue reliance on forward-looking statements when making decisions. Readers who rely on CCD's forward-looking statements must carefully consider these risk factors and other uncertainties and potential events.

 

Any forward-looking statements contained in this report represent the views of management only as at the date hereof, and are presented for the purpose of assisting readers in understanding and interpreting CCD's balance sheet as at the dates indicated or its results for the periods then ended, as well as its strategic priorities and objectives. These statements may not be appropriate for other purposes. CCD does not undertake to update any verbal or written forward-looking statements that may be made from time to time by or on behalf of CCD, except as required under applicable securities legislation.

 

 

1.0 CHANGES IN THE ECONOMY AND THE INDUSTRY 

 

Changes in the Canadian dollar vs. the U.S. dollar          

(Canadian dollars / U.S. dollars)
Click on, or paste the following link into your web browser, to view the associated PDF document (please refer to Page 1 of the Associated PDF Document).                                                          

http://www.rns-pdf.londonstockexchange.com/rns/2678B_-2014-2-28.pdf          

 

Changes in the prime rate

(as a %)
Click on, or paste the following link into your web browser, to view the associated PDF document (please refer to Page 2 of the Associated PDF Document).

http://www.rns-pdf.londonstockexchange.com/rns/2678B_-2014-2-28.pdf 

 

Changes in the unemployment rate                                         

(as a %) 
Click on, or paste the following link into your web browser, to view the associated PDF document (please refer to Page 3 of the Associated PDF Document).
http://www.rns-pdf.londonstockexchange.com/rns/2678B_-2014-2-28.pdf           

 

Changes in GDP

(as a %)
Click on, or paste the following link into your web browser, to view the associated PDF document (please refer to Page 4 of the Associated PDF Document).

http://www.rns-pdf.londonstockexchange.com/rns/2678B_-2014-2-28.pdf

 

 

2013 ECONOMIC ENVIRONMENT

 

Several obstacles stood in the way of global economic recovery in 2013. Growth in industrialized countries slowed from 1.3% in 2012 to 1.1% in 2013. At the beginning of the year, the eurozone was still in the longest recession in its history, but finally emerged from it in the second quarter. There were some signs of progress in the region as financial tensions began to ease. Anticipating an extended period of low inflation, the European Central Bank reduced its key interest rate in November 2013 for the second time that year. Inflation stood at less than 1.0% in December, still far below the ECB's target. The central banks of the industrialized countries also kept interest rates very low. Many emerging countries suffered as a result of industrialized countries' weak demand, and were also struggling to retain foreign capital and stabilize their currencies in the summer, as U.S. bond rates rose. In China, despite fears of a slowdown, the pace of growth stabilized at 7.7% in 2013.

 

The United States experienced several difficult periods in 2013, most of which were tied to its political and fiscal situation. After the fiscal cliff at the beginning of the year and the implementation of budget sequestration, a program of automatic government spending cuts, the U.S. economy was disrupted again in the fall by a political stalemate over the budget and the raising of the debt ceiling. This ultimately led to a 16-day government shutdown in October. For these reasons, the U.S. economy saw its growth diminish from 2.8% in 2012 to 1.9% in 2013. A bipartisan agreement was reached on December 10, 2013, reducing fiscal uncertainty, and this bolstered the confidence of Americans in their economy. The labour market continued to recover, as did the residential real estate sector. The Federal Reserve (the Fed) decided to taper its bond purchases by US$10 billion a month, effective January 2014.

 

The Canadian economy maintained its growth at 1.8% in 2013. The external sector remained plagued by weak global demand. Quebec and, to a lesser extent, Ontario were directly affected, but the resource-producing provinces also suffered from the drop in commodity prices. The Canadian economy as a whole was impacted by the government's deficit-reduction measures and slower business investment growth. The real estate market also showed signs of losing momentum in certain regions, particularly in Quebec.

 

 

INDUSTRY DESCRIPTION AND TRENDS

 

There was little change in the Canadian industry in 2013, reflecting the country's very subdued economic conditions. Canada has over 800 savings and loan cooperatives, slightly less than 50% of which are part of Desjardins Group, as well as some 70 Canadian and foreign banks.

 

Despite a rather gloomy economic environment due to ongoing uncertainty about the U.S. recovery and slower growth at home, Canadian financial institutions stayed on course in 2013. They continued to help Canadians with their personal finances and their businesses. Strict compliance with international standards and the know-how of Canadian institutions garnered praise once again at the 2013 World Economic Forum. For the sixth consecutive year, the Canadian banking system took top honours as the most stable in the world.

 

 

ECONOMIC OUTLOOK FOR 2014

 

Global economic conditions should improve in 2014, but are likely to remain fragile in several regions, particularly in the eurozone. Austerity measures and weak credit markets should continue to dampen growth in Europe. The European Central Bank may step in again to support the economy and the financial system by lowering its key interest rates or using non-traditional tools.

 

Elsewhere in the world, the economies of emerging countries should gradually recover as the situation improves in Europe and the United States. With the debt ceiling act has suspended until March 15, 2015, the U.S. political and fiscal problems no longer represent an immediate threat. The Fed is expected to continue tapering its security purchases until late in the year. U.S. medium- and long-term bond rates should therefore be slightly higher in 2014, even if the Fed is expected to keep its key interest rates at their floor level until the fall of 2015. Despite this, a gradual improvement in household finances and lower unemployment should support consumer spending. The U.S. real estate market should continue trending upward, and economic growth should pick up and reach 2.9%.

 

The Canadian economy should benefit from growing global demand and a slight rise in commodity prices. Consumer spending is expected to mirror improvements in the labour market and rising income levels, but caution will remain the watchword given the already high debt levels. In Quebec, the real estate market should stabilize in 2014, while it should slow down in most of the other provinces. Overall, economic growth should be approximately 2.0% in Canada as well as in Ontario and Quebec. Economic activity should not be strong enough to drive inflation above the Bank of Canada's target range, and this would encourage the central bank to maintain its key interest rates at current levels.

 

 

 

2.0 REVIEW OF FINANCIAL RESULTS

 

HIGHLIGHTS

 

§ Net income of $168.7 million, up 17% from 2012

§ Total income from the Business and Institutional Services segment up 12%

§ Return on liquid assets under pressure as a result of the low interest rate environment

§ Provision for credit losses down $5.8 million

 

SECTION 2.1

 

ANALYSIS OF 2013 RESULTS

 

NET INCOME AND CONTRIBUTION TO THE NETWORK

 

For 2013, CCD posted net income of $168.7 million, up $24.1 million or 17% compared to 2012. This increase resulted from the growth in the Business and Institutional Services segment's income and the strong performance of our arbitrage activities.

 

CCD's contribution to the Desjardins network consisted of remuneration on capital stock and other payments to the Desjardins network. The contribution totalled $201.1 million for 2013, compared to $183.8 million one year earlier. This increase stemmed from growth in net income for the year, which allowed CCD to increase the amount declared as remuneration on capital stock.

 

 

TOTAL INCOME

 

Total income, which is made up of net interest income and other income, amounted to $326.0 million, up $26.0 million or 9%, compared to 2012. This performance is attributable to all of CCD's business segments.

 

 

NET INTEREST INCOME

 

Net interest income is the difference between the interest income earned on assets such as loans and securities, and the interest expense related to liabilities such as deposits. It is affected by interest rate fluctuations, reinvestment strategies and the nature and characteristics of interest-bearing and non-interest-bearing financial instruments.

 

Net interest income for 2013 totalled $256.8 million, versus $278.7 million for 2012, down $21.9 million or 8%. Expressed as a percentage of average total assets, the net margin was 0.74%, down 15 basis points from last year. In order to analyze the change in net interest income, Table 1 presents changes by major asset and liability classes.

 

The decline in net interest income compared to last year was in large part due to the mix of income generated by Desjardins Group Treasury segment. It is worth noting that the strategies employed by managers as part of trading activities have a significant impact on the nature of this segment's income and can cause significant changes in both components of total income-net interest income and other income-from one period to the next. In this respect, net interest income generated by trading portfolio securities was lower than in 2012. Gains on these securities-which are presented in other income-were higher. Overall, trading activities generated $3.2 million more income than in 2012, while total income of the Desjardins Group Treasury segment was up 4%.

 

Furthermore, the low interest rate environment observed on capital markets continued in 2013 and exerted greater pressure on net interest income from liquid assets. As shown in Table 2, the lower return on these assets reduced interest income by $27.9 million compared to 2012.

 

Net interest income from the Business and Institutional Services segment grew $18.4 million or 19% from 2012. This performance was essentially due to growth in the business loan portfolio outstandings and was achieved despitestrong competition within the banking industry and low interest rates currently prevailing on capital markets. It should also be noted that this growth in net interest income was not achieved at the expense of the quality of the loan portfolio, as gross impaired loans represented less than 0.1% of total gross loans as at December 31, 2013.

TABLE 1 - NET INTEREST INCOME ON AVERAGE ASSETS AND LIABILITIES

 

For the years ended December 31

2013

2012(1)

(in thousands of $ and as a %)

Average

balance

Interest

Average rate

Average

balance

Interest

Average rate

Assets












Interest-bearing assets












   Securities, cash and

    deposits with

    financial institutions

$

8,117,979

$

141,637

1.74%

$

8,160,256

$

169,543


2.08%

   Loans


22,218,150


495,397

         2.23


19,275,392


433,878


      2.25

Total interest-bearing assets


30,336,129


637,034

        2.10


27,435,648


603,421


2.20%

Other assets


4,256,670


    --

              --


3,937,131


           --


          --

Total assets

$

34,592,799

$

637,034

1.84%

  $

31,372,779

$

603,421


1.92%

Liabilities and

   members' equity












Interest-bearing

   liabilities












    Deposits

$

26,406,323

$

380,215

1.44%

$

23,188,380

$

324,704


1.40%

Total interest-bearing

   liabilities


26,406,323


380,215

       1.44


23,188,380


324,704


      1.40

Other liabilities


6,092,630


   --

             --


6,251,798


            --


          --

Members' equity


2,093,846


  --

             --


1,932,601


            --


          --

Total liabilities and

   members' equity

$

34,592,799

$

380,215

1.10%

$

31,372,779

$

324,704


1.03%

Net interest income



$

256,819




$

278,717



As a percentage of

average assets





0.74%






0.89%

 

 

(1) Data for 2012 have been restated. For more information, see Note 3, "Changes in accounting policies, disclosures and reclassifications", to the Consolidated Financial Statements.

 

TABLE 2 - IMPACT OF CHANGES IN VOLUMES AND RATES ON NET INTEREST INCOME

 

For the year ended

December 31

2013

Increase (decrease)

(in thousands of $ and as a %)

Change in average volume

Change in average rate

Interest

Average volume

Average rate

Assets











Securities, cash and deposits with financial institutions

 

 

$

     (42,277)


 (0.34)%

$

(27,906)

$          (878)


$

  (27,028)

Loans


  2,942,758


(0.02)


    61,519

        66,240



    (4,721)

Change in interest income

$

2,900,481


(0.10)

$

    33,613

$      65,362


$

  (31,749)

Liabilities











Deposits

$

3,217,943


0.04%

$

    55,511

$      45,060


$

   10,451

Change in interest

  expense

$

3,217,943


  0.04

$

    55,511

$      45,060


$

   10,451

Change in net interest income





$

 (21,898)

$      20,302


$

  (42,200)

 

 

OTHER INCOME

 

Other income includes all income other than interest income.

 

Other income for fiscal 2013 totalled $69.2 million, compared to $21.3 million in 2012.

 

As shown in Table 3, this growth in other income compared to 2012 was primarily attributable to the $45.8 million decrease in the loss presented under "Trading activities". It should be remembered that the loss presented under that item arises from the fact that it also includes the impact on the Consolidated Statements of Income of derivative financial instruments that do not qualify for hedge accounting but are used as an economic hedge for items whose income or expenses are recognized in net interest income.

 

 

 

 

As mentioned above, the nature of the income generated by trading activities changes the two components of total income: net interest income and other income. The growth in gains on trading portfolio securities and a favourable difference in changes in the fair value of certain derivative financial instruments therefore reduced the loss presented under "Trading activities" compared to one year earlier.

 

Furthermore, income from deposit and payment service charges amounted to $20.5 million in 2013, down $1.0 million or 5% from one year earlier, as a result of lower volume of transactions. Net gains on available-for-sale securities increased $3.2 million compared to 2012 due to an increase in realized gains on disposals of securities.

 

Table 3 shows $1.4 million growth under "Other" compared to last year, due to an increase in income generated on the disposal of Desjardins acceptances.

 

TABLE 3 - OTHER INCOME

 

For the years ended December 31

(in thousands of $)

2013

2012(1)

2011

Deposit and payment service charges

$

 20,517

$

          21,563

 $

      20,169

Foreign exchange income


 43,812


          45,155


      45,271

Trading activities


  (17,225)


 (62,985)


     (57,651)

Net gains on available-for-sale securities


    7,257


        4,075


      29,742

Credit fees


   5,162


            5,591


        5,583

Management fees


   5,442


            5,070


        5,427

Other


   4,193


            2,835


        1,239

Total other income

$

 69,158

$

          21,304

 $

      49,780

 

(1) Data for 2012 have been restated. For more information, see Note 3, "Changes in accounting policies, disclosures and reclassifications, to the Consolidated Financial Statements.

 

ANALYSIS OF BUSINESS SEGMENT RESULTS

 

TABLE 4 - COMPONENTS OF NET INTEREST INCOME AND OTHER INCOME BY BUSINESS SEGMENT

 

For the years ended December 31

(in thousands of $)

2013

2012(1)

2011

Business and Institutional Services







   Net interest income

$

115,345

$

96,922

$

82,003

   Other income


  59,121


59,403


60,842



174,466


156,325


142,845

Desjardins Group Treasury







   Net interest income


134,809


175,601


170,615

   Other income


    7,400


(39,076)


(11,678)



142,209


136,525


158,937

Other







   Net interest income


    6,665


6,194


5,646

   Other income


    2,637


977


616



    9,302


7,171


6,262

Total - Net interest income


256,819


278,717


258,264

Total - Other income


  69,158


21,304


49,780

Total

$

325,977

$

300,021

$

308,044

 

(1) Data for 2012 have been restated. For more information, see Note 3, "Changes in accounting policies, disclosures and reclassifications", to the Consolidated Financial Statements.

 

BUSINESS AND INSTITUTIONAL SERVICES SEGMENT

 

Total income from the Business and Institutional Services segment amounted to $174.5 million in 2013, up $18.1 million or 12% compared to $156.3 million for the previous year.

 

The prudent growth strategy implemented by the Business and Institutional Services segment resulted in higher business loan portfolio outstandings, which generated a $18.4 million increase in net interest margin compared to the previous year. It should also be noted that new business growth achieved over the last year resulted in a 9% increase in loan fee income compared to last year. This growth was not achieved at the expense of the quality of the loan portfolio, as evidenced by the lower provision for credit losses compared to last year. Furthermore, the decrease in the outstandings of the public and parapublic sector loan portfolio trimmed $0.8 million from this portfolio's net interest income compared to 2012.

 

The Business and Institutional Services segment's other income for 2013 declined $0.3 million compared to last year to $59.1 million. This decline was primarily due to lower income generated by banking services as a result of a lower volume of transactions, partly offset by growth in income from foreign exchange activities.

 

The segment's continuing development efforts also made it possible for CCD to consolidate the advances it made in Canadian banking syndicates over the last few years and maintain the market shares it has acquired. CCD participated in 11 transactions as leader or co-leader, including 3 in Ontario.

 

DESJARDINS GROUP TREASURY SEGMENT

 

Total income from the Desjardins Group Treasury segment amounted to $142.2 million in 2013, up $5.7 million or 4% compared to $136.5 million in 2012. This performance was all the more remarkable because it was achieved in an environment in which low interest rates were eroding the return of the liquid asset portfolio, in particular securities.

 

Portfolio managers were able to fully capitalize on market conditions to grow income from trading activities as well as income generated by CCD's management of asset/liability matching. Furthermore, income generated by the portfolio of loans to Desjardins entities increased $2.7 million compared to 2012, due to growth in portfolio outstandings. These improved results fully offset the unfavourable impact of the lower return on liquid assets.

 

Other income from the Treasury segment amounted to $7.4 million in fiscal 2013 compared to a $39.1 million loss in 2012. This change was due to a decrease in unrealized losses on certain derivative financial instruments and higher gains on available-for-sale securities. Lastly, it should also be recalled that the nature of income generated by trading activities resulted in more income presented in other income compared to fiscal 2012.

 

 

OTHER

 

The Other category includes the operations of the Desjardins FSB Holdings Inc. subsidiary. Total income from this subsidiary increased $2.1 million from last year, to $9.3 million. Most of this additional income was generated through financing activities.

 

 

PROVISION FOR CREDIT LOSSES

 

The provision for credit losses was $1.6 million in 2013, down $5.8 million from $7.4 million in 2012. This decrease reflects an improvement in the quality of the business loan portfolio as well as a decrease in the average term of this portfolio, which had a favourable effect on the amount of the collective allowance. Furthermore, it should be mentioned that a recovery of individual allowances was recognized in 2013, due to a decline in impaired loans. The provision for credit losses therefore represented only 0.01% of average loans, down from 0.04% in 2012.

 

CCD's loan portfolio continues to be of excellent quality. As at December 31, 2013, gross impaired loans outstanding stood at $15.3 million, down $5.3 million from one year earlier. The gross impaired loans ratio, expressed as a percentage of the total gross loan portfolio, was less than 0.1% as at December 31, 2013, unchanged from one year earlier. 

 

 

NON-INTEREST EXPENSE

 

Non-interest expense includes expenses related to personnel administration, premises, equipment and furniture, and other operating expenses.

 

Table 5 provides a breakdown of non-interest expense by category. Non-interest expense totalled $118.5 million in 2013 compared to $106.0 million in 2012.

 

TABLE 5 - NON-INTEREST EXPENSE

 

For the years ended December 31

(in thousands of $ and as a %)

2013

2012(1)

2011(1)

Salaries and fringe benefits







  Salaries

$

31,382

$

26,509

$

23,799

  Fringe benefits


9,861


9,358


8,572



41,243


35,867


32,371

Premises, equipment and furniture, including depreciation


9,254


6,095


11,345

Service agreements and outsourcing


37,601


35,870


38,803

Fees


6,811


8,179


8,905

Other


23,604


19,958


17,165

Total non-interest expense

$

118,513

$

105,969

$

108,589

Productivity index(2)


36.4%


35.3%


35.3%

 

(1) Data for 2012 and 2011 have been restated. For more information, see Note 3, "Changes in accounting policies, disclosures and reclassifications", to the Consolidated Financial Statements.

(2) See the "Basis of presentation of financial information" section of this MD&A.

 

For the year ended December 31, 2013, salaries and related fringe benefits amounted to $41.2 million compared to $35.9 million in 2012. This growth in employee expenses was primarily due to an increase in the number of employees in order to support business growth in the Business and Institutional Services segment due to annual indexing of salaries and higher expenses associated with defined benefit pension plans.

 

Expenses related to premises, equipment and furniture totalled $9.3 million, compared to $6.1 million in 2012, an increase of $3.2 million. This growth was attributable to an additional depreciation expense related to management applications implemented at the beginning of the year, while the results for 2012 benefited from a lower expense due to the end of the depreciation period for management applications. In addition, the growth in service agreement and outsourcing expenses as well as expenses presented under "Other" were due to higher expenses incurred to support growth in activities. Lastly, it should be mentioned that fees decreased by $1.4 million compared to last year.

 

 

It should also be noted that as a result of the implementation of the sales tax harmonization agreement between Canada and Quebec on January 1, 2013, CCD no longer recovers the provincial sales tax paid on taxable expenses, which also partially accounts for the increase in non-interest expense compared to 2012.

 

As shown in Table 5, the productivity index was 36.4% for 2013.

 

 

OTHER PAYMENTS TO THE DESJARDINS NETWORK

 

In cooperation with the Desjardins network, CCD offers a broad spectrum of financial services, including foreign exchange transactions, transfers of funds, financing and letters of credit. Payments made to Desjardins Group entities as dividends on transactions carried out with Group entities amounted to $38.9 million for 2013, down $0.4 million from 2012 due to a reduction in the volume of foreign exchange transactions.

 

 

INCOME TAXES AND OTHER TAXES

 

Since CCD is a financial services cooperative, it is considered a private and independent company for tax purposes, unlike the vast majority of other financial institutions, which are considered large public corporations. CCD is therefore subject to the private company tax regime while benefiting from certain reduced tax rates under the credit union tax regime. Following certain regulatory changes in 2013, the reduced tax rates for credit unions will be phased out between now and 2017. The deferred tax asset increase associated with this tax rate increase reduced the tax expense recognized for 2013.

 

Furthermore, CCD may recover the income taxes that it would otherwise have had to pay when declaring remuneration on capital stock. An income tax recovery of $37.9 million was therefore recognized when it declared the 2013 remuneration on capital stock, compared to $32.8 million in 2012. It should be mentioned that since January 1, 2013, the effective date of a new accounting standard, the income tax recovery on remuneration on capital stock has been recorded in the Statements of Income, while previously it had been presented in the Consolidated Statements of Changes in Members' Equity.

 

For 2013, CCD's income tax expense, net of the income tax recovery on remuneration on capital stock, represented a recovery of $1.7 million, compared to an expense of $2.8 million for 2012.

 

 

REMUNERATION ON CAPITAL STOCK

 

Under the Act respecting the Mouvement Desjardins, CCD's Board of Directors may declare interest on capital shares; it then determines the terms of payment. As a result, CCD declares remuneration on capital stock in an amount corresponding to the lesser of its non-consolidated net income and its consolidated retained earnings, including recovery of related income taxes. This remuneration is distributed pro rata to the number of shares held by each member. For 2013, an amount of $162.2 million was declared as remuneration on capital stock, compared to $144.5 million for 2012. This growth was mainly due to the increase in net income. These amounts were also recorded under "Other liabilities - Other" in the Consolidated Balance Sheets as at December 31, 2013 and 2012, respectively.

 

Overall, CCD's contribution to the Desjardins network, including other payments to members, totalled $201.1 million, versus $183.8 million in 2012.

 

 

COMPARISON OF 2012 AND 2011

 

The following analysis presents a comparison between the results for the years ended December 31, 2012 and 2011. Note that the 2012 and 2011 data have been restated to be consistent with the new accounting principles adopted on January 1, 2013. For more information, see note 3 "changes in accounting policies, disclosures and reclassifications" of the consolidated financial statements.

 

Net income for 2012 was $144.7 million, compared to $152.6 million in 2011. This decrease in net income compared to the previous year was due to the low interest rate environment; however, the decrease was largely offset by growth in the Business and Institutional Services segment's income and the strong performance of arbitrage activities.

 

Total income from the Business and Institutional Services segment amounted to $156.3 million in 2012, up $13.5 million or 9% compared to the previous year, when it was $142.8 million. Growth in the outstandings of the personal and business loan portfolios had increased net interest income in the Business and Institutional Services segment by $14.9 million or 18% compared to fiscal 2011.

 

The Desjardins Group Treasury segment generated total income of $136.5 million in 2012, compared to $158.9 million in 2011. This decrease in income was due to a decline on gains on the disposal of available-for-sale securities and the lower return on the liquid asset portfolio. It should nevertheless be recalled that the decline in the segment's income compared to the previous year was offset by the increase in income from trading activities as well as income generated by CCD's management of asset/liability matching.

 

CCD's loan portfolio continued to be of excellent quality in 2012. Gross impaired loans outstanding stood at $20.6 million at the end of the year, down $18.0 million compared to December 31, 2011.

 

Non-interest expense was $106.0 million in 2012, compared to $108.6 million in 2011. This decrease was mainly due to the end of the depreciation period for management applications.

 

SECTION 2.2

 

ANALYSIS OF FOURTH QUARTER RESULTS

 

TABLE 6 - QUARTERLY RESULTS FOR THE PREVIOUS EIGHT QUARTERS

 


2013

2012(2)

(unaudited, in thousands of $ and as a %)

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

STATEMENT OF INCOME

















Net interest

   income

$

67,036

$

64,662

$

62,636

$

62,485

$

67,352

$

69,313

$

74,159

$

67,893

Other income


25,901


11,951


17,859


13,447


10,138


6,028


(3,795)


8,933

Provision for

 credit losses

 (recovery)


(3,637)


410


6,380


(1,601)


(12,171)


3,768


(928)


16,715

Non-interest

 expense


33,200


28,500


28,987


27,826


26,117


26,385


27,163


26,304

Other

  payments to

  Desjardins

  network


10,160


9,327


10,033


9,358


9,065


10,355


10,212


9,621

Operating

  income

 $

53,214

$

38,376

$

        35,095

 $

40,349

$

54,479

$

34,833

$

33,917

 $

24,186

Income taxes


12,937


9,660


4,949


8,639


13,090


9,198


8,179


5,124

 Tax

   recovery on

   remuneration

   on capital

  stock


(12,242)


(8,830)


(9,212)


(7,614)


(11,604)


(7,564)


(7,842)


(5,828)

Net income

$

52,519

$

37,546

$

39,358

$

39,324

$

52,993

$

33,199

$

33,580

$

24,890

Total assets

$

34,783,700

$

34,504,318

 $

32,723,276

$

31,122,430

$

29,280,712

$

33,266,485

$

30,013,842

$

30,661,164

Capital ratios(1)

 Tier 1a capital

  ratio


14.5%


15.7%


16.7%


15.0%


N/A


N/A


N/A


N/A

Tier 1 capital

  ratio


   14.5%


     15.7%


     16.7%


     15.0%


        16.5%


           17.1%


           17.9%


          18.3%

Total capital

  ratio


      15.1%


        16.3%


        17.3%


        15.6%


         17.2% 


          17.8%


         18.8%


         19.2%

 

(1) Since January 1, 2013, capital ratios have been calculated according to Basel III capital standards.

(2) Data for 2012 have been restated. For more information, see Note 3, "Changes in accounting policies, disclosures and reclassifications", to the Consolidated Financial Statements.

 

 

CONSOLIDATED RESULTS FOR THE FOURTH QUARTER

 

CCD recorded net income of $52.5 million for the fourth quarter of 2013, versus $53.0 million for the same period of 2012. Total income for the quarter ended December 31, 2013 was $92.9 million, compared to $77.5 million for the same quarter of 2012.

 

Total income from the Desjardins Group Treasury segment for the last quarter of the year was $42.4 million, up $6.9 million compared to the same period of 2012. The favourable difference compared to last year was essentially due to the increase in realized gains on disposal of available-for-sale securities and the growth in income from trading activities. Finally, it should be mentioned that income for the last quarter of 2013 benefited from a favourable difference arising from changes in the fair value of certain derivative financial instruments used to hedge foreign currency deposit issuances.

 

The Business and Institutional Services segment posted total income of $47.6 million for the quarter ended December 31, 2013, up $7.5 million. This performance was in large part attributable to an increase in net interest income and loan fee income as a result of growth in the outstandings of the personal and business loan portfolios. It should also be noted that income from banking service activities declined compared to the same period last year due to a decrease in the volume of transactions.

 

CCD recognized a $3.6 million recovery of the provision for credit losses in the fourth quarter of 2013, compared to a $12.2 million recovery in the last quarter of 2012. The recovery recognized in the fourth quarter was due to an improvement in the quality of the business loan portfolio and a decrease in the average term of this portfolio. In 2012, the recovery arose from a settlement related to a credit file and a decline in loan commitments.

 

Non-interest expense amounted to $33.2 million in the fourth quarter, up $7.1 million compared to the same quarter in 2012. This increase was due in large part to employee expenses, as a result of an increase in the number of employees in order to support business growth. Expenses related to premises, equipment and furniture also increased due to an additional depreciation expense related to management applications implemented at the beginning of the year.

 

Other payments to the Desjardins network totalled $10.2 million in the fourth quarter, up $1.1 million compared to the same period of 2012.

 

QUARTERLY TRENDS

 

Quarterly net income, income and non-interest expense fluctuate in response to certain trends such as seasonal changes, general economic conditions, market conditions and foreign exchange rate volatility.

 

A summary of the results for the last eight quarters is presented in Table 6 of this MD&A. Results for the last eight quarters have been affected by the following positive and negative factors:

 

Low interest rates on markets in recent quarters, combined with strong competition in the banking industry, generated downward pressure on net interest income, which was partially offset by growth in loan portfolio outstandings.

In the second quarter of 2013, CCD received a $300.0 million capital injection, which increased the volume of liquid assets and, consequently, income generated by liquid assets in the two last quarters of 2013.

Net income for the fourth quarters of 2013 and 2012 were the highest, as they benefited from recoveries of the provision for credit losses. Net income in the fourth quarter of 2013 also benefited from higher gains on the disposal of available-for-sale securities.

Net income for the second quarter of 2013 reflected the favourable impact on income taxes of the remeasurement of deferred tax assets following the announcement by the government of an increase in the tax rate for financial services cooperatives.

Reflecting the quality of the loan portfolio, the provision for credit losses remained relatively low over the last eight quarters, except for the first quarter of 2012 when a higher provision was recorded due to growth in portfolio outstandings and changes in credit risk.

Increases in non-interest expense in each of the four quarters of 2013 were due to expenses incurred to support activity growth. The productivity index has been relatively stable over the last eight quarters.

 

 

FINANCIAL OUTLOOK FOR 2014

 

In 2014, CCD will continue to face a low interest rate environment. As a result of these low interest rates, combined with the strong competition in the industry, net interest income will again come under pressure in 2014. CCD will also continue to rigorously manage non-interest expense.

 

CCD will begin 2014 on a solid footing, including a capitalization level that is significantly higher than the Canadian banking industry average. CCD continues to be a strong and well-capitalized financial institution, with a Tier 1 capital ratio of 14.5%, and it benefits from excellent asset quality, with a gross impaired loans to gross loans ratio of less than 0.1%. CCD will make ongoing efforts to improve productivity and maintain sound and prudent capital management.

 

 

3.0 BALANCE SHEET REVIEW

 

HIGHLIGHTS

 

§ Tier 1 capital ratio of 14.5% and the capital/asset ratio was 6.4% as at December 31, 2013, demonstrating CCD's financial strength

§ Liquidity ratio at 21% of total assets

§ Total assets increased 19% to $34.8 billion as at December 31, 2013

§ Loans to members and other Desjardins Group entities up $3.7 billion

§ Outstandings in the personal and business loan portfolios grew $1.0 billion

§ Quality loan portfolio, with impaired loans representing less than 0.1% of total gross loans

§ Issuance of $2.2 billion in medium-term notes on the Canadian market and an additional US$500.0 million on the U.S. market

§ Participation in the Canada Mortgage Bonds Program in an amount of $1.7 billion

 

 

 

SECTION 3.1

 

BALANCE SHEET MANAGEMENT

 

TABLE 7 - CONSOLIDATED BALANCE SHEETS

 

As at December 31

(in millions of $ and as a %) 

2013

2012(1)

2011(1)

Assets










Cash, deposits with financial institutions and

   securities

$

7,510

  21%

$

 7,335

25%

$

7,429

  25%

Securities purchased under reverse repurchase

   agreements


878

     3


      345

     1 


     735

     2

Loans


22,562

   65


 18,245

    62


17,789

   59 

Other assets


3,834

   11


   3,356

    12


  4,035

   14 

Total assets

$

34,784

100%

$

 29,281

100%

$

 29,988

100%

Liabilities and members' equity










Deposits

$

27,290

  79%

$

 22,570

  77%

$

 21,640

72%

Other liabilities


5,285

15


   4,794

16


   6,411

  21 

Members' equity


2,209

  6


   1,917

 7


   1,937

    7 

Total liabilities and members' equity

$

34,784

100%

$

 29,281

100%

$

 29,988

100%

 

(1) Data for 2012 and 2011 have been restated. For more information, see Note 3, "Changes in accounting policies, disclosures and reclassifications", to the Consolidated Financial Statements.

 

TABLE 8 - CASH, DEPOSITS WITH FINANCIAL INSTITUTIONS AND SECURITIES

 

As at December 31

(in millions of $) 

2013

2012

2011

Cash and deposits with financial institutions

$

236

$

554

$

344

Securities







Canada


3,131


2,558


3,754

Provinces and municipal corporations in Canada


3,053


2,639


2,275

Other issuers


1,090


1,584


1,056

Total

$

7,510

$

7,335

$

7,429

 

TOTAL ASSETS

 

As at December 31, 2013, CCD's total assets stood at $34.8 billion, up $5.5 billion from December 31, 2012.

 

Liquidities, comprised of cash and deposits with financial institutions as well as securities, totalled $7.5 billion as at December 31, 2013, up $175.3 million from December 31, 2012. The liquidity ratio, presented in Table 7, stood at 21% at the end of 2013, compared to 25% as at December 31, 2012. Even though lower than it was one year earlier, this ratio amply meets regulatory requirements and will enable CCD to support the growth of the Desjardins network.

 

A very high percentage of the securities are investment-grade securities that could be sold off very quickly, if necessary, to meet increased demand for funding from the caisse network and clients. As discussed in more detail in section 4.1, "Risk management", most of the securities in the securities portfolio are of high quality.

 

Other assets stood at $3.8 billion as at December 31, 2013, up $0.5 billion from one year earlier. This increase was due to the derivative financial instruments recognized as assets, whose market value increased by $0.3 billion in 2013 to $2.4 billion. This increase resulted from the decline in the value of the Canadian dollar against the U.S. dollar in 2013.

 

 

LOANS

 

The loan portfolio stood at $22.6 billion as at December 31, 2013, up $4.3 billion or 24% from last year. In its role as Desjardins Group treasurer, CCD continued to provide refinancing for the Federation and other Desjardins entities. Consequently, outstanding loans to these entities grew by $3.7 billion to $16.1 billion as at December 31, 2013. Note that these loans account for over 40% of CCD's total assets.

 

The personal and business loan portfolios increased by $1.0 billion or 21% since the beginning of the year to $5.7 billion as at December 31, 2013 as a result of continued, prudent business development efforts. Note that this growth was achieved while maintaining the quality of these portfolios. The public and parapublic sector loan portfolio, including clients' liability under acceptances, declined by $342.9 million since the end of 2012, to $1.6 billion as at December 31, 2013.

 

 

 

CREDIT QUALITY

 

CCD's loan portfolio continues to be of excellent quality. As at December 31, 2013, gross impaired loans outstanding stood at $15.3 million, down $5.3 million since December 31, 2012. The gross impaired loans ratio, expressed as a percentage of the total gross loan portfolio, was 0.1% at the end of the fourth quarter, unchanged from one year earlier.

 

CCD's loans guaranteed by governments and other public and parapublic organizations represented 10% of its total loan portfolio as at December 31, 2013.

 

Other information on the quality of CCD's credit portfolio is presented in Section 4.1, "Risk management", of this MD&A.

 

 

DEPOSITS

 

TABLE 9 - DEPOSITS

 

As at December 31

2013

2012

2011

(in millions of $ and as a %)

Payable on demand

Payable on a fixed date

Total

Total

Total

Total

Total

Total

Individuals

 $

124

$

19

$

143


   1%

 $

 137


     1%

     112


  1%

Business

 and government


1,242


22,001


23,243


85


       18,567


    82


     17,321


80

Deposit-

  taking

  institutions


641


3,263


3,904


14


      3,866


    17


       4,207


19

Total

   deposits

$

2,007

$

25,283

$

27,290


 100%

$

 22,570


    100%

$

21,640


100%

 

Geographic distribution

 

As at December 31

(in millions of $ and as a %) 

2013

2012

2011











Canada

$

17,189

   63%

$

 14,872

  66%

$

14,364

   66%

International


10,101

37


   7,698

34


   7,276

   34

Total

$

27,290

100%

$

 22,570

100%

$

 21,640

 100%

 

As at December 31, 2013, outstanding deposits stood at $27.3 billion, compared to $22.6 billion at the end of 2012. This $4.7 billion increase was mainly attributable to various issuances of securities on Canadian and U.S. markets completed during the year and supported the growth in Desjardins Group's funding requirements.

 

Additional information about CCD's security issuances is presented in the "Liquidity risk" section of this MD&A.

 

 

OTHER LIABILITIES

 

Other liabilities grew $0.5 billion compared to December 31, 2012. This change was mostly due to the increase in securities sold short and amounts payable to brokers and dealers presented under "Other liabilities - Other".

 

 

MEMBERS' EQUITY

 

Members' equity increased $0.3 billion or 15% over the year, to $2.2 billion as at December 31, 2013, compared to $1.9 billion in 2012. The main source of this growth was the issuance, in June 2013, of $300.0 million in capital shares. Note 16, "Capital stock", to the Consolidated Financial Statements presents additional information on CCD's capital stock.

 

 

 

SECTION 3.2

 

CAPITAL MANAGEMENT

 

Capital management is a function covering all Desjardins Group operations, including those of CCD. Its purpose is to ensure that the capital structure and level of Desjardins Group and its components are consistent with its risk profile, distinctive nature and cooperative objectives. Capital management must also ensure that the capital structure is adequate in terms of profitability targets, growth objectives, rating agencies' expectations and regulators' requirements. Furthermore, it serves to optimize the allocation of capital and internal capital flow mechanisms, and support growth, development and asset risk management at Desjardins Group.

 

CCD advocates prudent management of its capital. The purpose of such management is to maintain higher capital ratios than those of the Canadian banking industry and the standards set by the Federation. As at December 31, 2013, CCD's Tier 1a, Tier 1 and total capital ratios were 14.5%, 14.5% and 15.1%, respectively. The global financial crisis prompted the industry to place more emphasis on sound capitalization. Now more than ever, rating agencies and the market favour the best-capitalized institutions. These factors argue in favour of a general increase in the level and quality of capital issued by financial institutions. This is also reflected in the stricter requirements of Basel III, implemented on January 1, 2013.

 

 

Desjardins GROUP'S INTEGRATED CAPITAL MANAGEMENT FRAMEWORK

 

Broadly speaking, Desjardins Group's Integrated Capital Management Framework includes the policies and processes required to set targets for its capitalization and to assign targets to its components, to establish strategies to ensure that targets are met, to quickly raise capital, to ensure that the components' performance is appropriately measured, and to optimize internal capital flow and use mechanisms.

 

Desjardins Group has developed a stress-testing program aimed to establish and measure the effect of various integrated scenarios, i.e. to simulate various economic scenarios for all of its components and assess the financial and regulatory repercussions. This procedure makes it possible to determine if the minimum target, as established in the capitalization plan, is adequate in view of the risks to which Desjardins Group is exposed.

 

 

REGULATORY FRAMEWORK AND INTERNAL POLICIES

 

Desjardins Group's capital management is the responsibility of the Federation's Board of Directors. To support it in this task, it has mandated the Finance and Risk Management Committee to ensure that Desjardins Group has a sufficient and reliable capital base. Every year, the Finance Executive Division and Office of the CFO prepares, with the help of its components, a capitalization plan that sets and updates capital objectives and targets. This work includes CCD preparing its own annual capitalization plan.

 

The current situation and the forecast show that Desjardins Group has a solid capital base overall and, therefore, sufficient latitude to pursue its growth strategy.

 

CCD's capital ratios are calculated according to the guideline on adequacy of capital base standards applicable to financial services cooperatives issued by the AMF. This guideline was updated effective January 1, 2013 to take into account the revised framework for international convergence of capital measurement and capital standards (Basel III) issued by the Bank for International Settlements in order to make the financial system safer and more resilient in periods of stress.

 

 

Basel iii

 

The new Basel III regulatory framework increases capital requirements. This new framework, combined with global liquidity standards, forms an essential element of the global financial reform program. CCD must now maintain a minimum Tier 1 capital ratio of 8.5%. In addition, the Tier 1a capital ratio must be above 7%, including a 2.5% capital conservation buffer. Lastly, the total capital ratio must be above 10.5%, including this buffer.

 

In June 2013, the AMF determined that Desjardins Group met the criteria to be designated a domestic systemically important financial institution (D-SIFI). As a D-SIFI, beginning on January 1, 2016, the Group will be subject to an additional Tier 1a capital requirement corresponding to 1% of risk-weighted assets. Therefore, from January 1, 2016, its Tier 1a capital target will be 8%. Although CCD has not itself been designated as a D-SIFI, a detailed analysis of this change will be performed in order to assess the potential impacts on its capital targets. OSFI has determined that the six largest Canadian financial institutions meet the criteria to be designated D-SIFIs.

 

 

MINIMUM RATIOS AND COMPLIANCE WITH REQUIREMENTS

 

As part of work on the Desjardins Group Capitalization Plan and in accordance with Federation directives, CCD set target ratios to ensure sound capital management. Targets were set for the capital/asset ratio and the total capital ratio.

 

Furthermore, the member federations formally undertook to maintain CCD's total capital at an amount that maintains the capital/asset ratio and the total capital ratio at a minimum level that is equal to established standards.

 

As at December 31, 2013, CCD's Tier 1a, Tier 1 and total capital ratios, calculated according to Basel III requirements, were 14.5%, 14.5% and 15.1%, respectively. The capital/asset ratio under Basel III was 6.4% as at December 31, 2013, compared to 6.6% as at December 31, 2012. CCD therefore still has excellent capitalization.

 

The following table presents CCD's capital and capital ratios.

 

TABLE 10 - CAPITAL

 

As at December 31

2013(1)

2012(2)

(in thousands of $ and as a %)

Tier 1a capital(5)



Eligible capital shares

$ 2,142,821

$ 1,887,206

General reserve

1,467

1,467

Retained earnings

1,532

N/A

Accumulated other comprehensive income(3)

21,081

N/A

Deferral attributable to the amendment to IAS 19

3,157

N/A

Deductions(4)

(20,204)

N/A

Total Tier 1a capital(5)

$ 2,149,854

$ 1,888,673

Tier 2 capital



Eligible collective allowance

$79881

$77,065

Eligible qualifying shares

3

N/A

Total Tier 2 capital

$79,884

$77,065

Total regulatory capital (Tier 1 and 2)

$ 2,229,738

$ 1,965,738

Capital ratios



Tier 1a capital

14.5%

N/A

Tier 1 capital

14.5%

16.5%

Total capital

15.1%

17.2%

 

(1) According to the AMF guideline under Basel III.

(2) According to the AMF guideline under Basel II.

(3) Excluding the portion related to the cash flow hedge reserve.

(4)Represents intangible assets, such as software.

(5) Capital included in Tier 1 is all Tier 1a. CCD has no Tier 1b capital.

 

The amendments to IAS 19 on recognition of defined benefit pension plans specify in particular that the use of the "corridor approach" is no longer allowed and that all actuarial gains and losses must now be recognized when they occur. Moreover, it is no longer permitted to amortize past service costs, which will accelerate their recognition. At the same time, the revised IAS 19 allows risk-sharing features to be taken into account. The total negative impact of these amendments on Tier 1a capital ratio as at January 1, 2013 is, however, deferred and amortized on a straight-line basis over the period from January 1, 2013 to December 31, 2014, as Desjardins Group has elected to use the relevant transitional provision stipulated by the AMF.

 

On February 25, 2014, CCD approved the issuance of Class A capital shares in an amount of $400.0 million. The issue will take place during the first quarter of 2014.

 

As at December 31, 2013, CCD was in compliance with the standards described previously.

 

TABLE 11 - RISK-WEIGHTED ASSETS

 

As at December 31

2013

2012

(in thousands of $ and as a %)

Exposure(1)

Risk-weighted assets

Average risk-weighting rate (%) 

Risk-weighted assets

Credit risk






Sovereign borrowers

$  5,720,828

$                --


--%

$                 --

Financial institutions

22,864,022

4,572,804


20

3,700,635

Business

7,581,428

7,467,396


98

6,100,971

Mortgages

176,365

44,767


25

37,908

Other retail client exposure

13,357

10,018


75

15,789

Equities

7,092

7,092


100

5,907

Trading portfolio

556,781

135,544


24

96,296

Other assets

3,886,944

575,339


15

463,825

Total credit risk

$ 40,806,817

$ 12,812,960


31%

$ 10,421,331

Market risk


1,428,224



503,200

Operational risk(2)


557,758



532,459

Total risk-weighted assets


$ 14,798,942



$ 11,456,990

 

(1) Net exposure, after credit risk mitigation (net of specific allowances under the Standardized Approach but not under the Internal Ratings-Based approach, in accordance with the AMF Guideline).

(2) The Basic Indicator Approach was used to assess operational risk.

SECTION 3.3

 

ANALYSIS OF CASH FLOWS

 

Because of the nature of CCD's activities, the Consolidated Statements of Income and the Consolidated Balance Sheets consist primarily of liquidities. Normal operations trigger significant fluctuations in liquidity and affect numerous items, such as loans, deposits and securities. The main changes are explained in the following paragraphs.

 

During the year ended December 31, 2013, cash and cash equivalents decreased by $313.9 million, compared to an increase of $247.5 million recorded for the corresponding period in 2012. Cash and cash equivalents stood at $140.7 million as at December 31, 2013, versus $454.7 million one year earlier.

 

In 2013, cash flows used in operating activities totalled $190.3 million. The liquidity needs resulting from the growth in the various loan portfoliosand securities purchased under reverse repurchase agreements were partly offset by liquidities generated through the issuance of medium-term notes. For the corresponding period of 2012, operating activities generated $165.2 million in liquidities, as liquidities from issuances of deposit notes more than offset the increase in loans and the decrease in amounts payable to brokers and dealers.

 

Cash flows from financing activities totalled $155.5 million in 2013, in particular as a result of the $300.0 million capital share issue, which was partly offset by the payment of remuneration on capital stock. For the corresponding period of 2012, financing activities required $153.9 million due to the payment of remuneration on capital stock.

 

Cash flows used in investing activities were $279.1 million for the year ended December 31, 2013, mainly due to the growth in the available-for-sale securities portfolio. For the corresponding period of 2012, investing activities generated liquidities of $236.2 million as a result of the decrease in available-for-sale securities.

 

 

SECTION 3.4

 

OFF-BALANCE SHEET ARRANGEMENTS

 

In the normal course of operations, CCD enters into various off-balance sheet arrangements, including credit instruments, contractual commitments, financial assets held as collateral and structured entities, including securitization and assets under management.

 

CREDIT INSTRUMENTS

 

CCD makes credit instruments available to its members and clients in order to meet their financing needs. These instruments include credit commitments as well as guarantees and standby letters of credit. The risks associates with these credit instruments are managed according to the same strict rules as those applied to Consolidated Balance Sheet items. In management's opinion, no unusual risk results from these off-balance sheet items.

 

These instruments expose CCD to credit and liquidity risks. Management of these risks is described in section 4.0 of this MD&A. Table 12 shows the contractual amounts of credit instruments by remaining maturities. Since several of these credit instruments will mature or will be terminated without requiring any cash outflow, the contractual amounts of these commitments do not necessarily represent future liquidity needs.

 

Note 22, "Commitments, guarantees and contingent liabilities", to CCD's Consolidated Financial Statements provides further information on these credit instruments.

 

TABLE 12 - CREDIT INSTRUMENTS BY MATURITIES

 

As at December 31

2013

2012

2011

(in millions of $)

 Less than 1 year


1 to 5 years


 Over

5 years


 Total

Total

Total

Credit commitments

$ 14,719


$   6,871


$        57


$  21,647

$  16,920

$  16,770

Guarantees and standby letters of

   credit

         220


         134


             1


         355

         375

         481

Total credit instruments

 $ 14,939


$   7,005


  $      58


$ 22,002

 $ 17,295

$ 17,251

 

 

CONTRACTUAL COMMITMENTS

 

In the normal course of operations, CCD, like other major Canadian financial institutions, pledges part of its liquid assets in order to participate in clearing and payments systems. In addition, CCD has contractual commitments under which it must make future payments on leases. Note 23, "Leases", to CCD's Consolidated Financial Statements provides information on these contractual commitments.

 

 

 

 

FINANCIAL ASSETS HELD AS COLLATERAL

 

CCD receives financial assets as collateral as a result of transactions involving securities purchased under reverse repurchase agreements and transactions on derivatives. Such transactions are carried out under normal conditions. Note 22, "Commitments, guarantees and contingent liabilities", to CCD's Consolidated Financial Statements provides additional information on financial assets received as collateral.

 

 

OTHER COMMITMENTS AND GUARANTEES

 

In the normal course of operations, CCD also enters into various guarantee agreements with members and clients that remain off-balance sheet, including credit default swaps. Note 22 to the Consolidated Financial Statements, "Commitments, guarantees and contingent liabilities," provides information on these off-balance sheet arrangements.

 

 

STRUCTURED ENTITIES

 

In the normal course of operations, CCD enters into various financial transactions with structured entities to diversify its sources of financing and manage its capital. Structured entities are usually created for a unique and distinct purpose, and they often have limited activities. They are sometimes used to legally isolate the financial assets they hold from the transferring organization. These entities may be included on CCD's Consolidated Balance Sheets if CCD controls them. Detailed information concerning significant exposure to structured entities is provided below.

 

Securitization

 

CCD participates in the Mortgage-Backed Securities Program under the National Housing Act to manage its liquidities and capital. Transactions carried out under this program require using a structured entity, the Canada Housing Trust, which has been set up by Canada Mortgage and Housing Corporation (CMHC) under the Canada Mortgage Bonds (CMB) Program. Note 10, "Derecognition of financial assets", to the Consolidated Financial Statements provides more information on the financial assets transferred by CCD through securitization transactions.

 

To carry out securitization transactions, CCD bundles CMHC-guaranteed residential mortgages (previously acquired from member caisses of Desjardins Group) under mortgage-backed securities (NHA MBSs) and then transfers them to the structured entity in exchange for monetary consideration. The structured entity then finances these purchases by issuing CMBs to investors. Furthermore, under this program CCD acquires interests in securitized mortgage loans from Desjardins Group member caisses. The loans and interests acquired through these transactions do not meet recognition criteria since member caisses retain substantially all the risks and rewards related to these securitized loans and interests. In addition, CCD treats these transfers as collateralized financing transactions and recognizes a liability. This liability represents the consideration received from CMHC with respect to the loans and interests in mortgage loan securitization that do not meet the derecognition criteria.

 

As at December 31, 2013, outstanding NHA MBSs issued by CCD and sold to the Canada Housing Trust totalled $5.4 billion compared to $5.0 billion as at December 31, 2012. However, some securitization transactions entered into before January 1, 2010 resulted in derecognition, as CCD elected to apply the derecognition requirements prospectively. At the time of transfer, these transactions were therefore recognized as sales, and CCD retains certain interests in excess interest margins, which are retained interests, and assumes responsibility for servicing the transferred mortgage loans. The aggregate of these original assets transferred and derecognized was $0.2 billion as at December 31, 2013, compared to $0.6 billion at the end of 2012. Assets representing retained interests that CCD continues to recognize with respect to these transactions amounted to $1.1 million as at December 31, 2013 ($7.5 million as at December 31, 2012).

 

 

ASSETS UNDER MANAGEMENT

 

CCD performs liquidity management on behalf of third parties. These assets under management are not the property of CCD and therefore are not reflected on the Consolidated Balance Sheets. Management fees are received in exchange for the liquidity management services.

 

 

 

4.0 RISK MANAGEMENT

 

SECTION 4.1

 

RISK MANAGEMENT

 

The boxed areas of this section contain information on credit, market and liquidity risks in accordance with IFRS 7, "Financial Instruments: Disclosures." They also contain an analysis of how CCD assesses its risks as well as a description of its risk management objectives, policies and methods. IFRS 7 provides that risk disclosures may be included in the MD&A. Consequently, the boxed areas are an integral part of the Consolidated Financial Statements, as explained in Note 24, "Financial instrument risk management," to the Consolidated Financial Statements.

 

CCD is exposed to different types of risks in the normal course of operations, including credit risk, market risk, liquidity risk, operational risk, strategic risk and reputation risk. Strict and effective management of these risks is a priority for CCD, its purpose being to support its major orientations, particularly regarding its financial stability as well as its sustained and profitable growth, while complying with regulatory requirements. CCD considers risk an inextricable part of its development and consequently strives to promote a culture in which each of its employees and managers is responsible for risk management.

 

 

INTEGRATED RISK MANAGEMENT FRAMEWORK

 

CCD's objective in risk management is to optimize the risk-return trade-off, within set tolerance limits, by applying integrated risk management and control strategies, policies and procedures to all its activities. It also aims to provide, through the Integrated Risk Management Framework, a prudent and appropriate framework that complies with accepted accountability and independence principles.

 

As important components of this management framework, risk appetite and tolerance determine the type and level of risk that CCD is prepared to assume to achieve its business and strategic objectives. They provide a basis for integrated risk management by promoting a better understanding of risks and their impact on the risk profile. This framework provides for a system of risk indicators that are monitored on a regular basis to ensure that CCD's risk profile matches the degree of risk appetite and tolerance sought by senior management and the Board of Directors in view of CCD's mission, vision and values. The Board of Directors is responsible for approving the risk appetite and tolerance framework, which must reflect CCD's financial and strategic objectives.

 

The Integrated Risk Management Framework also includes the overall operational infrastructure and the risk management governance structure, which are supported by all the explicit and implicit rules, values, and ways of thinking and acting within Desjardins Group and CCD. This framework promotes exchanges between the risk management function, other support functions, business sectors and regulated entities.

 

To promote sound risk management and enhance risk management capabilities, risk management training sessions are held on a regular basis for members of governing bodies. The organization has a continuing professional development plan, through which it intends to continue updating the knowledge of such members.

 

 

RISK MANAGEMENT GUIDELINES

 

The Integrated Risk Management Framework is based on risk management guidelines that provide in particular for the following:

 

·      The accountability of CCD with regard to the risks inherent to its operations;

·      Application at every level of the organization in order to obtain a comprehensive vision of risk exposure;

·      The existence and presence of a complete and rigorous process to determine the appropriate capital level based on the risks assumed;

·      Consideration of risk management in the formulation of strategic plans and business strategies and in the resulting decisions;

·      Thorough risk assessment prior to launching new products or introducing projects with a strong financial impact.

 

 

RISK MANAGEMENT GOVERNANCE

 

The Integrated Risk Management Framework is based on a solid risk governance structure and reflects CCD's organizational structure.

 

CCD's Board of Directors is responsible for guiding, planning, coordinating and monitoring all of CCD's operations, and in such capacity, it participates actively in overseeing the major risks to which CCD is exposed. The Board of Directors is primarily responsible for adopting the overall directions and strategies proposed by senior management as well as risk management policies aimed at ensuring sound and prudent management of operations. To discharge its specific risk management responsibilities, the Board is supported by the Risk Management Commission, the Audit and Inspection Commission and the Board of Ethics and Professional Conduct. Further information about these bodies is found in the Corporate Governance section of the Annual Report.

 

CCD's Management Committee must, in particular, make recommendations to the Board of Directors concerning risk management policies and strategies and ensure that they are implemented efficiently and effectively.

 

Independent units complete CCD's risk management governance infrastructure. Desjardins Group's Risk Management Office is a strategic function whose main purpose is to partner in Desjardins Group's development by identifying, measuring and managing risks while ensuring the longevity of Desjardins Group regulated entities, including CCD. The risk management function is responsible for recommending and establishing risk management policies, and setting up the appropriate infrastructure, processes and practices to target all major risks. Monitoring and oversight of the various risks is a shared responsibility that is assumed, in particular, by the business sectors and teams responsible for regulatory compliance and financial governance. They complement the work of those responsible for risk management to ensure that services are in line with growing regulatory requirements.

 

The Desjardins Group Monitoring Office is an independent and objective assurance and advisory body that assists Desjardins Group's and CCD's management personnel in carrying out their governance responsibilities. It also oversees and advises management with respect to its duty to manage in a sound and prudent manner. In so doing, it contributes to improving Desjardins Group's and CCD's overall performance and maintaining the confidence of members, the public and regulatory bodies in Desjardins Group and CCD. The Desjardins Group Monitoring Office includes the internal audit services of Desjardins Group's subsidiaries and other components, including CCD, as well as audit and inspection services for the caisse network.

 

 

RISK MEASUREMENT AND DISCLOSURE

 

Risk measurement

 

CCD uses both quantitative and qualitative techniques to determine its risk exposure. It ensures that an appropriate selection of measurement tools and mitigation techniques are designed and maintained in order to support its business development.

 

Risks are quantified based on both the current economic context as well as hypothetical situations simulating crises applied across the entire organization. Sensitivity tests and crisis scenarios are used as additional risk analysis tools to measure the potential impact of exceptional but plausible events on profitability and capital levels. Organization-wide crisis scenarios are developed on the basis of the anticipated economic outlook under distress conditions. The results of these analyses help detect potential vulnerabilities to risk factors for various operations.

 

Risk disclosure

 

Risk reports on all significant risks are prepared for the Management Committee, the Risk Management Commission and the Board of Directors of CCD. These reports provide relevant information on changes in the main risk indicators as well as on the capital position, particularly capital adequacy in relation to CCD's risk profile. These reports are regularly updated to include the latest risk management developments so that decision-making bodies receive timely information on major risks that is both practical and forward-looking.

 

In addition, with Desjardins Group's designation as a domestic systemically important financial institution (D-SIFI), disclosure will be further enhanced in coming years as a result of compliance with the principles for effective risk data aggregation and risk reporting (RDARR), which will strengthen risk governance, risk data aggregation and risk reporting capabilities. Compliance with these principles will facilitate implementation of the recommendations of the Financial Stability Board regarding disclosure contained in the document "Enhancing the Risk Disclosures of Banks", issued on October 29, 2012.

 

 

BASEL III CAPITAL ACCORD

 

Basel III is an international capital adequacy tool designed to align regulatory capital requirements more closely with risk exposure and to further the continuous development of the risk assessment capabilities of financial institutions.

 

The Basel III framework is essentially based on three pillars: the first pillar sets out the requirements for risk-weighted regulatory capital; the second pillar deals with the supervisory review process; and the third pillar stipulates financial disclosure requirements.

 

In accordance with the guideline on adequacy of capital base standards, which was adapted to reflect the provisions of Basel III, CCD currently uses the Standardized Approach for credit and market risk exposures and the Basic Indicator Approach for operational risk. This provision is used to calculate capital ratios, among other things.

 

Again this year, numerous efforts were made to support the implementation of sound risk management practices and to align regulatory capital requirements more closely with risk exposure. Desjardins Group and CCD are continuing to invest in improving their tools and systems and aligning them with sound practices in the industry for the main types of risks. In recent years, the Bank for International Settlements has issued new requirements (Basel III) for the global regulation of capital standards. These new rules, in effect since January 1, 2013, have increased not only capital requirements but also risk management requirements. In addition to the changes made to the level and definition of eligible capital and measurement of risk-weighted assets, Basel III has, under Pillar 2, introduced new liquidity requirements and raised expectations for a number of management practices.

 

 

 

CREDIT RISK

 

Credit risk is the risk of losses resulting from a borrower's or counterparty's failure to honour its contractual obligations, whether or not such obligations appear on the consolidated balance sheet.

 

CCD is exposed to credit risk through its direct business and government loans1 as well as through various other commitments, including letters of credit and transactions involving derivative financial instruments and securities.

 

 

CREDIT RISK MANAGEMENT

 

CCD is accountable for its performance and it therefore has some latitude in terms of frameworks, approvals, and the corresponding management and monitoring tools and structures. To assist CCD in this area, Desjardins Group has set up centralized structures and procedures to ensure that this risk management framework allows for effective, sound and prudent management.

 

Desjardins Group has a Risk Management Office which includes two divisions that are primarily responsible for credit risk management for Desjardins Group as a whole and for CCD. These divisions share responsibilities based on the major activities: credit approval, quantification, monitoring and reporting.

 


CREDIT RISK FRAMEWORK

 

A series of policies and standards govern all aspects of CCD's credit risk management. This framework defines the responsibilities and powers of the parties involved, the limits imposed by risk tolerance, the rules governing credit granting and file administration and, the disclosure rules for CCD's exposure to credit risks.

 

Together, these frameworks govern risk management and control activities.

 

 

CREDIT GRANTING

 

Desjardins Group's Risk Management Office is responsible for approving CCD's files.

 

Professionals are grouped in a single division. Their skills, their approval responsibilities and the depth of the analysis required depend on the product's features as well as the complexity and extent of transaction.

 

 

BUSINESS LOANS

 

The granting of credit to businesses is based on an analysis of the various parameters of each file, where each borrower is assigned a risk rating. These ratings are assigned individually following a detailed examination of the financial, market, operational and management characteristics of the business.

 

For the main commercial portfolios, the scoring system used has 19 ratings, broken down into 12 levels, each representing a probability of default.

 

The characteristics of each borrower are analyzed using models based on internal and external historical data, taking into account the specific features of the borrower's economic sector and the performance of comparable businesses. These analyses are performed using systems that can make quantitative comparisons, and are supplemented by the professional judgment of the personnel involved with the file.

 

 

The following table provides a comparison of internal ratings and ratings assigned by external agencies.

 

TABLE 13 - RATINGS BY RISK LEVEL

 

Ratings

Moody's

S&P

Description

1 to 2

Aaa to Aa3

AAA to AA-

High quality

2.5

A1 to A3

A+ to A-

3 to 4

Baa1 to Baa3

BBB+ to BBB-

4.5 to 5.5

Ba1 to Ba3

BB+ to BB-

Lower quality

6 to 7.5

B1 to Caa1

B+ to CCC+

8 and 9

Caa2 to C

CCC to C-

10 to 12

D

D

Impaired loans or loans in default

 

__________________________

1 Excluding the Desjardins network entities, these loans accounted for close to 15% and 20% of assets on the Consolidated Balance Sheets as at December 31, 2013 and December 31, 2012, respectively.

 

 

The use of internal ratings and estimates has been expanded to other risk management and governance activities such as establishing analysis requirements and file authorization levels, determining the different types of follow-up activities, as well as assessing and disclosing portfolio risk quality.

 

 

TABLE 14 - CREDIT RISK EXPOSURE OF THE LOAN PORTFOLIO

 

As at December 31

2013

(in thousands of $)

High quality

Lower quality

Impaired loans and loans in default

Total






Day, call and short-term loans to investment dealer and brokers

$     119,000

$             --

$         --

$     119,000

Public and parapublic sectors

578,325

--

--

578,325

Members





Federation

14,352,289

--

--

14,352,289

Other

352,807

--

--

352,807

Other entities included in the group

  scope of Desjardins Group

1,411,971

--

--

1,411,971

Loans purchased from Desjardins Group

57,774

--

--

57,774

Personal

1,604,871

114,635

5,015

1,724,521

Business

1,915,929

2,087,681

10,326

4,013,936

                                                                                   

$ 20,392,966

$ 2,202,316

$ 15,341

$ 22,610,623







2012


High quality

Lower quality

Impaired loans and loans in default

Total






Public and parapublic sectors

$   1,065,328

$              --

$         --

$  1,065,328

Members





Federation

10,802,676

--

--

10,802,676

Other

184,978

--

--

184,978

Other entities included in the group

  scope of Desjardins Group

1,417,168

--

--

1,417,168

Loans purchased from Desjardins Group

88,863

--

--

88,863

Personal

1,287,199

103,013

5,751

1,395,963

Business

1,588,335

1,739,776

14,868

3,342,979


$ 16,434,547

$ 1,842,789

$ 20,619

$ 18,297,955

 

CHART 1 - LOAN DISTRIBUTION BY BORROWER CATEGORY

AS AT DECEMBER 31, 2013

Click on, or paste the following link into your web browser, to view the associated PDF document (please refer to Page 5 of the associated PDF Document).

 

http://www.rns-pdf.londonstockexchange.com/rns/2678B_-2014-2-28.pdf 

 

COUNTERPARTY AND ISSUER RISK

 

Counterparty and issuer risk is a credit risk relative to different types of securities, derivative financial instrument and securities lending transactions.

 

Desjardins Group's Risk Management Office sets the maximum exposure for each counterparty and issuer based on quantitative and qualitative criteria. The amounts are then allocated to different components based on their needs.

 

To properly managing its risk, CCD assigns a credit rating to each counterparty and issuer, based on four external credit assessment institutions (DBRS, Moody's, S&P and Fitch). CCD uses this rating to establish exposure limits and to calculate capital requirements using the Standardized Approach. These four credit assessment institutions meet the eligibility criteria of the Basel Accord and are authorized by the AMF and OSFI.

 

A large proportion of CCD's exposure is to different levels of government in Canada, Quebec public or parapublic entities and major Canadian banks. For most of them, the credit rating is A- or higher. In addition, CCD is not directly exposed to the sovereign debt of Greece, Portugal, Italy, Ireland or Spain, and its exposure to U.S. and European financial institutions is low.

 

In its derivative financial instrument and securities lending transactions, which include repurchase and reverse repurchase agreements and securities borrowing and lending, CCD is exposed to counterparty credit risk.

 

 

CCD uses derivative financial instruments primarily for asset-liability management purposes. Derivative financial instruments are contracts whose value is mainly based on an underlying asset, such as interest rates or exchange rates. The vast majority of derivative financial instruments are traded by mutual agreement between CCD and its counterparties, and include forward exchange contracts, currency swaps, interest rate swaps, credit default swaps, total return swaps, forward rate agreements, and currency, interest rate and stock index options. Other instruments are exchange-traded contracts or contracts traded through a clearing house, and mainly consist of futures and swaps.

 

The credit risk associated with derivative financial instruments refers to the risk that a counterparty will fail to honour its contractual obligations toward CCD at a time when the fair value of the instrument is positive for CCD. The credit risk associated with derivative financial instruments normally corresponds to a small fraction of the notional amount. The replacement cost and the credit risk equivalent are two measures used to quantify this risk. Replacement cost refers to the current replacement cost of all contracts with a positive fair value. Credit risk equivalent is equal to the sum of this replacement cost and the future credit exposure.

 

CCD limits the credit risk associated with derivative financial instruments by doing business with counterparties that have a high credit rating. Note 15, "Derivative financial instruments and hedging activities," to the Consolidated Financial Statements presents derivative financial instruments by credit risk rating and type of counterparty. Based on replacement cost, this note indicates that substantially all counterparties have credit ratings ranging from AAA to A. Furthermore, by purchasing hedges through credit derivatives, such as credit default swaps and total return swaps, CCD can transfer credit risk to a counterparty or hedge itself against various types of risk.

 

CCD also limits credit risk with certain counterparties by entering into master agreements called International Swaps and Derivatives Association (ISDA) agreements, which define the terms and conditions for the transactions. These agreements are legal contracts that bind the counterparties. Most of CCD's agreements provide for netting to determine the net exposure in the event of default. In addition, a Credit Support Annex can be added to the master agreement in order to request that the counterparties to pay or secure the current market value of the positions when such value exceeds a certain threshold. Taking into account master netting agreements, the risk-weighted balance for all CCD's derivative financial instruments as at December 31, 2013 was $385.2 million, compared to $378.0 million as at December 31, 2012. As at December 31, 2013, the amount of collateral that CCD would have to provide in the event of a downgrade was marginal because the replacement cost was positive for the majority of its contracts.

 

Securities lending transactions are regulated by Investment Industry Regulatory Organization of Canada participation agreements. CCD also uses netting agreements with its counterparties to mitigate credit risk and requires a percentage of collateralization (a pledge) on these transactions.

 

CCD accepts from its counterparties only financial collateral that complies with the eligibility criteria set out in its policies. These criteria allow for the timely realization of collateral, if necessary, in the event of default. The types of collateral received and pledged by CCD are mainly cash and government securities.

 

Additional information about credit risk is presented in Note 22, "Commitments, guarantees and contingent liabilities," to the Consolidated Financial Statements.

 

 

TABLE 15 - LOANS, LETTERS OF GUARANTEE AND CREDIT COMMITMENTS BY ECONOMIC SECTOR

 

As at December 31

2013

2012

(in thousands of $)

Residential mortgages

$                192,870

$           199,083

Consumer, credit card and other personal loans

   1,605,929

1,298,864

Public administrations

2,271,980

2,414,647

Agriculture and related enterprises

52,725

59,826

Retail trade

1,639,061

1,211,181

Wholesale trade

467,565

360,165

Education

3,187,590

3,167,274

Accommodation and food services

24,663

31,706

Non-residential real estate

867,408

416,315

Construction industries

773,401

 426,959

Manufacturing industries

1,358,142

1,245,011

Financial intermediaries

26,528,944

19,595,691

Fishing, logging and mining

1,041,094

1,044,813

Health and social services

314,316

403,776

Service corporations

1,118,630

954,975

Telecommunications and utilities

2,090,785

1,891,464

Transportation and warehousing

813,799

662,708

Other sectors

263,720

208,175

Total 

$            44,612,622

 $      35,592,633

 

Additional credit risk data

 

The tables below provide additional credit risk data. Used and unused exposures are comprised of the main credit risks, while off-balance sheet exposure includes credit equivalent amounts for comparable transactions, over-the-counter derivatives, other off-balance sheet exposures and the overall trading portfolio.

 

 

TABLE 16 - RISK EXPOSURE BY ASSET CLASS (EXPOSURE AT DEFAULT (EAD))

 

As at December 31, 2013

 Exposure categories(1)


 Used

 exposure  

Unused

exposure

Off-balance

sheet exposure(2)

 

 Total

 Net 

exposure(3)

(in thousands of $)

Standardized approach






Sovereign borrowers

$  5,070,527

$    636,033

$      14,268

$   5,720,828

$   5,720,828

Financial institutions

17,633,893

2,880,679

4,865,695

25,380,267

22,864,022

Businesses

4,172,189

3,347,645

157,978

7,677,812

7,581,428

Mortgages

176,365

--

--

176,365

176,365

Other retail client exposures

1,605,925

--

--

1,605,925

13,357

Equities

7,092

--

--

7,092

7,092

Trading portfolio

--

--

1,200,029

1,200,029

556,781

Total

$ 28,665,991

$ 6,864,357

$ 6,237,970

$ 41,768,318

$ 36,919,873

 

(1) The definition of exposure categories related to regulatory capital requirements differs from the accounting classification.

(2) Including repo-style transactions, over-the-counter derivatives and other off-balance sheet exposures.

(3) After credit risk mitigation (CRM) techniques, including the use of collateral, guarantees and credit derivatives.

 

 

TABLE 17 - GROSS RISK EXPOSURE BY ASSET CLASS (1) AND BY RISK TRANCHE (STANDARDIZED APPROACH)(2)

 

As at

December 31, 2013

Risk tranches

(in thousands of $)

0%

20%

35%

50%

75%

100%

Other

Total

Sovereign borrowers

$5,720,828

$                --

$             --

$             --

$             --

$             --

$             --

$5,720,828

Financial institutions

--

25,380,267

             --

             --

             --

             --

             --

25,380,267

Businesses

--

79,507

             --

5,188

             --

7,586,127

10,327

7,681,149

Mortgages

--

                 --

171,350

             --

             --

5,015

             --

176,365

Other retail exposures

--

                 --

             --

            --

1,605,925

            --

            --

1,605,925

Equities

--

                 --

             --

            --

            --

7,092

            --

7,092

Trading portfolio

 6,217

1,158,621

            --

  3,888

            --

31,224

79

1,200,029

Total

$5,727,045

$ 26,618,395

$   171,350

$       9,076

$1,605,925

$7,629,458

$    10,406

$41,771,655

 

(1)The definition of exposure categories related to regulatory capital requirements differs from the accounting classification.

(2) Exposures before the impact of individual allowances for credit losses and risk mitigation techniques.

 

MAXIMUM CREDIT RISK EXPOSURE

 

Table 18 presents the maximum credit risk for financial instruments, without taking into account collateral held or other credit enhancements. The maximum credit risk exposure for other financial instruments recognized on the Consolidated Balance Sheets is equal to their carrying amount.

 

 

 

TABLE 18 - MAXIMUM CREDIT RISK EXPOSURE

 

As at December 31

2013

2012

(in thousands of $)

Recognized on the Consolidated Balance Sheets





Deposits with financial institutions

$

134,544

$

414,728

Securities





Available-for-sale securities


5,257,483


5,017,104

Securities designated as at fair value through profit or loss


  2,016,184


1,763,551

Loans


22,607,286


18,293,091

Off-balance sheet





Credit commitments

$

21,646,757

$

16,920,070

Guarantees and standby letters of credit


355,242


374,608

 

MITIGATING CREDIT RISK

 

In its lending operations, CCD obtains collateral if deemed necessary for a client's loan facility following an assessment of the client's creditworthiness. Collateral normally takes the form of assets such as capital assets, receivables, inventory, cash, government securities or equities. For some portfolios, programs offered by organizations such as CMHC are used in addition to customary collateral. As at December 31, 2013, loans guaranteed by governments and other public and parapublic organizations represented 10% of total gross loans, compared to 13% at the end of 2012, as indicated in Table 19. Policies and procedures, adapted to each product, contain the requirements for appraising collateral, its legal validation and follow-up.

 

Where required, CCD uses mechanisms for sharing risk with other financial institutions, such as loan syndication.

 

TABLE 19 - LOANS BY BORROWER CATEGORY

 

As at December 31

 

2013

 

2012

 

2011

(in millions of $ and as a %)

Day, call and short-term loans to

   investment dealers and brokers

$       119

         -- %

$         --

-- %

$       91

        -- %

Public and parapublic sectors

578

     3

1,065

             6

1,905

       11

Members







Federation

14,352

    63

10,803

           59

9,679

       54

Other

353

      2

185

             1

230

         1

Other entities included in the group scope

   of Desjardins Group

1,412

      6

1,417

             8

1,887

       11

Loans purchased from Desjardins Group

58

    --

89

            --

138

         1

Personal

1,725

      8

1,396

             8

1,100

         6

Business

4,014

        18

3,343

           18

2,817

       16


22,611

100 %

18,298

        100%

17,847

     100%

Allowance for credit losses

$        (49)


$       (53)


$      (58)


Total loans by borrower category

$  22,562


$ 18,245


$ 17,789


Loans guaranteed by governments and

  other public and parapublic

  organizations included above

$    2,233


$   2,416


$  3,005


Loans guaranteed by governments and

  other public and parapublic

  organizations as a percentage of total

  gross loans

10%


13%


17%


 

Quality of loan portfolio

 

CHART 2 - GROSS IMPAIRED LOANS

As at December 31

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Allowance for credit losses

 

The impairment of a loan or a group of loans is determined by discounting future expected cash flows at the interest rate inherent to the financial asset. The allowance is equal to the difference between this amount and the carrying amount. This allowance is presented in deduction of assets under "Allowance for credit losses." To determine the estimated recoverable amount of a loan, CCD discounts the estimated future cash flows at the effective interest rate inherent to the loan. When the amounts and timing of future cash flows cannot be estimated with reasonable reliability, the estimated recoverable amount is determined using either the fair value of the collateral underlying the loan, net of expected costs of realization, or the observable market price for the loan. The collateral may vary depending on the type of loan.

 

Individual allowances

 

CCD first reviews its loan portfolios on a loan-by-loan basis to assess credit risk and determine if there is any objective evidence of impairment for which a loss should be recognized in the Consolidated Statements of Income. Loan portfolios for which an individual allowance has not been established are then included in groups of assets having similar credit risk characteristics and are subject to a collective allowance. Individual allowances totalled $3.3 million as at December 31, 2013, compared to $4.9 million as at the same date one year earlier. These amounts represented 21.8% and 23.6%, respectively, of the gross impaired loan portfolio.

 

 

 

TABLE 20 - IMPAIRED LOANS BY BORROWER CATEGORY

 

As at December 31

2013


2012


2011

(in millions of $ and as a %)

Gross loans

 Gross impaired

loans

 Individual allowances for credit losses

 Net impaired loans


 Net impaired loans


Net impaired loans

Day, call and short-term loans to investment dealers and brokers

$

119

$

--

--

%

$

--

$

--

$

        -- 

$

        --

Public and parapublic sectors


578


--

--



--


--





Members















Federation


14,352


--

--



--


--


        -- 


        --

Other


353


--

--



--


--


        -- 


        --

Other entities included in the group

   scope of Desjardins Group


1,412


--

--



--


--


        -- 


         --

Loans purchased from Desjardins

  Group


58


--

--



--


--


        -- 


        --

Personal


1,725


5

0.29



--


5


        6 


          8

Business


4,014


10

0.25



3


7


      10 


        20

Total

$

22,611

$

15



$

3

$

12

$

      16 

$

        28

As a percentage of gross loans





0.07

%




0.05%


0.09 %


0.15 %

 

 

TABLE 21 - SPECIFIC COVERAGE RATIO

 

 As at December 31

2013

2012

2011

(as a %)

Impaired loan portfolio coverage ratio

21.8

%

23.6

%

29.4

%

 

Collective allowance

 

The method used by CCD to determine the collective allowance takes into account the risk parameters of the various loan portfolios, in particular through the integration of sophisticated credit risk models. These collective allowance impairment models take into account certain factors such as probabilities of default (loss frequency), loss given default (extent of losses) and gross exposures at default. These parameters, which are based on historical losses, are determined according to the category and the risk rating of each loan. The measurement of the collective allowance also depends on management's assessment of current credit quality trends with respect to business sectors, the impact of changes in its credit policies, and economic conditions.

 

The collective allowance stood at $45.9 million as at December 31, 2013, versus $47.9 million as at December 31, 2012. An allowance related to off-balance sheet exposures of $34.0 million as at December 31, 2013, compared to $29.1 million as at the end of 2012 was recognized under "Other liabilities - Other" in the Consolidated Balance Sheets. The collective allowance reflects management's best estimate of allowances for credit losses regarding loans not yet individually identified as impaired.

 

Impaired loans

 

There is objective evidence of impairment when one of the following conditions is met: there is reason to believe that a portion of the principal or interest cannot be collected; or the interest or principal repayment is contractually 90 days past due, unless the loan is fully secured or in the process of collection; or the interest or principal is more than 180 days in arrears.

 

The volume of impaired loans decreased $5.3 million, from $20.6 million as at December 31, 2012 to $15.3 million at year-end 2013, due to the repayment and write-off of some of these loans. Net impaired loans-i.e. the gross amount less individual allowances for these loans-was $12.0 million as at December 31, 2013. Net impaired loans outstanding accounted for less than 0.1% of the gross loan portfolio as at December 31, 2013 and 2012.

 

Provision for credit losses

 

CCD recognized a provision for credit losses of $1.6 million for the year ended December 31, 2013. This represents a $5.8 million decrease from one year earlier, when a $7.4 million provision was recorded. This decrease was primarily due to an improvement in the quality of the business loan portfolio, as well as the decrease in the average term of this portfolio, which had a favourable effect on the amount of the collective allowance.

 

 

 

MARKET RISK

 

Market risk refers to the risk of changes in the fair value of financial instruments resulting from fluctuations in the parameters affecting this value, in particular, interest rates, exchange rates, credit spreads and their volatility.

 

CCD is exposed to market risk primarily through positions taken in the course of its traditional financing and trading activities. CCD has adopted policies that set out the principles, limits and procedures to use in managing market risk.

 

INTEREST RATE RISK MANAGEMENT

 

CCD is exposed to interest rate risk, which represents the potential impact of interest rate fluctuations on net interest income and the economic value of equity. Interest rate risk is the main component of market risk for CCD's traditional banking activities other than trading, such as accepting deposits and granting loans, as well as for its securities portfolio used for long-term investment purposes and as liquidity reserves.

 

Sound and prudent management is applied to optimize net interest income while minimizing the negative incidence of interest rate movements. The established policies describe the principles, limits and procedures that apply to interest rate risk management. Simulations are used to measure the impact of different variables on changes in net interest income and the economic value of equity.

 

Desjardins Group's asset and liability management committee (the Asset/Liability Committee) is responsible for analyzing and approving the global matching strategy on a monthly basis while respecting the parameters defined in interest rate risk management policies.

 

The following table presents the potential impact before income taxes on the non-trading portfolio of a sudden and sustained 100-basis-point increase or decrease in interest rates on net interest income and the economic value of equity.

 

 

 

TABLE 22 - INTEREST RATE SENSITIVITY (BEFORE INCOME TAXES)

 

As at December 31

2013

2012

(in thousands of $)

Net interest income(1)

Economic value of equity(2)

Net interest income(1)

Impact of a 100-basis-point increase in interest

   rates

$      148

$      (2,559)

 $     2,085

$    (3,140)

Impact of a 100-basis-point decrease in interest

   rates

$  (1,423)

$       2,622

 $   (5,988)

  $      3,770

 

(1) Represents the sensitivity of net interest income for the next 12 months.

(2) Represents the sensitivity of the present value of assets, liabilities and off-balance sheet instruments.

 

Interest rate sensitivity is based on the earlier of the repricing or maturity date of the assets, liabilities and derivative financial instruments used to manage interest rate risk. The situation presented reflects the position on that date only and can change significantly in subsequent years depending on the preferences of members and clients and the application of policies on interest rate risk management.

 

Some Consolidated Balance Sheets items are considered non-interest-rate sensitive instruments, such as non-performing loans, non-interest-bearing deposits, non-maturity deposits with an interest rate not referenced to a specific rate (such as the prime rate), and equity. As dictated in its policies, CCD's management practices are based on prudent assumptions with respect to the maturity profile used in its models to determine their interest rate sensitivity.

 

FOREIGN EXCHANGE RISK MANAGEMENT

 

Foreign exchange risk may be defined as the risk that the actual or expected value of assets denominated in a foreign currency will be higher or lower than that of liabilities denominated in the same currency.

 

Overall, CCD's exposure to this risk is low because the majority of its transactions are conducted in Canadian dollars. However, in certain specific situations, CCD may become exposed to foreign exchange risk, particularly with respect to the U.S. dollar and the euro. This exposure mainly arises from its intermediation activities with members and clients, and its financing and investing activities. To ensure that its exposure is properly controlled and limited, CCD uses, among other things, derivative financial instruments such as forward exchange contracts and currency swaps.

 

 

MANAGEMENT OF MARKET RISK RELATED TO TRADING ACTIVITIES - VALUE-AT-RISK

 

The market risk of trading portfolios is managed on a daily basis under a specific policy. The main tool used to measure the market risk of trading portfolios is "Value at risk" (VaR), which represents an estimate of the potential loss over a certain period of time at a given confidence level.

 

A Monte Carlo VaR is calculated daily on the trading portfolios using a 99% confidence level and a holding horizon of one day. It is therefore reasonable to expect a loss exceeding the VaR figure once every 100 days. The calculation of VaR is based on historical data for a one-year interval.

 

The following table presents the aggregate VaR of CCD's trading activities by risk category as well as the diversification effect. Interest rate risk and foreign exchange risk are the two risk categories to which CCD is exposed. The definition of a trading portfolio meets the various criteria defined in the Basel Capital Accord.

 

 

 

TABLE 23 - VaR BY RISK CATEGORY (TRADING PORTFOLIO)

 


As at

December 31, 2013

For the year ended December 31, 2013

As at December 31, 2012

For the year ended December 31, 2012

(in thousands of $)


Average

High

Low


Average

High

Low

Foreign exchange

$   67

$  128

$   548

$      3

$    40

$    42

$ 114

$     1

Interest rate

558

609

1,104

303

357

467

777

269

Diversification effect (1)

(57)

(107)

N/A(2)

N/A(2)

(26)

(44)

N/A(2)

N/A(2)

Aggregate VaR

$ 568

$  630

$ 1,187

$  359

$ 371

$ 65

$ 745

$ 264

 

 

(1) Represents the risk reduction related to diversification, namely the difference between the sum of the VaR for the various market risk

    categories and the aggregate VaR.

(2) Not applicable: The highs and lows of the various market risk categories can refer to different dates.

 

BACK TESTING

 

Back testing is conducted to validate the VaR model used by comparing on a daily basis the VaR with the profits or losses (P&L) on CCD's portfolios.

 

CCD performs back testing daily, applying a hypothetical P&L to its trading portfolios. The hypothetical P&L is calculated by determining the difference in value resulting from changes in market conditions between two consecutive days. The portfolio mix between these two days remains static.

 

 

The following chart presents changes in VaR for trading activities as well as the profits and losses related to these activities. During the fourth quarter of 2013, the actual P&L did not exceed the VaR.

 

CHART 3

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STRESS TESTING

 

From time to time, certain events that are considered highly unlikely may occur and have a significant impact on trading portfolios. These events at the tail-end of the distribution are the result of extreme situations.

 

The approach used to measure the risk related to highly unlikely but plausible events is applied through the use of a stress testing program (sensitivity tests, historical scenarios and hypothetical scenarios) at regular intervals. Stress testing results are analyzed together with the VaR calculations in order to detect vulnerability to such events. The stress-testing program is reviewed periodically to ensure that it is kept current.

 

 

 

LIQUIDITY RISK

 

Liquidity risk refers to CCD's capacity to raise the necessary funds (by increasing liabilities or converting assets) to meet a financial obligation, whether or not it appears on the Consolidated Balance Sheets.

 

In its role as Treasurer to Desjardins Group, CCD is exposed to liquidity risk. Liquidity risk is managed in order to ensure that Desjardins Group has timely and cost-effective access to the funds needed to meet its financial obligations as they become due, in both routine and crisis situations. Managing this risk involves maintaining a sufficient level of liquid securities, ensuring stable and diversified sources of funding, monitoring indicators and adopting a contingency plan to implement in the event of a liquidity crisis.

 

Liquidity risk management is a key component of the overall risk management strategy. Desjardins Group and CCD have established policies describing the principles, limits, risk appetite and tolerance thresholds and procedures that apply to liquidity risk management.

 

Policies are reviewed on a regular basis to ensure that they are appropriate for the operating environment and market conditions. They are also updated to reflect regulatory requirements and sound liquidity risk management practices.

 

The implementation of Basel III will strengthen international minimum liquidity requirements through the application of a liquidity coverage ratio (LCR) and a net stable funding ratio (NSFR). The Basel Committee recently issued a timetable and guidance for phase-in of the LCR effective 2015. The rules for applying NSFR requirements are still under review and should come into effect in 2018. Desjardins Group already monitors these two ratios on a regular basis under its liquidity risk management policy and intends to comply with the new standards once they become effective.

 

 

Desjardins Group's Treasury segment ensures stable and diversified sources of institutional funding by type, source and maturity. It uses a wide range of financial products and borrowing programs on various markets for its financing needs.

 

It should be noted that systems are in place for the issuance of covered bonds and the securitization of CMHC-insured loans. Furthermore, Desjardins Group is eligible for the Bank of Canada's various intervention programs and loan facilities for Emergency Lending Assistance advances.

 

 

LIQUIDITY RISK MEASUREMENT AND MONITORING

 

Desjardins Group determines its liquidity needs by reviewing its current operations and evaluating its future forecasts for balance sheet growth and institutional funding conditions. Various analyses are used to determine the actual liquidity levels of assets and the stability of liabilities based on observed behaviours or contractual maturities. Maintaining reserves of high-quality liquid assets is required to offset potential cash outflows following a disruption in capital markets, or events that would restrict its access to funding or result in a serious run on deposits.

 

The minimum liquid asset levels to be maintained by the caisse network, the Federation and CCD are specifically prescribed by policies. Daily management of securities and the reserve level to be maintained is centralized at Desjardins Group Treasury and is subject to monitoring by the Risk Management Division under the supervision of Desjardins Group's Finance and Risk Management Committee. Securities eligible for liquidity reserves must meet high security and negotiability criteria and provide assurance of their adequacy in the event of a severe liquidity crisis. The securities held are largely Canadian government securities.

 

In addition to regulatory ratios, a Desjardins-wide stress testing program has been set up. This program incorporates the concepts put forward in "Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring." The scenarios make it possible to measure the extent of potential cash outflows in a crisis situation, to implement liquidity ratios and levels to be maintained across Desjardins Group and to assess the potential marginal cost of such events, depending on the type, severity and level of the crisis.

 

 

Liquidity risk indicators

 

The purpose of monitoring liquidity indicators daily is to quickly identify a lack of liquidity, whether potential or real, within Desjardins Group and on capital markets. Warning levels subject to an escalation process are established for each of these indicators. If one or more indicators trigger a warning level, the Desjardins Group Finance and Risk Management Committee is immediately alerted. This committee would also act as a crisis committee should the contingency plan need to be applied.

 

Desjardins Group has a liquidity contingency plan providing for, in particular, an internal crisis committee vested with special decision-making powers to deal with crisis situations. This plan lists the sources of liquidity available in exceptional situations. In addition, it lays down the decision-making and information process based on the severity level of a potential crisis.

 

The aim of the plan is to allow quick and effective intervention in order to minimize disruptions caused by sudden changes in member and client behaviour and potential disruptions in capital markets or economic conditions.

 

 

Sources of refinancing

 

Core financing, which includes capital and a diversified deposit portfolio, is the foundation upon which CCD's liquidity position depends. Total deposits presented on the Consolidated Balance Sheets amounted to $27.3 billion as at December 31, 2013, up $4.7 billion since December 31, 2012. This growth was mainly due to market debt, which is CCD's preferred source of refinancing. In addition, CCD diversifies its refinancing sources in order to limit its dependence on a single currency. As shown in Chart 5, in addition to the Canadian dollar deposit base, 37% of CCD's refinancing was denominated in U.S. dollars and 4% in euros, funds being obtained primarily under short-term and medium-term note programs.

 

CHART 4 - DEPOSITS BY CATEGORY                                                       CHART 5 - DEPOSITS BY CURRENCY

AS AT DECEMBER 31, 2013                                                                     AS AT DECEMBER 31, 2013

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(please refer to Page 8 of the Associated PDF                                             (please refer to Page 9 of the Associated PDF
Document).                                                                                               

Document).

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REFINANCING PROGRAMS AND STRATEGIES

 

As Treasurer of Desjardins Group, CCD satisfies the needs of the organization's members and clients, and implements the appropriate strategies to determine, measure and manage the related risks. A policy on the adequacy and administration of cash flows as well as a management plan for refinancing have been put in place to that end. In 2013, CCD maintained its cash flow at an adequate level to respond to Desjardins Group's needs.

 

To secure long-term refinancing at the best cost, CCD continues to be present on the federally-guaranteed mortgage loan securitization market under the Canada Mortgage Bonds (CMB) program. In addition, to ensure stable refinancing, CCD diversifies its sources from institutional markets. It therefore regularly makes use of the financial markets when conditions are favourable and makes public and private issues of term notes on Canadian, U.S. and European markets as required.

 

 

The main programs currently used by CCD are:

 

Table 24 - MAIN REFINANCING PROGRAMS

 

As at December 31, 2013

Refinancing program

Maximum authorized amount

Medium-term notes (Canadian)

$5 billion

Covered bonds (multi-currency)

€5 billion(1)

Short-term notes (European)

€1 billion

Short-term notes (U.S.)

US$7 billion

Medium-term notes (multi-currency)

€7 billion

 

(1) This maximum authorized amount covers CCD's Structured Covered Bond Program and Legislative Covered Bond Program.

 

In 2013, CCD also participated in new issues under the Canada Mortgage Bonds (CMB) Program. The aggregate amount of assets securitized through this program was $1.7 billion in 2013. CCD also issued $2.2 billion of medium-term notes on the Canadian market and US$500.0 million through its multi-currency medium-term deposit note program during the same period. On January 29, 2014, CCD also obtained the CMHA's accreditation for its legislative covered bond program.

 

CCD's medium-term notes totalled $14.8 billion as at December 31, 2013, compared to $10.8 billion as at December 31, 2012.

 

Credit ratings on issued securities

 

Maintaining competitive credit ratings is instrumental to accessing sources of wholesale funding, obtaining low funding costs and boosting Desjardins Group's credibility and recognition among institutional investors and counterparties.

 

The rating agencies analyze Desjardins Group primarily on a combined basis, since CCD's credit ratings are backed by the Group's financial strength. The agencies recognize Desjardins Group's strong capitalization, the stability of its operating surplus earnings, its significant market share in Quebec and the quality of its assets.

 

In the first quarter of 2013, Moody's downgraded the credit ratings of CCD as well as the ratings of five other Canadian financial institutions. This agency stated that this decision was essentially due to the economic situation in Canada, which showed signs for concern such as high consumer debt levels and elevated housing prices. Moody's also said that financial institutions are more vulnerable than in the past to downside risks weighing on the Canadian economy. Management is of the opinion that this decision has more to do with this agency's concern about Canada's economic situation than with the quality of CCD's loan portfolio or balance sheet.

 

In the following quarters of 2013, the four ratings agencies confirmed the credit ratings of the securities issued by CCD. The ratings assigned by the four agencies are with a stable outlook.

 

Following the announcement on January 15, 2014 of an agreement under which Desjardins Group will purchase State Farm Canada's businesses, Standards & Poor's, Moodys and DBRS indicated that CCD's rating would remain unchanged.

 

On January 24, 2014, Fitch affirmed CCD's credit ratings, as well as those of the six major Canadian banks. The agency mentioned that these financial institutions were well positioned to withstand a moderate downturn in the real estate market and deterioration in consumer credit profiles due to their stable surplus earnings, good credit quality, strong financing and liquidity positions and sound capital ratios. On January 27, 2014 Moody's once again affirmed CCD's ratings, with a stable outlook.

 

CCD thus has excellent credit ratings that are among the best of the major Canadian and international banks.

 

TABLE 25 - CREDIT RATINGS OF SECURITIES ISSUED


 
DBRS
Standard &
Poor’s
Moody’s
Fitch
Short-term
R-1 (high)
A-1
P-1
F1+
Medium- and long-term, senior
AA
A+
Aa2
AA-

 

 

Contractual obligations

 

Contractual obligations are commitments with respect to minimum future payments and impact CCD's liquidity needs. Such contractual obligations are recognized in the Consolidated Balance Sheets or are off-balance sheet.

 

 

 

Table 26 presents financial liabilities as well as other obligations by remaining contractual term to maturity. The amounts presented include principal and interest, if any.

 

 

 

TABLE 26 - CONTRACTUAL OBLIGATIONS BY TERM TO MATURITY

 

As at December 31

2013

(in thousands of $)

Payable on demand

Less than 1 year

1 to 5 years

Over 5 years

Total

Liabilities






Deposits

$   2,006,447

$  12,741,020

$ 13,400,194

$        159,852

$      28,307,513

Acceptances

                 --

985,150

--

--

985,150

Commitments related to securities sold short

                 --

3,287

208,752

34,625

246,664

Commitments related to securities sold under
  repurchase agreements

                 --

538,340

--

--

538,340

Other financial liabilities

                 --

1,385,735

59,232

--

1,444,967

Derivative financial instruments with net

 Settlement

                 --

576,782

1,428,749

45,331

2,050,862

Derivative financial instruments with gross

 settlement(1)






Cash flows to be paid on liabilities

                 --

5,099,867

248,164

--

5,348,031

Cash flows to be paid on assets

                 --

7,583,254

3,886,745

--

11,469,999

Off-balance sheet items






Credit commitments

                 --

14,718,882

6,870,896

56,979

21,646,757

Guarantees and standby letters of credit

                 --

220,182

134,262

798

355,242

Credit default swaps

                 --

--

259,540

--

259,540


2012


Payable on demand

Less than 1 year

1 to 5 years

Over 5 years

Total

Liabilities






Deposits

 $1,809,633

 $10,279,011

 $11,210,269

 $   231,388

$  23,530,301

Acceptances

                 --

      841,000

                   --

                --

         841,000

Commitments related to securities sold short

                 --

               929

          44,279

       17,846

        63,054

Commitments related to securities sold under
  repurchase agreements

                   --

       574,880

                   --

                --

       574,880

Other financial liabilities

                 --

     1,202,447

          52,716

                --

     1,255,163

Derivative financial instruments with net settlement

                   --

        624,758

     1,259,673

       45,271

      1,929,702

Derivative financial instruments with gross settlement(1)






Cash flows to be paid on liabilities

                 --

     4,288,995

     1,421,907

                --

        5,710,902

Cash flows to be paid on assets

                 --

  4,867,689

  2,719,621

              --

 $   7,587,310

Off-balance sheet items






Credit commitments

--

10,696,732

6,172,299

51,039

16,920,070

Guarantees and standby letters of credit

--

232,757

141,000

851

374,608

Credit default swaps

--

--

249,235

--

249,235

 

 

(1) The "Derivative financial instruments with gross settlement" category includes cash flows to be paid on both derivative financial instruments recorded as liabilities and derivative financial instruments recorded as assets. Contractual cash outflows for derivative financial instruments with gross settlement are accompanied by related cash inflows that are not included in this table.

 

 

 

 

OPERATIONAL RISK

 

Operational risk is the risk of inadequacy or failure attributable to processes, people, internal systems or external events resulting in losses, failure to achieve objectives or a negative impact on reputation.

 

Operational risk management

 

Operational risk is inherent to all business activities as well as internal and outsourced activities. Losses can mainly arise from fraud, damage to tangible assets, illegal acts, systems failures, or problems in process management.

 

Operational risk management framework

 

The primary objective of the operational risk management framework is to maintain operational risk at an acceptable level while focusing on the quality of service provided to CCD clients and on organizational agility. The development of frameworks to identify, measure, monitor and disclose operational risk ensures its sound and prudent management.

 

Practices currently in place to foster efficient and proactive management of events that could lead to operational risks include, among other things, risk assessment, outsourcing risk management, protection of information, technology risk management and insurance coverage, as well as business continuity and crisis management.

 

The operational risk management framework is periodically reviewed based on regulatory authorities' expectations and industry practices.

 

 

 

Outsourcing risk management

 

A program has been set up to manage CCD's outsourcing activities. Major outsourcing agreements have been identified and are monitored to ensure that they are being properly managed.

 

Business continuity and crisis management

 

CCD has a business continuity program whose purpose is to ensure that services related to essential operations will continue to be provided to members and clients in the event of business interruptions, system disruptions or crises.

 

Information risk management

 

CCD is aware of the importance of protecting information and has implemented an information risk management program as well as a training and awareness program to protect privacy and ensure the safety of its members' and clients' property.

 

Technology risk management

 

CCD has a specific framework for technology risk management. The purpose of the framework is to define the concept of technology risks for CCD, the scope of application of the technology risk management approach, the governance structure and related management activities.

 

 

STRATEGIC RISK

 

Strategic risk refers to a possible loss attributable to an inability to adapt to a changing environment because of a failure to act, an inappropriate strategic choice or the inability to effectively implement strategies.

 

It is first up to senior management and the Board of Directors to address, define and monitor developments in CCD's strategic orientations according to the consultation processes specific to it. Events that could compromise the achievement of CCD's strategic objectives and initiatives are systematically and regularly monitored by its management personnel and senior management. Business sectors and support functions sectors periodically assess events and risks that could prevent the achievement of strategic objectives, and report thereon to the appropriate bodies.

 

 

REPUTATION RISK

 

Reputation risk is the risk that a negative perception by the stakeholders, whether or not justified, of Desjardins Group's or CCD's practices, actions or lack of action could have an unfavourable impact on income and equity, and the trust that it inspires.

 

Reputation is of critical importance and cannot be managed separately from other risks. Therefore, managing reputation risk in all its spheres of activity is a constant concern for CCD.

 

The organization has defined guidelines, a management framework, and roles and responsibilities with regard to reputation risk. This framework is in addition to various processes already in place, such as the regulatory compliance program, ethical requirements, and reputation risk assessments as part of new initiatives or the introduction of new products. All these aspects are aimed to promote sound reputation risk management. All management personnel and employees are required to perform their duties in accordance with these principles as well as the values of Desjardins Group and CCD.

 

OVERVIEW OF OTHER RISKS

 

ENVIRONMENTAL RISK

 

Environmental risk is the risk of financial, operational or reputational loss for CCD as a result of environmental impacts or issues, whether they occur through CCD's credit or investment activities or through its operations. In addition to the potential financial losses that could be incurred through poor management of environmental risk, there is increased credit risk through the impairment of assets pledged as security and greater reputational risk should assets taken as collateral become the subject of discussions in the media of social and environmental issues.

 

Environmental risk is an integral part of Desjardins Group's Integrated Risk Management Framework. Risks associated with climate change were subjected to a comprehensive assessment in 2013 in order to identify any significant risks that should be integrated into current risk management.

 

 

 

LEGAL AND REGULATORY ENVIRONMENT RISK

 

Legal and regulatory environment risk represents the consequences of not complying with the laws, regulations, standards and practices governing our operations.

 

The financial services industry is one of the most strictly regulated sectors. In recent years, the regulations governing the industry have significantly in response to numerous socio-economic phenomena such as the development of new, increasingly complex financial products, the continuing volatility in the securities industry, financial fraud, and the fight against money laundering and terrorist financing, to mention but a few. In addition to federal (Canadian and U.S.) and provincial government requirements, the regulatory environment also includes organizations such as the AMF, the Canadian Securities Authorities, the OSFI, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the Mutual Fund Dealers Association of Canada (MFDAC), the Investment Industry Regulatory Organization of Canada (IIROC) and, in the U.S., the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Complying with major legislative and regulatory changes such as the Foreign Account Tax Compliance Act (FATCA), the Dodd-Frank Act or the Basel Accord requires Desjardins Group to make significant investments of financial and human resources. It should be noted that CCD is not directly subject to all these regulations, but they are nevertheless part of Desjardins Group's regulatory environment.

 

Legal and regulatory environment risk entails, inter alia, effectively preventing and handling possible disputes and claims that may lead in particular to judgments or decisions by a court of law or regulatory agency that could result in financial penalties. They may also end in unfavourable judgments, decisions or settlements that could negatively affect the conduct of CCD's current operations and lead to further costs associated with legal proceedings that could have an adverse impact on CCD's financial position and corporate image.

 

Desjardins Group's Office of the Chief Compliance Officer is responsible for developing, updating and maintaining the compliance management framework, which is based on the identification and monitoring of regulatory obligations and the functional units subject to them. Regulatory developments and their impact on operations are therefore monitored on an ongoing basis by the compliance function in cooperation with Legal Affairs. The compliance function provides support to managers in charge of business segments and support functions so that they can effectively manage their risks, by developing an appropriate framework and documentation, acting in an advisory capacity, setting up training programs and conducting periodic inspections of operations. Lastly, a formal reporting process is in place for CCD's senior management and decision-making bodies. This overall management of compliance provides reasonable assurance that CCD's operations comply with the applicable regulations.

 

 

SECTION 4.2

 

OTHER RISK FACTORS THAT COULD IMPACT FUTURE RESULTS

 

As indicated in the caution concerning forward-looking statements, general and specific risks and uncertainties may cause CCD's actual results to differ from those in the forward-looking statements. Some of these risk factors are presented below.

 

General economic and business conditions in the regions in which CCD operates

 

General economic and business conditions in the regions in which CCD operates may significantly affect its revenues. These conditions include short and long-term interest rates; inflation; debt securities market fluctuations; foreign exchange rates; the volatility of capital markets, including tighter liquidity conditions in certain markets; the strength of the economy; and the amount of business conducted by CCD in a given region.

 

Foreign exchange rates

 

Exchange rates fluctuations in the Canadian dollar, the U.S. dollar and other foreign currencies may affect CCD's financial position and future profit or loss. Fluctuations in the Canadian dollar may also adversely affect the earnings of CCD's business clients in Canada.

 

Monetary policy

 

The monetary policies of the Bank of Canada and the Federal Reserve Board in the United States, as well as other interventions in capital markets, have impacts on CCD's income. The general level of interest rates may affect CCD's profitability. Interest rate fluctuations affect the spread between interest paid on deposits and interest earned on loans, which could change CCD's net interest income. CCD has no control over changes in monetary policies or capital market conditions, and it therefore cannot forecast or anticipate them systematically.

 

Competition

 

The degree of competition in the markets in which CCD operates affects its performance. Client retention depends on many factors, such as product and service pricing, changes to the products and services offered, and customer service delivery.

 

 

 

Changes in standards, laws and regulations

 

Changes made to standards, laws and regulations, including changes affecting their interpretation or implementation, could have an impact on CCD by restricting its product or service offering or by enhancing the ability of its competitors to compete with its products or services. In addition, CCD's failure to comply with applicable laws, regulations and other guiding principles, even though it takes care to avoid such a possibility, could result in penalties and fines that may have an unfavourable impact on its reputation and financial results. Such changes could also affect the capital and liquidity levels that CCD elects to maintain.

 

Accuracy and completeness of information concerning clients and counterparties

 

CCD relies on the accuracy and completeness of the information it has on its clients and counterparties. When deciding to authorize a loan or in other transactions with clients or counterparties, it may use information provided by them, including financial statements and other financial information. It may also rely on representations made by clients and counterparties regarding the completeness and accuracy of such information, and on auditors' reports regarding the financial statements. The financial position and income of CCD could be adversely affected if it relied on financial statements that do not comply with accounting standards, are misleading or do not present fairly, in all material respects, the financial position and the results of operations of its clients and counterparties. CCD trains its employees and implements procedures to mitigate the risks related to the use of inaccurate, incomplete or fraudulent information from its clients and counterparties.

 

Accounting policies used by CCD

 

The accounting policies that CCD uses determine how it reports its financial position and results of operations, and they may require management to make estimates or rely on assumptions about matters that are inherently uncertain. Any change to these estimates and assumptions may have a significant impact on CCD's results of operations and financial position.

 

New products and services to maintain or expand CCD's market share

 

The ability of CCD to retain or increase its market shares depends partly on its skill in adapting its products and services to changing standards in the financial services industry. Financial services companies are subject to increasing pressure regarding the pricing of their products and services. This factor may reduce net interest income or revenues from fee-based products and services. Moreover, the adoption of new technologies could require CCD to modify or adapt its products and services, resulting in major expenses.

 

Ability to recruit and retain key management personnel, including senior management

 

CCD's future performance depends partly on its ability to recruit and retain key management personnel, including senior management, as there is fierce competition to retain the best people in the financial services industry. CCD cannot, however, be sure that it will be able to continue to recruit and retain key management personnel, including senior management, even though this is one of the objectives of its resources management policies and practices.

 

Business infrastructure

 

Third parties provide some of the essential components of CCD's business infrastructure, such as Internet connections and network access. Interruptions in network access services or other communication services provided by such third parties could adversely affect the ability of CCD to offer products and services to customers and otherwise conduct its business.

 

Geographic concentration

 

As at December 31, 2013, CCD's lending to clients in Quebec accounted for 89% of its aggregate loan portfolio. Moreover, its operations are heavily concentrated in Quebec. As a result of this significant geographic concentration, its results largely depend on economic conditions in Quebec. Any deterioration in these conditions could adversely affect:

 

(i)             Past due loans;

(ii)            Problem assets and foreclosed property;

(iii)           Claims and lawsuits;

(iv)           Demand for products and services; and

(v)            The value of collateral for loans, especially mortgages, and by extension clients' borrowing capacity, the value of assets associated with impaired loans and collateral coverage.

 

Credit ratings

 

The credit ratings assigned to CCD by ratings agencies are instrumental to its access to sources of wholesale funding and the cost of such funding. There is no guarantee that credit ratings and related outlooks assigned by the agencies to CCD's various securities will be maintained. Furthermore, a downgrade to any ratings could raise CCD's cost of funding and reduce its access to capital markets.

 

Other factors

 

Other factors that may have an impact on CCD's future results include changes in tax laws, unexpected changes in consumer spending and savings habits, technological changes, the ability to implement CCD's disaster recovery plan within a reasonable time, the possible impact on CCD's business of international conflicts or natural disasters, and CCD's ability to anticipate and properly manage the risks associated with these factors despite a disciplined risk management environment.

 

CCD cautions the reader that factors other than the foregoing could affect future results. Investors and other stakeholders relying on forward-looking statements to make decisions with respect to CCD should carefully consider these factors as well as other uncertainties, potential events, and industry factors or other items specific to CCD that could adversely impact its future results.

 

 

SECTION 4.3

 

ADDITIONAL INFORMATION RELATED TO CERTAIN RISK EXPOSURES

 

The tables below provide more detailed information about more complex, higher-risk financial instruments.

 

TABLE 27 - DERIVATIVE FINANCIAL INSTRUMENTS

 

As at December 31

2013

2012

(in millions of $)

Notional amounts

Positive value

Negative value

Notional amounts

Positive value

Negative value

Credit default swaps(1)

 $          260

$          5

$        --

$           249

 $         --

 $          6

Total return swaps(2)

          1,137

          --  

           3 

1,131

            --

          26

 

(1) CCD's commitment and the nature of underlying assets are provided in the "Credit default swaps" section of Note 22, "Commitments, guarantees and contingent liabilities", to the Consolidated Financial Statements. Credit default swaps are presented in the Consolidated Balance Sheets as derivative financial instruments.

(2) These amounts do not include any amounts realized as part of securitization activities. Total return swaps are presented in the Consolidated Balance Sheets as derivative financial instruments.

 

 

TABLE 28 - LEVERAGED FINANCE LOANS AND SUBPRIME LOANS

 

As at December 31

2013

2012

(in millions of $)

Leveraged finance loans(1)

 $            141

 $       165

Alt-A mortgage loans(2)

      32      

            36

Subprime residential mortgage loans(3)

        1      

              2

 

(1) Leveraged finance loans are loans to large corporations and finance companies whose credit rating is between BB+ and D, and whose level of indebtedness is very high compared to other companies in the same industry.

(2) Alt-A mortgage loans are defined as loans to borrowers with non-standard income documentation. These loans are presented in the Consolidated Balance Sheets under "Loans" and are measured at amortized cost.

(3) These loans are defined as loans to borrowers with a high credit risk profile. None of these loans is currently in default. Subprime residential mortgages are presented in the Consolidated Balance Sheets under "Loans" and are measured at amortized cost.

 

 

5.0 ADDITIONAL INFORMATION

 

SECTION 5.1

 

CONTROLS AND PROCEDURES

 

CCD must comply with certain requirements of CSA regulations respecting continuous disclosure obligations, oversight of external auditors, certification of financial disclosures and audit committees, which led the management of CCD to provide a certification as at December 31, 2013 on the design and effectiveness of its disclosure controls and procedures as well as its internal control over financial reporting.

 

DISCLOSURE CONTROLS AND PROCEDURES

 

In accordance with the CSA guidance in National Instrument 52-109, the Chair of the Board, President and CEO as well as the Senior Vice-President and Chief Financial Officer of CCD designed or caused to be designed, disclosure controls and procedures, which are supported in particular by a process for periodic certification of financial disclosures in annual and interim filings. All information collected as part of the financial governance process is reviewed on a quarterly and annual basis by the members of Desjardins Group's Disclosure Committee and the members of CCD's Audit Commission, who play a lead role in the oversight and assessment of the adequacy of disclosure controls and procedures.

 

As at December 31, 2013, CCD's management assessed the design and effectiveness of its disclosure controls and procedures in accordance with the control framework developed in 1992 by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.

 

 

An assessment of the design and effectiveness of disclosure controls and procedures was therefore performed by CCD's management under the supervision of the Chair of the Board, President and CEO and the Senior Vice-President and Chief Financial Officer of CCD. Based on the results of this assessment, the Chair of the Board, President and CEO and the Senior Vice-President and Chief Financial Officer of CCD concluded that disclosure controls and procedures were adequately designed and effective, and did not contain any material weakness, thereby ensuring that information required to be disclosed in reports filed or submitted under Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that CCD provides investors with complete and reliable information.

 

 

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The management of CCD caused an adequate internal control over financial reporting process to be designed and has maintained it. This process is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

 

The design and effectiveness of internal control over financial reporting were assessed in accordance with the COSO's control framework (1992) for financial controls and in accordance with the Control Objectives for Information and Related Technologies (COBIT) framework for IT general controls.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, whether due to error or fraud. Moreover, management's assessment of the controls provides only reasonable, not absolute, assurance that all the problems related to control which could give rise to material misstatements have been detected.

 

The assessment of the design and effectiveness of internal control over financial reporting was performed by the management of CCD under the supervision of the Chair of the Board, President and CEO and the Senior Vice-President and Chief Financial Officer of CCD. Based on the results of this assessment, the Chair of the Board, President and CEO and the Senior Vice-President and Chief Financial Officer of CCD concluded that, as at December 31, 2013, internal control over financing reporting was adequately designed and effective, and did not contain any material weakness.

 

 

CHANGE IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

During the year ended December 31, 2013, CCD did not make any changes to its internal control over financial reporting that had materially affected, or may materially affect, its operations.

 

 

SECTION 5.2

 

RELATED PARTY DISCLOSURES

 

In the normal course of business, CCD offers financial services to related parties, including its affiliated companies and other related companies, and enters into agreements for operating services with them. It also pays it key management personnel compensation under normal market conditions.

 

CCD has set up a process to obtain assurance that all transactions with its management personnel and the persons who are related to them have been carried out as arm's length transactions and in compliance with the legislative framework applicable to CCD.

 

Such related party transactions are explained in Note 28, "Related party disclosures", to CCD's Consolidated Financial Statements.

 

 

SECTION 5.3

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

A description of the accounting policies used by CCD is essential to understanding the Consolidated Financial Statements as at December 31, 2013. The significant accounting policies are described in Note 2, "Significant accounting policies," to the Consolidated Financial Statements. Some of these policies are of particular importance in presenting CCD's financial position and operating results because they require management to make judgments as well as estimates and assumptions that may affect the reported amounts of some assets, liabilities, income and expenses, as well as related information. The significant accounting policies that required management to make difficult, subjective or complex judgments, often involving uncertainties, are discussed below.

 

 

STRUCTURED ENTITIES

 

A structured entity is consolidated when it is controlled by CCD. Management must make significant judgments when it assesses the various elements and all related facts and circumstances as a whole to determine whether control exists, especially in the case of structured entities.

 

A structured entity is an entity that has been designed so that voting rights or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. A structured entity often has some or all of the following features or attributes: restricted activities, a narrow and well-defined objective, insufficient equity to permit it to finance its activities without subordinated financial support, or financing in the form of multiple contractually linked instruments issued to investors.

 

Additional information about structured entities is presented in Note 12, "Interests in other entities", to the Consolidated Financial Statements.

 

 

 

DETERMINATION OF THE FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

The fair value measurement of financial instruments is determined using three levels of the fair value hierarchy, reflecting the importance of the inputs used for the measurements. Level 1 denotes measurement based on quoted prices in active markets for identical assets or liabilities, while level 2 designates valuation techniques based primarily on observable market data. Level 3 concerns valuation techniques not based primarily on observable market data.

 

There is little subjectivity in the determination of the fair value of financial instruments, especially securities and commitments on securities sold short, obtained from quoted prices on active markets. Fair value is based on the quoted price within the bid-ask spread that is most representative of fair value in the circumstances.

 

If there are no quoted prices on active markets, fair value is determined using models that maximize the use of observable inputs and minimize the use of unobservable inputs. In such cases, fair value estimates are established using valuation techniques such as cash flow discounting, comparisons with similar financial instruments, option pricing models and other valuation techniques commonly used by market participants, if these techniques have been demonstrated to provide reliable estimates. Valuation techniques rely on assumptions concerning the amount and timing of estimated future cash flows and discount rates that are mainly based on observable inputs, such as interest rate yield curves, exchange rates, credit curves and volatility factors. When one or several material inputs are not observable on the market, fair value is determined mainly based on internal inputs and estimates that take into account the characteristics specific to the financial instrument and any factor relevant to the measurement. For complex financial instruments, significant judgment is made in determining the valuation technique to be used and in selecting inputs and adjustments associated with this technique. Due to the need to use estimates and make judgments when applying many valuation techniques, fair value estimates for identical or similar assets may differ between entities. Fair value reflects market conditions on a given date and may not be representative of future fair values. It should not be considered as being realizable in the event of immediate settlement of these instruments.

 

Loans

 

The fair value of loans is determined by discounting expected contractual cash flows using market interest rates charged for similar new loans at the reporting date and takes estimated prepayments into account. Changes in interest rates and in the creditworthiness of borrowers are the main causes of changes in the fair value of loans held by CCD, which result in a favourable or unfavourable difference compared to their carrying amount. The fair value of impaired loans is assumed to be equal to their carrying amount.

 

Deposits

 

The fair value of fixed-rate deposits is determined by discounting expected cash flows using market interest rates currently being offered for deposits with substantially the same term and takes estimated prepayments into account. The fair value of deposits with floating-rate features or with no stated maturity is assumed to be equal to their carrying amount.

 

Derivative financial instruments

 

The fair value of derivative financial instruments is determined using pricing models that incorporate the current market prices and the contractual prices of the underlying instruments, the time value of money, interest rate yield curves, credit curves and volatility factors. The fair value of derivative financial instruments is presented without taking into account the impact of legally enforceable master netting agreements. However, CCD adjusts the measurement of these instruments based on credit risk, and such adjustments reflect the financial ability of the counterparties to the contracts and CCD's creditworthiness, as well as credit risk mitigation measures such as legally enforceable master netting agreements.

 

Financial instruments whose fair value equals their carrying amount

 

The carrying amount of certain financial instruments that mature in the next 12 months is a reasonable approximation of their fair value. These financial instruments include the following items: "Cash and deposits with financial institutions", "Securities purchased under reverse repurchase agreements", "Clients' liability under acceptances", some items included in "Other assets - Other", "Acceptances", "Commitments related to securities sold under repurchase agreements", and some items included in "Other liabilities - Other".

 

Additional information on the fair value of financial instruments is presented in Note 6, "Fair value of financial instruments", to the Consolidated Financial Statements.

 

 

DERECOGNITION OF FINANCIAL ASSETS

 

A financial asset is derecognized from the Consolidated Balance Sheets when the contractual rights to the cash flows from the asset expire, when the contractual rights to receive these cash flows are retained but CCD has the obligation to pay them to a third party under certain conditions, or when CCD transfers the contractual rights to receive the cash flows and substantially all the risks and rewards of ownership of the asset have been transferred.

 

When substantially all the risks and rewards of ownership of the transferred financial asset are retained by CCD, such asset is not derecognized from the Consolidated Balance Sheets and a financial liability is recognized, when appropriate.

 

When substantially all the risks and rewards related to a financial asset are neither transferred nor retained, CCD derecognizes the financial asset over which it does not retain control and recognizes an asset or a liability representing the rights and obligations created or retained in the asset transfer. If control of the financial asset is retained, CCD continues to recognize the asset in the Consolidated Balance Sheets to the extent of its continuing involvement in said asset.

 

When a financial asset is derecognized in its entirety, a gain or a loss is recognized in the Consolidated Statements of Income for an amount equal to the difference between the carrying amount of the asset and the value of the consideration received.

 

Management must use its judgment to determine whether the contractual rights to the cash flows have expired, have been transferred or have been retained with an obligation to pay them to a third party. With respect to the transfer of substantially all the risks and rewards of ownership of the assets, management evaluates CCD's exposure before and after the transfer as well as the changes in the amount and timing of the net cash flows of the transferred asset. Lastly, management must make judgments to determine whether it controls the financial asset and to measure retained rights.

 

Additional information about the derecognition of financial assets is presented in Note 10, "Derecognition of financial assets", to the Consolidated Financial Statements.

 

 

IMPAIRMENT OF FINANCIAL ASSETS

 

At the reporting date, CCD determines if there is any objective evidence that a financial asset or a group of financial assets is impaired.

 

Allowance for credit losses

 

Measuring the allowance for credit losses is very important for CCD, given the size of its loan portfolio.

 

Evidence of impairment results from a loss event that occurs after a loan has been granted but before the reporting date and that has an impact on the estimated future cash flows of the loan.

 

The impairment of a loan or a group of loans is determined by estimating the recoverable amount of these financial assets. The allowance is equal to the difference between this amount and the carrying amount. To determine the estimated recoverable amount of a loan, CCD discounts the estimated future cash flows at the effective interest rate inherent to the loan. When the amounts and timing of future cash flows cannot be estimated with reasonable reliability, the estimated recoverable amount is determined using either the fair value of the collateral underlying the loan, net of expected costs of realization, or the observable market price for the loan. The collateral may vary depending on the type of loan.

 

The allowance for credit losses represents management's best estimate for loan impairment at the reporting date. As part of its evaluation, management must make judgments to determine the data, assumptions and estimates to be used, including determining when a loan is considered impaired and the amount that could be recovered. Changing these estimates and assumptions would have an impact on the allowance for credit losses and the provision for credit losses for the year.

 

The allowance resulting from this impairment is established using two components: individual allowances and collective allowance.

 

For individual allowances, CCD first reviews its loan portfolios on a loan-by-loan basis to assess credit risk and determine if there is any objective evidence of impairment for which a loss should be recognized in the Consolidated Statements of Income. Loan portfolios for which an individual allowance has not been established are then included in groups of assets having similar credit risk characteristics and are subject to a collective allowance.

 

The method used by CCD to determine the collective allowance takes into account the risk parameters of the various loan portfolios, in particular through the integration of sophisticated credit risk models. These collective allowance models take into account certain factors such as the probabilities of default (loss frequency), loss given default (extent of losses) and gross exposures at default. These parameters, which are based on historical losses, are determined according to the category and risk rating of each loan. The measurement of the collective allowance relies heavily on management's judgment and depends on management's assessment of current credit quality trends with respect to business sectors, the impact of changes in its credit policies and economic conditions.

 

Additional information about loans and the allowance for credit losses is presented in Note 9, "Loans and allowance for credit losses", to the Consolidated Financial Statements.

 

 

Available-for-sale securities

 

Securities classified in the "Available-for-sale" category are examined at the reporting date to determine whether there is any objective evidence that they are impaired. In measuring the decline in value, CCD takes into account many facts specific to each investment and all the factors that could indicate that there has been impairment. Factors considered include, but are not limited to, a significant or prolonged decline in fair value, significant financial difficulties of the issuer, a breach of contract, the increasing probability that the issuer will enter bankruptcy or a restructuring and the disappearance of an active market for the financial asset. Management also uses judgment to determine when to recognize an impairment loss.

 

CCD individually assesses debt securities classified as "Available-for-sale" to determine whether there is any objective evidence of impairment. For equity securities classified in the "Available-for-sale" category, the objective evidence would also include a significant or prolonged decline in fair value below cost.

 

Additional information about the recognition of available-for-sale securities and fair value measurement is presented in Note 5, "Carrying amount of financial instruments", Note 6, "Fair value of financial instruments", and Note 8, "Securities", to the Consolidated Financial Statements.

 

 

IMPAIRMENT OF NON-FINANCIAL ASSETS

 

CCD assesses at the reporting date whether there is evidence that an asset may be impaired. An impairment loss is recognized when the carrying amount of the asset exceeds its recoverable amount.

 

The recoverable amount represents the higher of the fair value less costs of disposal and the value in use. Fair value represents the best estimate of the amount obtainable from the sale, less costs of disposal, in an arm's-length transaction between knowledgeable and willing parties. The value in use is calculated using the most appropriate method, generally by discounting recoverable future cash flows.

 

Estimating the recoverable amount of a non-financial asset to determine if it is impaired also requires that management make estimates and assumptions, and any change in these estimates and assumptions could impact the determination of the recoverable amount of non-financial assets and, therefore, the outcome of the impairment test. The main estimates and assumptions used in calculating the recoverable amount are future cash flows estimated based on internal financial forecasts, expected future earnings, the growth rate and the discount rate.

 

 

PROVISIONS

 

Provisions are liabilities of uncertain timing or amount. A provision is recognized when CCD has an obligation (legal or constructive) as a result of a past event, the settlement of which should result in an outflow of resources embodying economic benefits, and when a reliable estimate can be made of the amount of the obligation. The amount of the obligation is discounted where the effect of the time value of money is material.

 

Provisions are based on management's best estimate of the amounts required to settle the obligation on the reporting date, taking into account the relevant risks and uncertainties. As these estimates are forward-looking in nature, management must use its judgment to forecast the timing and amount of future cash flows. Actual results may differ significantly from forecasts.

 

CONTINGENT LIABILITIES

 

In the normal course of its business operations, CCD is involved in various litigation matters and lawsuits relating to its various products, services, investments and other activities.

 

It is not currently possible to determine the outcome of these litigation matters and lawsuits, the timing of such outcome or the potential impact on CCD's financial position. In management's opinion, the outcome of these litigation matters and lawsuits, to the extent that it can be measured, could have an impact on CCD's profit or loss for a specific period, but would not have a significant adverse impact on its consolidated financial position.

 

 

INCOME TAXES

 

The income tax expense comprises the current tax expense and the deferred tax expense. Income taxes are recognized in the Consolidated Statements of Income unless they relate to items that were recognized outside profit or loss directly in the Consolidated Statements of Comprehensive Income or the Consolidated Statements of Changes in Members' Equity. In such cases, income taxes are also recognized outside profit or loss, except for the income tax consequences of remuneration on capital stock when certain conditions are met. 

 

The calculation of income taxes is based on the expected tax treatment of transactions. To determine the current and deferred portions of income taxes on surplus earnings, management must make judgments to establish assumptions concerning the dates on which deferred income tax assets and liabilities will be reversed. Significant judgment must be used to interpret the relevant tax legislation in order to determine the income tax expense. If CCD's interpretation differs from that of taxation authorities or if the reversal dates do not correspond to the forecasted dates, the provision for income taxes may increase or decrease in subsequent years.

 

Note 20, "Income taxes", to the Consolidated Financial Statements provides additional information on income taxes.

 

 

EMPLOYEE BENEFITS

 

Group pension plans are plans whose risks are shared by entities under common control. CCD participates in the pension plan and supplemental pension plan through Desjardins Group's defined benefit group plans. It also offers medical, dental and life insurance plans to retiring employees and their dependents through Desjardins Group's defined benefit group plan. The other defined benefit plan offered by CCD is a supplementary pension plan whose risks are not shared by entities under common control.

 

The main group pension plan offered, the Desjardins Group Pension Plan (DGPP), is a funded defined benefit group plan whose risks are shared by the participating employers of Desjardins Group. Participants and employers share the risks and costs related to the DGPP, including any deficit, on a prorata basis of 35% and 65%, respectively.

 

For the DGPP, benefits are determined on the basis of the number of years of membership and take into consideration the average salary of the employee's five most highly paid years, for years of service accumulated before 2013, and the eight most highly paid years, for years of service accumulated subsequently. Benefits are indexed annually using the Consumer Price Index, up to a maximum of 3% for years of service accumulated before 2013, and 1% for a period of 10 years starting at age 65 for years of service accumulated after 2013.

 

Defined benefit pension plans are plans for which CCD has formally committed to a level of benefits and therefore assumes actuarial and, when the plans are funded, investment risks. Since the terms of the pension plans are such that future changes in salary levels will have an impact on the amount of future benefits, the cost of the benefits and the value of the defined benefit plan obligation are in general actuarially determined using various assumptions. Although management believes that the assumptions used in the actuarial valuation process are reasonable, there remains a degree of risk and uncertainty that may cause future actual results to materially differ from these assumptions, which could give rise to actuarial gains or losses.

 

Actuarial calculations are made based on management's best estimate assumptions primarily concerning the plan obligation discount rate, and also, but to a lesser extent, salary increases, the retirement age of employees, the mortality rate, the rate of increase in pension benefits and the participants' future contributions that will be used to make up the deficit. The participants' estimated discounted contributions required to make up the deficit decrease the defined benefit plan obligation. A complete actuarial valuation is performed each year by a qualified actuary. The discount rates used have been determined by reference to the rates of high quality corporate bonds whose terms are consistent with those of the plans' cash flows.

 

The terms of the other group plans and CCD's own supplemental pension plan are such that changes in salary levels or healthcare costs will have an impact on the amount of future benefits. The cost of these benefits is accrued over the service lives of employees using accounting policies similar to those used for defined benefit pension plans.

 

CCD participates in defined benefit group plans whose risks are shared by entities under common control. CCD's share in the cost recognized and the liability for the defined benefit group pension plans of Desjardins Group is mainly determined based on funding rules, as described in the plan's by-laws. The main Desjardins Group pension plan is funded by both employee and employer contributions, which are determined based on the financial position and the funding policy of the plan. Employers' contributions are determined using a percentage of the assessable payroll for their employees participating in the plan.

 

CCD's share in the cost of the other group plan of Desjardins Group is determined based on the number of active insureds of CCD as a percentage of total number of active insureds for Desjardins Group as a whole.

 

Note 21, "Net defined benefit plan liabilities", to the Consolidated Financial Statements provides further information on accounting for defined benefit plans and on the sensitivity of the key assumptions.

 

 

SECTION 5.4

 

FUTURE ACCOUNTING CHANGES

 

Accounting standards that have been issued by the IASB but are not yet effective as at December 31, 2013 are presented below. Regulatory authorities have stated that early adoption of these standards will not be permitted, unless they indicate otherwise.

 

Ias 32, "financial instruments: presentation"

 

In December 2011, the IASB issued amendments to IAS 32, "Financial Instruments: Presentation", to clarify the criteria for offsetting financial assets and financial liabilities.

 

CCD is currently assessing the impact of the amendments made to this standard, which are effective for annual periods beginning on or after January 1, 2014.

 

IAS 39, "Financial Instruments - Recognition AND Measurement" - Novation of Derivatives and Continuation of Hedge Accounting

 

In June 2013, the IASB issued amendments to IAS 39, "Financial Instruments: Recognition and Measurement". According to these amendments, hedge accounting should be continued when a derivative financial instrument designated as a hedging instrument is novated from one counterparty to a central counterparty or an entity acting in that capacity and certain conditions are met.

 

The amendments to this standard, which are effective for annual periods beginning on or after January 1, 2014, will have no impact on CCD's profit or loss or financial position.

 

 

Annual improvements

 

In December 2013, the IASB issued Annual Improvements 2010-2012 Cycle and Annual Improvements 2011-2013 Cycle, which contain necessary, but not urgent, amendments to certain standards.

 

Some of these amendments are effective for annual periods beginning on or after July 1, 2014, while others are effective for transactions entered into on or after July 1, 2014. These amendments will have no material impact on CCD's profit or loss or financial position

 

 

Ifrs 9, "financial instruments"

 

The IASB issued in November 2009 and amended in October 2010 the first phase of a project that will replace IAS 39, "Financial Instruments: Recognition and Measurement". This standard defines a new way of classifying and measuring financial assets and liabilities. Financial assets will be classified in two categories (amortized cost and fair value through profit or loss) based on the entity's business model for managing its financial assets and the contractual cash flow characteristics of the financial assets. However, an exposure draft issued in November 2012 proposes the introduction of a third financial instrument category for debt securities: fair value through other comprehensive income. Financial liabilities will be classified in the same categories as those defined in IAS 39, but their measurement under the fair value option will be modified.

 

In November 2013, the IASB also issued the phase of its IAS 39 replacement project addressing hedging activities. The IFRS 9 hedge accounting model retains the current types of hedging relationships (fair value, cash flow and net investment hedges) but includes significant changes that will allow hedge accounting to better reflect the entity's risk management policies. The assessment of the effectiveness of a hedge will be replaced by the economic relationship principle, and changes have been made to the accounting for certain derivative financial instruments designated as part of a hedging relationship. The obligation to retrospectively assess the effectiveness of a hedge and the option under which a hedging relationship may be voluntarily terminated will be eliminated, while disclosure requirements about the entity's risk management activities will be enhanced. Entities that apply IFRS 9 will be able to choose an accounting policy under which they will continue to apply the IAS 39 hedge accounting model instead of adopting the IFRS 9 model until the IASB completes its project dealing with accounting for macro hedging.

 

The IASB's project phase dealing with financial asset impairment methodology is still ongoing. The IASB has temporarily removed the mandatory effective date of IFRS 9, which was January 1, 2015, and will determine a new effective date when all the phases of this project have been finalized.

 

CCD is currently assessing the impact of the adoption of IFRS 9.

 

 

SECTION 5.5

 

FIVE-YEAR STATISTICAL REVIEW

 

TABLE 29 - CONSOLIDATED BALANCE SHEETS

 

As at December 31

2013

2012(1)

2011(1)

2010(1)

2009(2)

(in thousands of $)

Assets






Cash and deposits with financial

    institutions

$    236,360

 $     554,110

$     343,544

$     585,275

$   196,321

Securities

7,273,667

     6,780,655

    7,085,101

    7,035,231

    5,100,146

Securities purchased under reverse

   repurchase agreements

877,949

      345,342

      735,367

    230,002

      64,143

Loans






Day, call and short-term loans to

   investment dealers and brokers

119,000

                     --

     91,000

   103,000

      59,000

Public and parapublic sectors

578,325

     1,065,328

    1,904,756

  1,609,151

  1,974,169

Members






       Federation

14,352,289

   10,802,676

  9,678,649

  8,724,221

  5,775,888

352,807

        184,978

     230,195

    189,814

      19,824

Other entities included in the group

   scope of Desjardins Group

1,411,971

     1,417,168

    1,886,748

   1,659,415

  1,679,716

Loans purchased from Desjardins

   Group

57,774

          88,863

       137,636

     185,050

    229,943

Personal

1,724,521

     1,395,963

    1,100,825

    812,569

     596,725

Business

4,013,936

     3,342,979

    2,817,887

  2,769,334

 2,808,926

Allowance for credit losses

               (49,221)

      (52,800)

     (58,451)

    (66,049)

 (128,587)

 Total loans

          22,561,402

18,245,155

17,789,245

15,986,505

13,015,604

Clients' liability under acceptances

              985,150

      841,000

     676,500

     672,200

     750,500

Derivative financial instruments

           2,375,996

     2,048,542

    2,888,139

   2,085,255

    2,819,219

Deferred tax assets

               28,418

          26,603

        26,867

       25,032

        27,745

Other

             444,758

        439,305

       443,257

      638,607

      623,023

Total assets

$        34,783,700

$ 29,280,712

$29,988,020

$27,258,107

$22,596,701

Liabilities and members' equity






Deposits






Individual

$    142,773

$      136,785

$     111,934

$       97,122

$       93,511

Business and government

        23,242,563

  18,566,938

  17,321,365

  12,852,432

   9,177,411

Deposit-taking institutions

          3,904,419

     3,866,338

    4,206,609

   6,132,899

   5,565,260

Total deposits

        27,289,755

22,570,061

21,639,908

19,082,453

14,836,182

Acceptances

            985,150

      841,000

     676,500

     672,200

     750,500

Commitments related to securities sold

   short

            224,483

          57,115

      73,322

      156,641

       167,060

Commitments related to securities sold

   under repurchase agreements

            538,236

        574,817

      242,422

   1,408,676

      986,595

Derivative financial instruments

          2,064,425

     2,032,621

    3,118,583

   2,675,700

   2,724,607

Net defined benefit plan liabilities

              28,028

          32,991

       31,408

       37,809

         5,070

Other

          1,444,967

     1,255,163

   2,268,901

   1,598,061

   1,798,414

Members' equity






Capital stock

         2,187,206

     1,887,206

   1,887,206

   1,587,206

   1,287,206

Retained earnings

               1,532

     (6,310)

        (4,147)

     (26,663)

          (21)

Accumulated other comprehensive

   income

             18,451

           34,581

         51,215

         45,179

       20,243

General reserve

              1,467

1,467

2,702

20,845

20,845

Total members' equity

        2,208,656

   1,916,944

  1,936,976

  1,626,567

  1,328,273

Total liabilities and members' equity

$       34,783,700

$ 29,280,712

$29,988,020

$27,258,107

$22,596,701

 

(1) Data for 2012, 2011 and 2010 have been restated. For further information, see Note 3, "Changes in accounting policies, disclosures and reclassifications", to the Consolidated Financial Statements.

(2) In accordance with GAAP in effect prior to the adoption of IFRS.

 

 

 

TABLE 30 - CONSOLIDATED STATEMENTS OF INCOME

 

For the years ended December 31

2013

2012(1)

2011(1)

2010(1)

2009(2)

(in thousands of $)

Interest income






Loans

$   495,397

$  433,878

$  402,360

$  268,770

$   245,298

Securities

141,637

169,543

172,352

192,619

188,664


637,034

603,421

574,712

461,389

433,962

Interest expense

380,215

324,704

316,448

217,283

183,075

Net interest income

256,819

278,717

258,264

244,106

250,887

Other income

69,158

21,304

49,780

25,674

63,476

Total income

325,977

300,021

308,044

269,780

314,363

Provision for credit losses (recovery)

1,552

7,384

2,762

(29,581)

12,610


324,425

292,637

305,282

299,361

301,753

Non-interest expense






Salaries and fringe benefits

41,243

35,867

32,371

40,619

41,845

Premises, equipment and furniture,

   including depreciation

9,254

6,095

11,345

15,878

16,082

Service agreements and outsourcing

37,601

35,870

38,803

10,837

9,785

Fees

6,811

8,179

8,905

8,179

10,504

Other 

23,604

19,958

17,165

12,638

23,096


118,513

105,969

108,589

88,151

101,312

Operating income before other

   payments to the Desjardins network

205,912

186,668

196,693

211,210

200,441

Other payments to the Desjardins

   network

38,878

39,253

42,001

39,363

35,975

Operating income 

167,034

147,415

154,692

171,847

164,466

Income taxes

36,185

35,591

37,125

41,182

37,080

Tax recovery on remuneration on capital stock

(37,898)

(32,838)

(35,023)

(42,366)

--

Net income

$   168,747

$  144,662

$  152,590

$ 173,031

$   127,386

 

(1) Data for 2012, 2011 and 2010 have been restated. For further information, see Note 3, "Changes in accounting policies, disclosures and reclassifications", to the Consolidated Financial Statements.

(2) In accordance with GAAP in effect prior to the adoption of IFRS.

 

 

 


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