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Thursday 16 August, 2012

Caisse Centrale

Doc re. Desjardins Group Q2 Report

RNS Number : 1236K
Caisse Cent. Desjardins Du Quebec
15 August 2012
 

DESJARDINS GROUP                           Financial Report

                                                                Second Quarter 2012

                                                                June 30, 2012

Desjardins Group (Desjardins Group or Desjardins) comprises the Desjardins caisse network in Quebec and Ontario (the caisse network), the Fédération des caisses Desjardins du Québec (the Federation) and its subsidiaries, including Caisse centrale Desjardins and Capital Desjardins inc., the Fédération des caisses populaires de l'Ontario and the Fonds de sécurité Desjardins.

Excellent second quarter for Desjardins Group
with surplus earnings of $402 million

Total income grew by 3.7% and assets stood at $194 billion

 

financial highlights

SUMMARY OF FINANCIAL DATA

COMBINED RESULTS

(in millions of dollars and as a percentage)


For the three-month periods

ended June 30

For the six-month periods

ended June 30


2012

2011

2012

2011

Net interest income

$

963

$

979

$

1,921

$

1,946

Net premiums


1,295


1,238


2,523


2,397

Other income


1,092


1,014


1,758


1,625

Total income


3,350


3,231


6,202


5,968

Provision for credit losses


62


83


144


127

Claims, benefits, annuities and changes in insurance and investment contracts


1,425


1,277


2,171


2,098

Non-interest expense


1,342


1,415


2,812


2,821

Surplus earnings before member dividends


402


353


823


710

Return on equity(1)

11.1

%

11.5

%

11.5

%

11.7

%

(1)   See "Basis of presentation of financial information".

FINANCIAL POSITION

(in millions of dollars and as a percentage)


As at June 30, 2012

As at December 31, 2011

Assets

$

193,987


$

190,137


Loans


128,608



125,154


Deposits


128,470



123,403


Total capital ratio


18.8

%


19.3

%

Tier 1 capital ratio


16.1



17.3


Gross impaired loans/gross loans ratio


0.39



0.41


 

 

TABLE OF CONTENTS

 

1

Financial highlights

5

Review of financial results

18

Risk management

 

1

Summary of financial data

 

5

Analysis of Desjardins Group's


18

Risk management

2

Message from senior management

 


results


23

Additional information concerning

3

Management's Discussion and

 

7

Results by business segment



exposure to certain risks

 

Analysis of Desjardins Group

 

12

Summary of interim results

24

Additional information

 

3

Basis of presentation of financial

12

Review of financial position


24

Controls and procedures

 


information


13

Financing activities


24

Related party disclosures

 

3

Caution concerning forward-


14

Savings recruitment activities


24

Critical accounting policies and

 


looking statements


15

Capital management



estimates

 

4

Desjardins Group profile


16

Analysis of cash flows


24

Future accounting changes

 

4

Economic environment


17

Off-balance sheet arrangements


24

Material event





 

 

25

Unaudited Condensed Interim





 

 


Combined Financial Statements

 

MESSAGE FROM SENIOR MANAGEMENT

Lévis, August 10, 2012 - For the second quarter ended June 30, 2012, Desjardins Group, the leading cooperative financial group in Canada, posted surplus earnings before member dividends of $402 million, compared to $353 million for the year-earlier quarter, an increase of 13.9%. The caisse network, Desjardins Card Services and the Property and Casualty Insurance segment recorded growth in their business volumes, allowing Desjardins to pursue its development in its various market segments. The second quarter was also characterized by a lower loss ratio than in the same quarter of 2011 in the Property and Casualty Insurance segment and by an increase in other income as a result of growth in credit card activities and fee income from the sale of insurance.

"The caisse network posts a strong growth for the second quarter, and recorded a solid performance in an increasingly competitive environment. Our insurance subsidiaries also recorded a robust increase in volumes in Canada," said Monique F. Leroux, Chair of the Board, President and Chief Executive Officer. "I am particularly proud of the recognition of Desjardins Group as 'Best Corporate Citizen in Canada'. This reflects the efforts deployed by our 50,000 elected officers and employees in serving members and communities."

The Personal Services and Business and Institutional Services segment contributed $201 million to surplus earnings for the second quarter of 2012, compared to $199 million for the corresponding quarter of 2011. The Wealth Management and Life and Health Insurance segment posted surplus earnings of $49 million for the second quarter of 2012, down $24 million compared to the same quarter in 2011, while the Property and Casualty Insurance segment recorded an increase of $24 million in its surplus earnings, for a $47 million contribution for the second quarter of 2012.

Return on equity was 11.1% for the second quarter of 2012, down slightly compared to the second quarter of 2011.

Desjardins Group actively pursues development opportunities across Canada and abroad, with tangible results, such as the opening of a representation office in Paris; the signing of an agreement with Coast Capital Savings, one of the top financial cooperatives in Western Canada, for card services; the implementation of a service offer to support the development of cooperatives and mutuals; and, finally, the launch of an investment program to improve Desjardins's technological infrastructure and accelerate the digital shift underway in its caisse and subsidiary network. In addition, during the second quarter, Desjardins Group, through its subsidiary Western Financial Group Inc., acquired, Hodges & Company Insurance Services Ltd., an insurance brokerage network specializing in commercial insurance and based in Victoria, British Columbia. This is the subsidiary's ninth acquisition since joining Desjardins. Furthermore, on July 31, 2012, Maple Group Acquisition Corporation, an entity in which Desjardins Group has a stake as an investor along with 12 other partners, announced that the offer to purchase all shares of TMX Group Inc. had been successful.

Desjardins Group remains one of the best capitalized financial institutions in Canada: its Tier 1 and total capital ratios, measured under the Basel II regulatory framework, stood at 16.1% and 18.8%, respectively, as at June 30, 2012. These ratios were 17.3% and 19.3%, respectively, as at December 31, 2011. Since the implementation of Basel II, Desjardins Group has applied the deferred treatment prescribed by the Autorité des marchés financiers (AMF), under which equity related to investments in its insurance subsidiaries made before January 1, 2007 was fully deducted from Tier 2 capital until the end of fiscal 2011. Effective 2012, this equity must be deducted in equal shares of 50% from Tier 1 capital and Tier 2 capital. The end of the application of this deferred treatment had an unfavourable impact of 143 basis points on the Tier 1 capital ratio in the second quarter of 2012, but the total capital ratio remained the same.

On June 18, 2012, the Fédération des caisses Desjardins du Québec implemented, for the first time in its history, a program to issue capital shares for up to $1.2 billion. As at June 30, 2012, an amount of $291 million had been issued. These capital shares, currently included in the Tier 1 capital under Basel II, meet with the upcoming regulatory capital requirements (Basel III) for Tier 1 Common Equity.

 

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF DESJARDINS GROUP

This Management's Discussion and Analysis (MD&A), dated August 10, 2012, presents the results of the analysis of the key elements of and changes in Desjardins Group's financial position for the period ended June 30, 2012, in comparison with the previous period. This MD&A should be read in conjunction with Desjardins Group's unaudited Condensed Interim Combined Financial Statements (the Interim Combined Financial Statements), including the notes thereto, as at June 30, 2012, and the Desjardins Group 2011 Annual Report (the 2011 Annual Report), containing the MD&A and the audited Combined Financial Statements (the annual Combined Financial Statements).

Additional information about Desjardins Group is available on the SEDAR website at www.sedar.com (under the Capital Desjardins inc. profile), where the Annual Information Forms of Capital Desjardins inc. and of Caisse centrale Desjardins (under the Caisse centrale Desjardins profile) can also be found in addition to information on the Federation (under the Fédération des caisses Desjardins du Québec profile). More information is also available on the Desjardins website at www.desjardins.com/en/a_propos/investisseurs; however, none of the information presented on these sites is incorporated by reference into this report.

 

 

BASIS OF PRESENTATION OF FINANCIAL INFORMATION

Desjardins Group's Interim Combined Financial Statements are presented in accordance with International Financial Reporting Standards (IFRS), which constitute Canadian generally accepted accounting principles (GAAP) for Desjardins Group, and the accounting requirements of the Autorité des marchés financiers (AMF) in Quebec, which do not differ from GAAP. The Interim Combined Financial Statements of Desjardins Group were prepared in accordance with IFRS, as issued by the International Accounting Standards Board (IASB), and, more specifically, in accordance with International Accounting Standard (IAS) 34, "Interim Financial Reporting". For further information about accounting policies, see the interim and annual Combined Financial Statements.

This MD&A was prepared in accordance with the National Instruments in force on continuous disclosure obligations issued by the Canadian Securities Administrators. Unless otherwise indicated, all the amounts are unaudited and are presented in Canadian dollars. To assess its performance, Desjardins Group uses and presents both 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 may find these non-IFRS measures useful in analyzing financial performance. These measures are defined below:

Productivity index

The productivity index is used to measure efficiency and is equal to the ratio of non-interest expense to total income, net of claims, benefits, annuities and changes in insurance and investment contract liabilities, expressed as a percentage. The lower the ratio, the higher productivity is.

Return on equity

Return on equity, which is expressed as a percentage, is equal to surplus earnings before member dividends, excluding the non-controlling interests' share, divided by average equity before non-controlling interests.

Growth in operating income

Growth in operating income is equal to the percentage change in total income, net of net income from available-for-sale securities, net income from securities at fair value through profit or loss and net income from other investments, in relation to the corresponding period of the previous year.

Caution concerning forward-looking statements

Desjardins Group'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 with respect to Desjardins Group's objectives, regarding financial performance, its priorities, its operations, the review of economic conditions and markets, as well as the outlook for the Canadian, U.S., European and other international economies. Among the forward-looking statements are those in the "Economic environment", "Review of financial position" and "Additional information" sections. 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, uncertainties and inherent risks, both general and specific. It is therefore possible that the predictions, projections or other forward-looking statements as well as Desjardins Group's objectives and priorities may not materialize or may prove to be inaccurate because of a number of factors and that actual results differ materially. A number of factors beyond Desjardins Group's control could influence the accuracy of the forward-looking statements in this MD&A. These factors include those discussed in the "Risk management" section, such as credit, market, liquidity, operational, insurance, strategic and reputation risk. Additional risk factors include legislative or regulatory developments in Quebec, Canada or globally, such as changes in fiscal and monetary policies; new liquidity reporting and regulatory guidance, or interpretations thereof; and amendments to and new interpretations of capital guidelines. There are also factors related to changes in economic and financial conditions in Quebec, Canada or globally, including the unemployment rate; the geographic concentration of operations; changes in interest rates and exchange rates; trade between Quebec and the United States; the ability of third parties to comply with their obligations to Desjardins Group; consumer spending; credit demand; the effects of increased competition in a market open to globalization; the presence of new and established competitors; fraud, including the use of new technologies in unprecedented ways against Desjardins Group, its members or its clients; legal or regulatory procedures and lawsuits; consumer saving habits; the effect of possible international conflicts, including terrorism, or natural disasters; and new developments.

Lastly, there are also operational risk factors, including the inherent limits of risk management models; changes to technology; disruption of service for the Internet and other technologies; the ability to design new products and services and bring them to market in a timely fashion; the ability to collect complete and accurate information about our clients and their counterparties; the ability to perform and integrate strategic acquisitions and alliances; changes to the accounting policies and methods Desjardins Group uses to present its financial position and operating results, including the uncertainties involving main accounting assumptions and estimates, as well as changes in estimates; the impact of future accounting changes; the ability to recruit and retain key officers; and management's ability to foresee and manage risk factors.

It is important to note that the above-mentioned list of factors that could influence future results is not exhaustive. Other factors could have an adverse effect on results. Additional information on these and other factors is found in section 4.0, "Risk management", of the 2011 Annual Report. Although Desjardins Group believes that the expectations expressed in these forward-looking statements are reasonable, it can give no assurance or guarantee that these expectations will prove to be correct. Desjardins Group cautions readers against placing undue reliance on forward-looking statements when making decisions.

Any forward-looking statements contained in this report represent the views of management only as at the date hereof, and are presented to help members and analysts understand Desjardins Group's financial position as at the dates indicated or for the periods ended on such dates, as well as its strategic priorities and objectives, and these statements may not be appropriate for other purposes. Desjardins Group does not undertake to update any oral or written forward-looking statements that could be made from time to time by or on behalf of Desjardins Group, except as required under applicable securities legislation.

DESJARDINS GROUP PROFILe

Desjardins Group is the leading cooperative financial group in Canada, with assets of $194.0 billion. The organization brings together 397 caisses in Quebec and Ontario, the Fédération des caisses Desjardins du Québec and its subsidiaries, including Caisse centrale Desjardins and Capital Desjardins inc., the Fédération des caisses populaires de l'Ontario and the Fonds de sécurité Desjardins. A number of its subsidiaries and components are active across Canada. Desjardins Group's "Personal Services and Business and Institutional Services", "Wealth Management and Life and Health Insurance", and "Property and Casualty Insurance" business segments offer a full range of financial products and services to 5.6 million members and clients, individuals and businesses alike, providing a customized response to their needs. As one of the largest employers in the country, Desjardins Group capitalizes on the skills of its 44,645 employees and the commitment of some 5,366 elected officers.

The tasks of carrying out treasury operations and acting as Desjardins's official representative with the Bank of Canada and the Canadian banking system are assumed by Caisse centrale Desjardins, also a cooperative financial institution.

ECONOMIC ENVIRONMENT

Despite all the efforts of euro zone governments and monetary authorities, the economic and financial situation remains tense in this region. There has been a strong outcry from citizens as a result of the negative effects of austerity plans on the economy. The European banking system is in fragile shape and there are concerns about the global repercussions that could result if a major financial institution were to go bankrupt. Investors are turning to safe-haven securities, thereby creating pressure on bond rates in countries that are perceived to be the soundest, in particular the United States and Canada, but also Germany and France. This situation will continue as long as uncertainty about the euro zone is not significantly dispelled.

In contrast to the improvements experienced at the start of the year, the U.S. economy is becoming increasingly shaky. Retail sales have been down for the past three months, the ISM Manufacturing Index has slid below 50, and employment rates are relatively disappointing. The United States' economy will therefore be hard pressed to grow more than 2% in 2012 and 2013. The pre-electoral environment and the fear that the tax cuts expiring at the end of 2012 will not be extended are creating a climate of uncertainty that is not conducive to stimulating the economy.

In Canada, the situation is a bit more positive. Job creation continues while investment spending is steadily increasing. Real GDP should be up 2.1% in 2012, and 2.4% in 2013. Weak commodity prices as a result of slow global economic growth will be one of the main obstacles to growth in Canada. Federal and provincial governments' budgetary restrictions will also curb activity in the country.

Quebec started off 2012 with moderate growth of 0.6% at an annualized rate in the first quarter, largely as a result of business and government investments. Consumer spending had stagnated because of the hike in the provincial sales tax (QST) effective January 1. However, the labour market's good performance over the past few months should make it possible to reverse this situation. Exports were adversely affected by the global economic slowdown and the high-flying loonie in relation to the U.S. dollar. Growth in Quebec is estimated at 1.4% in 2012, and should climb to 2.0% in 2013.

The mid-year picture is better than expected for the housing market in Quebec. Housing starts were practically as robust as in the first half of 2011 because of the surge in condominiums. A new record high in this market segment is about to be set in 2012. Home resales were surprisingly strong in the first half of the year, up 7.6% compared to the same period in 2011, but are expected to slow down somewhat in the second half of the year. Stricter mortgage insurance rules will be less favourable to home ownership, but strong job creation and low interest rates will prevent an excessively abrupt slowdown in the residential sector.

Given the current economic environment, major central banks are being encouraged to keep their key interest rates very low. The delicate situation in the euro zone in fact prompted the European Central Bank to reduce its key interest rates by 25 basis points on July 5, 2012. The U.S. Federal Reserve should wait until the end of 2014 before announcing an increase in key interest rates and could even set up other stimulus measures. In such a context, the Bank of Canada could wait until the fall of 2013 to raise its overnight rate.

Persisting global financial tensions will continue to exert downward pressure on U.S. and Canadian bond rates. Despite the aversion to more risky investment vehicles, high corporate profits could be beneficial to stock markets. The S&P 500 could post advances of close to 11% in 2012, and 7% in 2013. With only a 3% advance expected in 2012, the Canadian stock market will be affected by the various problems of commodity producers. It should pick up again in 2013 with anticipated growth of nearly 10%. Finally, oil prices should rise up somewhat to an average of US $94 a barrel this year, and US $96 next year. As for the Canadian dollar, it should continue to be very close to par in the months ahead.

 

 

 

 

 

 

REVIEW OF FINANCIAL RESULTS

 

RESULTS AND RATIOS

(in millions of dollars and as a percentage)  


For the three-month periods

ended June 30

For the six-month periods

ended June 30


2012

2011

Change

2012

2011

Change

Results













Net interest income

$

963

$

979

(1.6)

%

$

1,921

$

1,946

(1.3)

%

Net premiums


1,295


1,238

4.6



2,523


2,397

5.3


Other income


1,092


1,014

7.7



1,758


1,625

8.2


Total income


3,350


3,231

3.7



6,202


5,968

3.9


Provision for credit losses


62


83

(25.3)



144


127

13.4


Claims, benefits, annuities and changes in insurance and investment contract liabilities


1,425


1,277

11.6



2,171


2,098

3.5


Non-interest expense


1,342


1,415

(5.2)



2,812


2,821

(0.3)


Income taxes on surplus earnings


119


103

15.5



252


212

18.9


Surplus earnings before member dividends

$

402

$

353

13.9

%

$

823

$

710

15.9

%

Contribution to combined surplus earnings by business segment(1)













Personal Services and Business and Institutional Services

$

201

$

199

1.0

%

$

390

$

430

(9.3)

%

Wealth Management and Life and Health Insurance


49


73

(32.9)



110


136

(19.1)


Property and Casualty Insurance


47


23

104.3



117


64

82.8


Other


105


58

81.0



206


80

157.5



$

402

$

353

13.9

%

$

823

$

710

15.9

%

Returned to members and the community













Provision for member dividends

$

67

$

71

(5.6)

%

$

118

$

136

(13.2)

%

Sponsorships and donations


23


23



41


39

5.1



$

90

$

94

(4.3)

%

$

159

$

175

(9.1)

%

Ratios













Return on equity(2)

11.1

%

11.5

%



11.5

%

11.7

%



Productivity index(2)

69.7


72.4




69.8


72.9




(1)   Information about each segment is presented in Note 15, "Segmented Information", to the Interim Combined Financial Statements.

(2)   See "Basis of presentation of financial information".

Analysis of Desjardins Group's results 

Comparison of the second quarters of 2012 and 2011

For the second quarter ended June 30, 2012, Desjardins Group recorded surplus earnings before member dividends of $402 million, compared to $353 million a year earlier, an increase of 13.9%. These surplus earnings included the non-controlling interests' share, which amounted to $12 million for the second quarter of 2012, and $4 million for the second quarter of 2011.

These results reflect the Personal Services and Business and Institutional Services segment's contribution to surplus earnings of $201 million, or 50.0%. The Wealth Management and Life and Health Insurance segment and the Property and Casualty Insurance segment made contributions of $49 million and $47 million, respectively, representing 12.2% and 11.7% of surplus earnings, respectively. The Other category made a contribution of $105 million, or 26.1% of surplus earnings.

Return on equity was 11.1%, compared to 11.5% for the corresponding quarter of 2011.

Each quarter, Desjardins Group estimates the amount to be recorded for the payment of dividends to caisse members at the end of the fiscal year. The amount returned to members and the community totalled $90 million, which is comparable to the amount recorded in the same quarter in 2011. This amount includes donations and sponsorships as well as the amount provisioned for member dividends, which was $67 million, compared to $71 million for the corresponding quarter of 2011.

Total income

Total income for the second quarter of 2012 was $3,350 million, an increase of $119 million, or 3.7%, over the same quarter in 2011.

Net interest income was down slightly for the second quarter of 2012, totalling $963 million, compared to $979 million for the same period in 2011. This decrease was mainly due to the low interest rate environment and fierce competition in the mortgage lending market. A $7.5 billion or 6.1% increase in outstanding loans over last year mitigated this impact.

Growth in insurance business generated a 4.6% increase in net premiums, which amounted to $1,295 million. The overall insurance operations of the Wealth Management and Life and Health Insurance segment posted net insurance and annuity premium income of $865 million for the second quarter of 2012, compared to $856 million for the same period in 2011, representing a 1.1% increase. Net insurance premiums were up 3.4%, both in Quebec and in the other provinces, compared to second quarter of 2011, totalling $764 million. The activities of the Property and Casualty Insurance segment generated net premium income of $487 million in the second quarter of 2012, compared to $438 million for the same period in 2011, an increase of 11.2%. This increase stemmed from the larger number of policies issued as a result of growth initiatives targeting mass market clients and groups both in Quebec and across Canada, the development of white label partnerships and of business insurance, and the increase in the average premium in certain market segments, among other factors.

Other income stood at $1,092 million, up $78 million, or 7.7%, compared to the same quarter in 2011, chiefly because of growth in credit card activities and fee income from the sale of insurance generated by Western Financial Group Inc.

Provision for credit losses

The provision for credit losses totalled $62 million for the second quarter of 2012, down $21 million, or 25.3%, compared to the corresponding period in 2011, primarily as a result of adjustments related to changes in the parameters of the provision.

Claims, benefits, annuities and changes in insurance and investment contract liabilities

Expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities totalled $1,425 million, up 11.6% compared to the same period in 2011. For the Wealth Management and Life and Health Insurance segment, these expenses were $1,088 million, up $149 million, or 15.9%, compared to the same quarter in 2011. The change was chiefly the result of a $154 million increase in actuarial liabilities included under "Insurance and investment contract liabilities", including the increase in the fair value of investments. The deterioration of the claims experience in long-term disability insurance also accounted for the change.

Expenses for the Property and Casualty Insurance segment were $343 million, compared to $334 million for the same period in 2011, representing an increase of $9 million, or 2.7%, essentially due to the growth in the Ontario automobile insurance policy portfolio, largely offset by a reduction in the loss ratio. The loss ratio was 70.4% for the second quarter of 2012, compared to 76.3% for the same period in 2011. This change was mostly attributable to the decrease in the frequency of claims because of more favourable weather conditions and the higher average premium earned compared to the same period in 2011.

Non-interest expense and other items

Non-interest expense decreased by $73 million, or 5.2%, to total $1,342 million compared to the second quarter of 2011. This decrease was primarily a result of significant IT upgrade investments in 2011 as well as lower provisions related to the investment portfolio. These factors were offset by the annual increase in salaries and fringe benefits due to indexing.

The productivity index, calculated as the ratio of non-interest expense to total income, net of expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities, improved considerably to stand at 69.7% for the second quarter, compared to 72.4% for the second quarter of 2011. The improvement in the productivity index was attributable to the growth in operating income and investment performance for the second quarter of 2012, compared to the same period in 2011, combined with tight control of non-interest expense.

Comparison of the first six months of 2012 and 2011

For the six-month period ended June 30, 2012, Desjardins Group recorded surplus earnings before member dividends of $823 million, compared to $710 million a year earlier, an increase of 15.9%. These surplus earnings included the non-controlling interests' share, which amounted to $23 million for the first half of 2012 and $10 million for the first half of 2011.

Return on equity was 11.5%, compared to 11.7% for the corresponding period in 2011.

The amount returned to members and the community for the first half of 2012 totalled $159 million and included donations, sponsorships and bursaries as well as the amount provisioned for member dividends, which was $118 million, compared to $136 million for the same period in 2011. An $18 million downward adjustment to the provision recorded in 2011 was made in the first quarter of 2012.

Total income

Total income for Desjardins Group was $6,202 million, an increase of $234 million, or 3.9%, compared to the first half of 2011. Net interest income was down $25 million, or 1.3%, to $1,921 million, compared to the first half of 2011, mainly because of pressure on interest rates, in spite of growth in loans outstanding. Net premiums in the insurance segments were up 5.3%, to total $2,523 million. The overall insurance operations of the Wealth Management and Life and Health Insurance segment generated net insurance and annuity premium income of $1,676 million for the first half of 2012, compared to $1,653 million for the same period in 2011, representing an increase of 1.4%. The activities of the Property and Casualty Insurance segment generated net premium income of $956 million in the first half of 2012, compared to $841 million for the same period in 2011, an increase of 13.7% for the same reasons as for the second quarter.

Other income stood at $1,758 million, an increase of $133 million, or 8.2%, compared to the first half of 2011, chiefly because of growth in credit card activities and fee income from the sale of insurance generated by Western Financial Group Inc., the subsidiary acquired in the second quarter of 2011.

Provision for credit losses

The provision for credit losses was up $17 million, or 13.4%, compared to the same period in 2011. The increase was the result, among other things, of growth in loans outstanding in the Personal Services and Business and Institutional Services segment and recoveries made in the first half of 2011. However, the increase was offset by adjustments to the provision.

Claims, benefits, annuities and changes in insurance and investment contract liabilities

Expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities totalled $2,171 million, up 3.5%, compared to the same period in 2011. For the Wealth Management and Life and Health Insurance segment, these expenses were $1,543 million, up $47 million, or 3.1%, compared to first half of 2011. The change was a result of a $41 million increase in actuarial liabilities included under "Insurance and investment contract liabilities".

Expenses for the Property and Casualty Insurance segment were $634 million, compared to $603 million for the same period in 2011, representing an increase of $31 million, or 5.1%. The change resulted basically from the same factors as those mentioned for the second quarter. Furthermore, the loss ratio was 66.3% for the first half of 2012, compared to 71.7% for the same period in 2011.

Non-interest expense and other items

Non-interest expense was $2,812 million, down $9 million compared to the first half of 2011. This change was mainly due to significant IT upgrade investments in 2011, as well as lower provisions related to the investment portfolio, offset by the increase in salaries and fringe benefits due to annual indexing.

The productivity index was 69.8% for the first half of 2012, compared to 72.9% for the first half of 2011, for the same reasons as mentioned for the second quarter.

 

RESULTS BY BUSINESS SEGMENT

Desjardins Group's financial reporting is based on accounting by operations structured according to the needs of members and clients, as well as the markets in which Desjardins Group operates, thereby reflecting its internal management method. The financial results of Desjardins Group are therefore divided into the following three business segments: Personal Services and Business and Institutional Services, Wealth Management and Life and Health Insurance, and Property and Casualty Insurance. This section includes an analysis of the results for each of these business segments. Lastly, the Other category is also added to these three segments.

Intersegment transactions are carried out in the normal course of business and are measured at the exchange amount, which corresponds to the amount of consideration established and agreed to by each of the legal entities and business units.

 

 

Personal Services and Business and Institutional Services

The Personal Services and Business and Institutional Services segment offers Desjardins Group members and clients a broad range of regular financial products and services, which are mainly distributed by the caisse network. It also makes its products and services available through complementary distribution networks and mortgage representatives, by phone, online, via applications for mobile devices, as well as at ATMs.

Personal Services and Business and Institutional Services - Segment results

(in millions of dollars and as a percentage)


For the three-month periods

ended June 30

For the six-month periods

ended June 30


2012

2011

Change

2012

2011

Change

Net interest income

$

913

$

916

(0.3)

%

$

1,818

$

1,847

(1.6)

%

Other income


401


419

(4.3)



859


854

0.6


Total income


1,314


1,335

(1.6)



2,677


2,701

(0.9)


Provision for credit losses


62


83

(25.3)



144


127

13.4


Non-interest expense


993


985

0.8



2,016


1,997

1.0


Income taxes on surplus earnings


58


68

(14.7)



127


147

(13.6)


Surplus earnings before member dividends


201


199

1.0



390


430

(9.3)


Provision for member dividends, net of tax recovery


49


50

(2.0)



87


97

(10.3)


Non-controlling interests' share






1

(100.0)


Surplus earnings for the period after member   dividends - Group's share

$

152

$

149

2.0

%

$

303

$

332

(8.7)

%

 

Comparison of the second quarters of 2012 and 2011

The Personal Services and Business and Institutional Services segment recorded surplus earnings before member dividends of $201 million for the second quarter of 2012, an increase of 1.0%, or $2 million, compared to the same period in 2011.

Total income for the segment stood at $1,314 million, down slightly compared to the second quarter of 2011. Net interest income was also down slightly, due to the persistent low interest rate environment and fierce competition in the mortgage lending market. However, the increase in residential mortgages and business loans outstanding mitigated the impact. Other income was down $18 million, or 4.3%, to stand at $401 million as a result of lower trading income stemming from capital market volatility. This decrease was offset by growth in credit card activities that led to higher other income.

The provision for credit losses totalled $62 million for the second quarter of 2012, down $21 million, or 25.3%, compared to the corresponding period in 2011, primarily as a result of adjustments related to changes in the parameters for the provision.

Non-interest expense was up $8 million, or 0.8%, compared to the same period in 2011 as a result of the increase in salaries and fringe benefits due to business growth and annual indexing.

Comparison of thefirst six months of 2012 and 2011

The Personal Services and Business and Institutional Services segment recorded surplus earnings before member dividends of $390 million for the first half of 2012, a decrease of 9.3%, or $40 million, compared to the first half of 2011.

Total income for the segment stood at $2,677 million, down slightly compared to the same period in 2011. These results included a $29 million, or 1.6%, reduction in net interest income, mainly due to the persistent low interest rate environment and fierce competition on the mortgage lending market. The increase in residential mortgages and business loans outstanding, of $6.5 billion and $1.0 billion, respectively, compared to the end of the first half of 2011, mitigated the reduction in net interest income. Other income was up $5 million, or 0.6%, compared to the first half of 2011. The increase is partly due to growth in credit card activities and point-of-sale financing, as well as the disposal of an investment which generated a gain of $21 million. However, the increase was mitigated by a reduction in trading income, for the same reasons as mentioned for the second quarter.

The provision for credit losses increased $17 million, or 13.4%, compared to the same period in 2011 as a result, among other things, of the growth in loans outstanding and the recoveries made in the first half of 2011. However, the increase was offset by adjustments to the provision.

Non-interest expense was up $19 million, or 1.0%, compared to the same period in 2011, for the same reasons as mentioned for the second quarter.

 

 

 

 

 

Wealth Management and Life and Health Insurance

The Wealth Management and Life and Health Insurance segment offers a wide range of products and services tailored to the changing needs of individuals, groups and businesses, either as caisse network members or clients of complementary distribution channels, in terms of asset management and financial security. Its products and services are also distributed by financial planners in the caisse network, and by phone, online and via applications for mobile devices.

 

Wealth Management and Life and Health insurance - Segment results

(in millions of dollars and as a percentage)


For the three-month periods

ended June 30

For the six-month periods

ended June 30


2012

2011

Change

2012

2011

Change

Net interest income

$

1

$

1

%

$

1

$

2

(50.0)

%

Net premiums


865


856

1.1



1,676


1,653

1.4


Other income


675


562

20.1



814


793

2.6


Total income


1,541


1,419

8.6



2,491


2,448

1.8


Claims, benefits, annuities and changes in insurance and investment contract liabilities


1,088


939

15.9



1,543


1,496

3.1


Non-interest expense


387


389

(0.5)



802


780

2.8


Income taxes on surplus earnings


17


18

(5.6)



36


36


Surplus earnings after member dividends


49


73

(32.9)



110


136

(19.1)


Non-controlling interests' share


6


1

500.0



9


1

800.0


Surplus earnings for the period after member dividends - Group's share

$

43

$

72

(40.3)

%

$

101

$

135

(25.2)

%

 

 

Comparison of the second quarters of 2012 and 2011

For the second quarter of 2012, the Wealth Management and Life and Health Insurance segment recorded surplus earnings after member dividends of $49 million, down $24 million, or 32.9%, compared to the same quarter in 2011. Capital market volatility, low interest rates and the deterioration of the claims experience in long-term disability insurance accounted for most of the change compared to the results for the second quarter of 2011.

The segment's total income was $1,541 million, an increase of $122 million, or 8.6%, due mainly to the $89 million increase in investment income from life and health insurance operations, partially offset by an increase in insurance contract liabilities included in expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities. Net insurance premium income was up $25 million, although offset by a $16 million decrease in net annuity premiums. In addition, the growth in average assets under management for the distribution of various products contributed to the increase in other income.

Expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities were $1,088 million, up $149 million, or 15.9%, compared to the same quarter in 2011, mainly as a result of a $154 million increase in actuarial liabilities included under "Insurance and investment contract liabilities", including the upward fluctuation in the fair value of investments.

Non-interest expense was down $2 million, or 0.5%, to total $387 million for the second quarter of 2012.

Comparison of the first six months of 2012 and 2011

For the first half of 2012, surplus earnings after member dividends were $110 million, a decrease of $26 million, or 19.1%, compared to the first half of 2011.

The segment's total income was $2,491 million, an increase of $43 million, or 1.8%, due mainly to the $66 million increase in net insurance premiums. Furthermore, net annuity premiums were down $43 million compared to the first half of 2011. Finally, the growth in average assets under management for the distribution of various products contributed to the increase in other income.

Expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities were up $47 million, or 3.1%, compared to the first half of 2011, mainly as a result of a $41 million increase in actuarial liabilities included under "Insurance and investment contract liabilities".

The $22 million, or 2.8%, increase in non-interest expense for the first half of 2012 was mainly attributable to the increase in salaries and fringe benefits due to business growth, growth in commissions on sales of savings products and the remuneration paid to the caisse network, as well as the acquisition of MGI Financial Inc. in October 2011, which generated additional expenses of $8 million.

Property and Casualty Insurance

The Property and Casualty Insurance segment offers a line of home and automobile insurance products directly to the general public, to members of partner groups and to businesses. In addition to being offered through the caisse network, these products are distributed across Canada via several client care centres, online, via applications for mobile devices and through an extensive financial service and insurance product distribution network operated by Western Financial Group Inc.

 

Property and Casualty Insurance - Segment results

(in millions of dollars and as a percentage)


For the three-month periods

ended June 30

For the six-month periods

ended June 30

 


2012

2011

Change

2012

2011

Change

 

Net interest income

$

3

$

4

(25.0)

%

$

7

$

4

75.0

%

Net premiums


487


438

11.2



956


841

13.7


Other income


78


63

23.8



138


85

62.4


Total income


568


505

12.5



1,101


930

18.4


Claims, benefits, annuities and changes in insurance and investment contract liabilities


343


334

2.7



634


603

5.1


Non-interest expense


165


143

15.4



320


241

32.8


Income taxes on surplus earnings


13


5

160.0



30


22

36.4


Surplus earnings after member dividends


47


23

104.3



117


64

82.8


Non-controlling interests' share


5


3

66.7



12


7

71.4


Surplus earnings for the period after member dividends - Group's share

$

42

$

20

110.0

%

$

105

$

57

84.2

%

OTHER INFORMATION













Gross premiums written

$

587

$

529

11.0

%

$

1,075

$

948

13.4

%

Loss ratio

70.4 %

76.3 %

(5.9)

points

66.3 %

71.7 %

(5.4)

points

 

 

Comparison of the second quarters of 2012 and 2011

For the second quarter of 2012, the Property and Casualty Insurance segment recorded surplus earnings after member dividends of $47 million, an increase of $24 million, or 104.3%, compared to 2011, chiefly due to higher net premium income and an improved loss ratio.

The segment's total income was $568 million for the second quarter of 2012, up $63 million, or 12.5%, compared to the same period in 2011. This performance was due to the $49 million growth in net premium income stemming from the larger number of policies issued. This increase came as a result of growth initiatives targeting mass market clients and groups, both in Quebec and across Canada, the development of white label partnerships and of business insurance, and the increase in the average premium in certain market segments. Other income increased by $15 million as a result, in particular, of higher fee income.

Expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities were up $9 million, or 2.7%, compared to 2011. The change was chiefly attributable to growth in the Ontario automobile insurance policy portfolio, largely offset by a decrease in the loss ratio. The loss ratio was 70.4% for the second quarter of 2012, down 5.9 points compared to its corresponding 2011 level, mostly due to the decrease in the frequency of claims because of more favourable weather conditions and the higher average premium earned compared to the same period in 2011.

The increase of $22 million, or 15.4%, in non-interest expense was primarily attributable to the expansion of the operations of Western Financial Group Inc., the increase in salaries and fringe benefits as a result of growth in personnel and annual indexing, and higher IT costs to support business growth.

Comparison of the first six months of 2012 and 2011

For the first half of 2012, the segment's surplus earnings after member dividends amounted to $117 million, an increase of $53 million, or 82.8%, compared to the same period in 2011, mainly as a result of an improved loss ratio in 2012. The loss ratio was 66.3% in 2012, down 5.4 points compared to its corresponding 2011 level. Western Financial Group Inc. contributed $12 million to surplus earnings for the first half of 2012, a $7 million increase compared to the first half of 2011.

Total income for the segment stood at $1,101 million, up $171 million, or 18.4%, compared to the same period in 2011. This performance was due to the same reasons as those for the quarter, except that there was also an increase in gains realized on the disposal of investments.

Expenses related to claims, benefits, annuities and changes in insurance liabilities were up $31 million from the same period in 2011, for the same reasons as those mentioned for the quarter.

Non-interest expense was up $79 million, or 32.8%, especially owing to the consolidation of the operations of Western Financial Group Inc., which was acquired in the second quarter of 2011, for an amount of $59 million, to an increase in salaries and fringe benefits and to higher IT costs.

Other category

The Other category includes financial information that is not specific to a business segment. It primarily includes treasury activities related to the operations of Caisse centrale Desjardins and the financial intermediation between surplus and liquidity needs of the caisses. This category also includes the support functions of the Federation, the operations of Capital Desjardins inc. and the Fonds de sécurité Desjardins, and the operating results related to the asset-backed term notes (ABTN) held by Desjardins Group. It also includes Desjardins Technology Group Inc., which encompasses all of Desjardins Group's IT operations. In addition to various consolidation adjustments, the category includes intersegment balance eliminations.

Desjardins Group considers that an item-by-item comparative analysis of this category is not appropriate given the integration of various consolidation adjustments and intersegment balance eliminations. Consequently, Desjardins Group presents an analysis based on its contribution to surplus earnings before member dividends.

Contribution to surplus earnings

Surplus earnings before member dividends for the second quarter of 2012 totalled $105 million, versus $58 million for the same period in 2011. For the first six months of 2012, surplus earnings before member dividends totalled $206 million, compared to $80 million for the corresponding period in 2011.

Second quarter 2012

Surplus earnings before member dividends of $105 million were mainly attributable to treasury activities, to the favourable net impact of changes in the fair value of derivatives used in hedging operations, and to lower investment portfolio provisions.

Second quarter 2011

Surplus earnings before member dividends of $58 million were chiefly due to the favourable net impact of changes in the fair value of derivatives used in hedging operations, and to treasury activities, offset by significant IT upgrade investments.

First six months of 2012

Surplus earnings before member dividends of $206 million were primarily due to the $79 million increase in the fair value of the ABTN portfolio, net of hedging positions, to treasury activities, and to lower investment portfolio provisions.

First six months of 2011

Surplus earnings before member dividends of $80 million were due, among other things, to treasury activities, to the favourable net impact of changes in the fair value of derivatives used in hedging operations, and to an increase in the fair value of the ABTN portfolio and related items totalling $32 million, offset by significant IT upgrade investments.

 

 

  

 

 

 

 

 

 

SUMMARY OF INTERIM RESULTS

 

The table below presents a summary of data related to the results for Desjardins Group's most recent eight quarters.

results of most recent eight quarters

(in millions of dollars)


2012

2011

2010


Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Net interest income

$

963

$

958

$

1,007

$

968

$

979

$

967

$

982

$

999

Net premiums


1,295


1,228


1,221


1,233


1,238


1,159


1,181


1,079

Other income


1,092


666


1,284


1,525


1,014


611


471


1,135

Total income


3,350


2,852


3,512


3,726


3,231


2,737


2,634


3,213

Provision for credit losses


62


82


54


56


83


44


42


60

Claims, benefits, annuities and changes in insurance and investment contract liabilities


1,425


 

746


1,444


 

1,750


 

1,277


 

821


 

907


1,310

Non-interest expense


1,342


1,470


1,478


1,325


1,415


1,406


1,473


1,270

Income taxes on surplus earnings


119


133


109


150


103


109


41


141

Surplus earnings before member dividends


402


421


427


445


353


357


171


432

Provision for member dividends, net of tax recovery


49


38


90


43


50


47


65


49

Surplus earnings for the period after member dividends

$

353

$

383

$

337

$

402

$

303

$

310

$

106

$

383

Quarterly income, expenses and surplus earnings before member dividends fluctuate based on certain trends, including, among other things, seasonal variations and changes in general economic and market conditions. For more information about quarterly trends, see page 75 of the 2011 Annual Report.

REVIEW OF FINANCIAL POSITION

CONDENSED STATEMENT OF FINANCIAL POSITION

(in millions of dollars and as a percentage)


As at June 30, 2012

As at December 31, 2011

Assets









Cash and deposits with financial institutions 

$

1,179

0.6

%

$

1,356

0.7

%

Securities


38,731

20.0



41,205

21.7


Securities borrowed or purchased under reverse repurchase agreements


7,010

3.6



4,959

2.6


Loans


128,608

66.3



125,154

65.8


Segregated fund assets


5,890

3.0



5,427

2.9


Other assets


 12,569

6.5



12,036

6.3


Total assets

$

193,987

100.0

%

$

190,137

100.0

%

Liabilities and equity









Deposits

$

128,470

66.2

%

$

123,403

64.9

%

Other liabilities


47,584

24.5



49,357

25.9


Subordinated bonds


3,045

1.6



3,350

1.8


Equity


14,888

7.7



14,027

7.4


Total liabilities and equity

$

193,987

100.0

%

$

190,137

100.0

%

 

Financing activities

Loans by borrower category

(in millions of dollars and as a percentage)


As at June 30, 2012

As at December 31, 2011

Residential mortgages

$

83,245

64.5

%

$

79,686

63.4

%

Consumer, credit card and other personal loans


18,110

14.0



17,985

14.3


Business and government


27,725

21.5



27,948

22.3




129,080

100.0

%


125,619

100.0

%

Allowance for credit losses


(472)




(465)



Total loans by borrower category

$

128,608



$

125,154



Loans guaranteed by governments and other public and parapublic institutions included above

$

38,690



$

36,362



 

As at June 30, 2012, Desjardins Group's total assets stood at $194.0 billion, up $3.9 billion, or 2.0%, since December 31, 2011. This increase was mainly the result of growth in the loan portfolio, particularly in the housing market.

At the end of the second quarter of 2012, cash and deposits with financial institutions as well as securities, including those borrowed or purchased under reverse repurchase agreements, totalled $46.9 billion, compared to a volume of $47.5 billion at the end of 2011. Total securities, excluding those borrowed or purchased under reverse repurchase agreements, totalled $38.7 billion, compared to $41.2 billion as at December 31, 2011, for a decline of $2.5 billion, or 6.0%, while securities borrowed or purchased under reverse repurchase agreements grew by $2.1 billion, or 41.4%, to total $7.0 billion.

As at June 30, 2012, Desjardins Group's outstanding loan portfolio, net of the allowance for credit losses, totalled $128.6 billion, up $3.5 billion, or 2.8%, since December 31, 2011. This growth was due especially to Desjardins Group's consistent results in residential mortgages as well as in consumer, credit card and other personal loans. 

Outstanding residential mortgages grew by $3.6 billion, or 4.5%, since the end of 2011, to total $83.2 billion as at June 30, 2012, compared to an increase of $2.4 billion, or 3.2%, for the same period a year ago. Desjardins Group, which is a leading player in home financing, especially in Quebec, therefore continued to do well in this highly coveted and competitive market. Note that this credit category accounted for 64.5% of its loan portfolio at the end of the second quarter, which had again been relatively active in the area of new construction and resales, both in Quebec and Ontario.

For instance, accumulated housing starts in Quebec amounted to 19,189 units for the first six months of 2012, down very slightly by 1.2% from the year-earlier period, while existing home resales were up 7.6% for a total of 47,431 resales. The average selling price rose by 4.0%. In Ontario, housing activity remained very brisk, as evidenced by the 22.7% surge in accumulated housing starts (36,923 units versus 30,093 in 2011) and a 4.9% increase in resales (111,322 transactions versus 106,084 in 2011). The average selling price rose by 6.7%.

Consumer, credit card and other personal loans outstanding totalled $18.1 billion as at June 30, 2012, up $125 million, or 0.7%, since the end of 2011. Business and government loans amounted to $27.7 billion at the end of the second quarter of 2012, down $223 million, or 0.8%, since December 31, 2011.

Quality of loan porfolio

Information about the quality of Desjardins Group's loan portfolio is presented under "Risk management", on pages 17 and 18 of this MD&A.

 

SAVINGS RECRUITMENT ACTIVITIES

DEPOSITS

(in millions of dollars and as a percentage)


As at June 30, 2012

As at December 31, 2011

Individuals

$

84,915

66.1

%

$

82,486

66.8

%

Business and government


31,685

24.7



29,009

23.5


Deposit-taking institutions and other


11,870

9.2



11,908

9.7


Total deposits

$

128,470

100.0

%

$

123,403

100.0

%

 

As at June 30, 2012, Desjardins Group's outstanding deposits stood at $128.5 billion, up $5.1 billion, or 4.1%, since the end of 2011. More specifically, savings from individuals, which accounted for 66.1% of Desjardins's total savings portfolio, rose by $2.4 billion, or 2.9%, to stand at $84.9 billion. 

Other deposit categories comprising Desjardins's savings recruitment include deposits from business and government. Outstanding business and government deposits totalled $31.7 billion as at June 30, 2012, up $2.7 billion, or 9.2%, since December 31, 2011. Savings from deposit-taking institutions and other sources, such as securities issues on capital markets, decreased by $38 million, or 0.3%, since the beginning of the year to total $11.9 billion.

 

Capital management

 

Capital management aims to ensure that the capital structure and level of Desjardins Group and its components are adequate in terms of the risks taken by the organization, regulators' requirements, profitability targets, growth objectives, and rating agencies' expectations. In this context, Desjardins Group must optimize the allocation of capital and the internal capital flow mechanisms, and support growth, development, and risk management of the Combined Statements of Financial Position.

 

Desjardins Group's capital ratios are calculated according to the guideline on adequacy of capital base standards applicable to financial services cooperatives, issued by the Autorité des marchés financiers (AMF) in Quebec. This regulatory framework is largely based on the revised framework for international convergence of capital measurement and capital standards (Basel II) issued by the Bank for International Settlements (BIS). In this regard, the AMF allowed Desjardins Group to use the Advanced Internal Ratings-Based Approach, subject to conditions, for credit risk related to retail loan portfolios (individuals). Other credit exposures and market risk are assessed according to the Standardized Approach, while operational risk is calculated based on the Basic Indicator Approach.

 

Desjardins Group is one of the best capitalized financial institutions in Canada: its Tier 1 and total capital ratios, measured under the Basel II regulatory framework, remained at 16.1% and 18.8%, respectively, as at June 30, 2012. These ratios were 17.3% and 19.3%, respectively, as at December 31, 2011. Desjardins Group therefore still has excellent capitalization, with a Tier 1 capital ratio above its target of 15%.

 

Since the implementation of Basel II, Desjardins Group has applied the deferred treatment prescribed by the AMF, under which equity related to investments in its insurance subsidiaries made before January 1, 2007, was fully deducted from Tier 2 capital until the end of fiscal 2011. Effective 2012, this equity must be deducted in equal shares of 50% from Tier 1 capital and Tier 2 capital. The end of the application of this deferred treatment had an unfavourable impact of 143 basis points on Tier 1 capital ratio in the first six months of 2012, while the total capital ratio remained the same.

 

On June 18, 2012, Desjardins Group introduced a program to issue capital shares for a maximum of $1.2 billion, through the Federation. An amount of $291 million had been issued as at June 30, 2012. These capital shares, currently included in the Tier 1 capital under Basel II, meet the upcoming regulatory capital requirements (Basel III) for Tier 1 Common Equity. To this end, on May 1, 2012, the Federation was granted venture issuer status. During the second quarter, Desjardins Group also called all outstanding Series C Senior subordinated bonds, in the amount of $300 million.

 

 

 

 

 

REGULATORY CAPITAL

(in millions of dollars and as a percentage)



As at June 30, 2012

As at December 31, 2011

Tier 1 capital







Eligible capital shares



$

2,567

$

2,186

Reserves




10,205


9,032

Undistributed surplus earnings




735


1,236

Deferral attributable to the coming into force of IFRS




289


578

Non-controlling interests




60


60

Goodwill




(339)


(336)

Other deductions(1)




(1,531)


(423)

Total Tier 1 capital



$

11,986

$

12,333

Tier 2 capital







Subordinated bonds



$

3,057

$

3,363

Eligible collective allowance




279


256

Other eligible securities




111


110

Non-controlling interests




68


68

Other deductions(1)




(1,527)


(2,379)

Total Tier 2 capital



$

1,988

$

1,418

Total regulatory capital



$

13,974

$

13,751

Capital ratios





Tier 1 capital



16.1

 %

17.3

 %

Total capital



18.8


19.3


(1)   Mainly include the provision deficit related to the Internal Ratings-Based Approach ($275 million [$346 million as at December 31, 2011]), securitization exposures ($192 million [$117 million as at December 31, 2011]) and investments in components deconsolidated for regulatory capital purposes (primarily Desjardins Financial Security and Desjardins General Insurance Group ($2,467 million [$2,254 million as at December 31, 2011]), net of the unamortized balance of $82 million representing the impact of IFRS adoption on these investments ($163 million as at December 31, 2011) as well as in affiliated companies ($120 million [$80 million as at December 31, 2011]).

In the context of implementing the Integrated Capital Management Framework, the financial goal for Desjardins Group's Tier 1 capital ratio was maintained at a minimum of 15%, taking into account the global economic context, the new regulatory requirements announced by the BIS with respect to Basel III (in effect as of January 1, 2013) and the implementation of IFRS. In view of that, as at January 1, 2011, the date of conversion to IFRS, Desjardins Group elected to use the transitional provision permitted by the AMF. This election is irrevocable and makes it possible to mitigate the impact of the new accounting standards through a quarterly adjustment of Desjardins Group's eligible undistributed surplus earnings over a two-year period ending December 31, 2012. Accordingly, for purposes of calculating the Tier 1 capital ratio, Desjardins Group has amortized, since January 1, 2011, the eligible portion of the IFRS impact of $1.2 billion on a straight-line basis, for a quarterly amortization of $145 million, and will do so until December 31, 2012. If this transitional measure is taken into account, the impact of IFRS on Tier 1 and total capital ratios as at June 30, 2012, was a decline of 120 basis points and 102 basis points, respectively, in these ratios since December 31, 2011. Had it not been for this transitional measure, the negative effect would have been 154 basis points and 130 basis points, respectively.

 

 

 

 

 

 

 

Risk-weighted assets

(in millions of dollars and as a percentage)


Internal Ratings-Based Approach

Standardized

Approach

TOTAL

As at June 30, 2012

As at
December 31,
2011


Exposure(1)

Risk-weighted assets

Exposure(1)

Risk-weighted assets

Exposure(1)

Risk-weighted assets

Average risk-weighting rate

Risk-weighted assets

Sovereign borrowers

$

$

$

13,390

$

$

13,390

$

%

$

Financial institutions




7,659


1,528


7,659


1,528

20



1,630

Business




39,296


28,730


39,296


28,730

73



27,632

Mortgages


50,312


4,228


219


43


50,531


4,271

8



4,790

Revolving exposures for      eligible retail clients


26,853


7,248




26,853


7,248

27



8,596

Other retail client exposures


35,418


3,781


4,100


2,675


39,518


6,456

16



6,470

Securitization




1,574


924


1,574


924

59



636

Equities




32


32


32


32

100



41

Trading portfolio




1,893


420


1,893


420

22



572

Other assets(2)






12,319


3,660

30



3,508

Scaling factor(3)



915





915



1,039

Total credit risk


112,583


16,172


68,163


34,352


193,065


54,184



54,914

Market risk





1,606



1,606



1,791

Operational risk(4)







11,652



11,281

Transitional threshold adjustment(5)







6,795



3,339

Total risk-weighted assets

$

112,583

$

16,172

$

68,163

$

35,958

$

193,065

$

74,237

%

$

71,325

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

(2)   The other assets are measured using a method other than the Standardized Approach or the Internal Ratings-Based Approach.

(3)   The scaling factor is a 6.0% calibration of risk-weighted assets assessed using the Internal Ratings-Based Approach for credit exposures in accordance with Section 1.3 of the AMF guideline.

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

(5)   As prescribed in Section 1.6 of the AMF guideline.

Analysis of cash flows

Because of the nature of Desjardins Group's operations, most of the items on the Combined Statements of Income and the Combined Statements of Financial Position are cash items. Normal operations therefore cause considerable fluctuations in liquidity and affect numerous items, such as loans, deposits and securities. The main changes in cash flows are explained in the following paragraphs.

For the six-month period ended June 30, 2012, cash and cash equivalents were down $177 million, versus a decrease of $154 million for the corresponding quarter in 2011. As at June 30, 2012, cash and cash equivalents stood at $1,179 million, compared to $1,467 million a year earlier.

For the six-month period ended June 30, 2012, cash flows used in operating activities totalled $1,434 million, primarily because of an increase of $3,598 million in loans, a decrease of $2,059 million in commitments related to securities lent or sold under repurchase agreements, and an increase of $2,051 million in securities borrowed or purchased under reverse repurchase agreements, offset primarily by an increase of $5,067 million in deposits, and a decrease of $1,110 million in securities at fair value through profit or loss. For the corresponding period in 2011, cash flows from operating activities were $10 million as a result of an increase of $6,786 million in deposits, offset primarily by an increase of $3,442 million in loans and of $3,176 million in securities borrowed or purchased under reverse repurchase agreements.

Cash flows from financing activities amounted to $39 million for the six-month period ended June 30, 2012, primarily due to the issuance of capital shares for $291 million and a net change of $91 million in capital stock, offset mainly by the redemption of $300 million of subordinated bonds and the remuneration on permanent shares of $34 million, net of income tax recovery. For the corresponding period in 2011, cash flows from financing activities were $100 million, chiefly as a result of a net change of $82 million in capital stock and the sale of debt securities and subordinated bonds to third parties on the market amounting to $46 million, offset by the remuneration on permanent shares of $30 million, net of income tax recovery.

Cash flows from investing activities were $1,218 million for the six-month period ended June 30, 2012, as a result of proceeds from disposals of available-for-sale securities of $20,621 million and proceeds from maturities of available-for-sale securities of $776 million, offset primarily by the purchase of available-for-sale securities of $20,094 million. For the corresponding period in 2011, cash flows used in investing activities amounted to $264 million due to the purchase of available-for-sale securities of $11,703 million, offset primarily by proceeds from disposals and maturities of available-for-sale securities for the respective amounts of $11,202 million and of $553 million.

Off-balance sheet arrangements

In the normal course of operations, Desjardins Group enters into different arrangements, including assets under administration and under management on behalf of its members and clients, credit instruments, derivative financial instruments, contractual commitments, financial assets received as collateral and unconsolidated special purpose entities, including securitization. These types of arrangements are described on pages 88 to 91 of the 2011 Annual Report. There have not been any additions to or material changes in these off-balance sheet items since December 31, 2011.

Off-balance sheet savings

Desjardins Group is one of Canada's leading trustees and wealth managers. Off-balance sheet savings are comprised essentially of financial assets in the form of investment funds and other types mainly held by individuals. As a result, they do not belong to Desjardins Group, but to its members and clients.

Stock market activity in Canada was affected by the more uncertain financial and economic conditions during the second quarter of 2012. The S&P/TSX index fell 6.4% during this period, while it had advanced 3.7% in the previous quarter. Despite the more difficult environment, Desjardins Group's recruitment of off-balance sheet savings was not unduly affected, as shown by the increase of $1.5 billion, or 3.1%, since December 31, 2011, in investment funds and securities under administration or under management, to total $50.1 billion as at June 30, 2012.

Special purpose entities (SPEs)

In the normal course of operations, Desjardins Group enters into various financial transactions with SPEs. These entities are usually created for a single and distinct purpose, and they often have a limited life. They are used to legally isolate the financial assets they hold from the transferring organization, which can be Desjardins Group or one of its clients. SPEs are generally not operating entities, and when they are, they very rarely have employees. Under IFRS, SPEs may be recognized or not in the Combined Statements of Financial Position, depending on their characteristics.

Desjardins Group also participates in the National Housing Act Mortgage-Backed Securities Program. Transactions under the Program involve the use of off-balance sheet arrangements with an SPE. The SPE used by Desjardins Group is Canada Housing Trust, set up by Canada Mortgage and Housing Corporation (CMHC) under the Canada Mortgage Bonds (CMB) Program. Note 9, "Securitization and other transferred financial assets", to the annual Combined Financial Statements provides more information concerning the financial assets transferred by Desjardins Group through securitization transactions.

Details concerning significant exposure to SPEs are provided in the table below:

Significant exposure to other special purpose entities (SPEs)

(in millions of dollars)


As at June 30, 2012

As at December 31, 2011


Desjardins Group's exposure

Total assets of special purpose entities(1)

Desjardins Group's exposure

Total assets of special purpose entities(1)

Unconsolidated SPEs









Trusts for Canadian non-bank asset-backed term notes (ABTN)(2)

$

2,720

$

16,081

$

2,561

$

16,185

Private investment funds related to guaranteed-capital products and other activities


86


243


84


233










Consolidated SPEs 









Private hedge funds related to guaranteed-capital products and other activities


83


83


59


59

(1)    The total assets of the SPEs disclosed correspond to the most recent data available to Desjardins Group. For investment funds and hedge funds related to guaranteed-capital structured products, the amount presented corresponds to the entity's net assets.

(2)    See Note 6, "Securities", to the Interim Combined Financial Statements for information about the ABTNs, the margin funding facility (MFF), and the hedging positions to minimize risk on the ABTN portfolio. The amount in the "Desjardins Group's exposure" column comprises only the margin funding facility of $1,193 million ($1,193 million as at December 31, 2011) and the fair value of the new notes totalling $1,527 million ($1,368 million as at December 31, 2011).

 

RISK MANAGEMENT

 

RISK MANAGEMENT

Desjardins Group is exposed to different types of risk in the normal course of operations, including credit risk, market risk, liquidity risk, operational risk, insurance risk, strategic risk and reputation risk. Strict and effective management of these risks is a priority for Desjardins Group, its purpose being to support its major orientations, particularly regarding financial stability, compliance with Basel requirements and sustained and profitable growth. 

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

In this regard, Desjardins Group has an integrated risk management framework. The purpose of the framework is to provide the organization with reasonable assurance with respect to the understanding and management of the full spectrum of major risks to which Desjardins Group is exposed.

During the first six months of 2012, Desjardins Group's risk management policies and practices did not change from those stated on pages 92 to 108 of the 2011 Annual Report.

Desjardins Group's risk management approach is based on principles promoting the accountability of business segments and entities with respect to combined results and risk management quality as well as the leading role played by the Board of Directors of all the subsidiaries in risk and result monitoring. A number of committees support the Board of Directors and management of each subsidiary in discharging their risk management responsibilities.

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 Combined Statements of Financial Position.

Desjardins Group is exposed to credit risk first through its direct personal, business and government loans. It is also exposed through its various other commitments, including letters of credit, foreign exchange lines and transactions involving derivative financial instruments and securities.

Additional credit risk information:

 Risk exposure by asset class (exposure at default [EAD])

As at June 30, 2012

(in millions of dollars)


Exposure categories(1)


Used exposure

Unused exposure

 Off-balance sheet exposure(2)

Total

Net exposure(3)

Standardized Approach











Sovereign borrowers

$

12,732

$

574

$

84

$

13,390

$

13,390

Financial institutions


5,768


1,961


3,906


11,635


7,659

Business


36,159


3,315


1,336


40,810


39,296

Mortgages


219


-


-


219


219

Other retail client exposures


4,317


937


32


5,286


4,100

Securitization


1,574


-


-


1,574


1,574

Equities


32


-


-


32


32

Trading portfolio



-


13,090


13,090


1,893

Internal Ratings-Based Approach











Mortgages


44,229


6,083


-


50,312


50,312

Revolving retail client exposures


9,131


17,713


8


26,852


26,853

Other retail exposures


29,002


6,415


1


35,418


35,418

Total

$

143,163

$

36,998

$

18,457

$

198,618

$

180,746

(1)   The definition of exposure categories related to 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.

Exposures by asset class(1)and by risk tranche (Standardized Approach)(2)

As at June 30, 2012

(in millions of dollars)


Risk tranches

Exposure categories

0%

20%

35%

50%

75%

100%

Other

Total

Sovereign borrowers

$

13,390

$

$

-

$

-

$

-

$

-

$

-

$

13,390

Financial institutions



11,635


-


-


-


-


-


11,635

Business



1,484


-


21


-


38,960


430


40,895

Mortgages



-


209


-


-


10


-


219

Other retail client exposures



-


-


-


5,243


27


38


5,308

Securitization



27


-


-


-


628


919


1,574

Equities



-


-


-


-


32


-


32

Trading portfolio


1,739


10,258


-


-


-


1,093


-


13,090

Total

$

15,129

$

23,404

$

209

$

21

$

5,243

$

40,750

$

1,387

$

86,143

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

(2)   Exposures before individual allowances for losses and before CRM.

 

Counterparty and issuer risk

A large proportion of the securities in all the securities portfolios held by Desjardins Group are issued or guaranteed by public or parapublic entities. The portfolios are concentrated with Canadian issuers and counterparties having a credit rating of A- or higher.

The Risk Management Executive Division sets the maximum exposure for each counterparty and issuer based on quantitative and qualitative criteria. The amounts are then allocated to the various Desjardins components based on their needs and their risk appetite and tolerance levels.

Exposure to sovereign borrowers

Desjardins Group is not directly exposed to the sovereign debt of the European countries most affected by the recent financial upheaval, namely Greece, Portugal, Italy, Ireland and Spain. Its exposure to U.S. and European financial institutions is marginal.

Quality of loan portfolio

Desjardins Group's loan portfolio continues to be of excellent quality. As at June 30, 2012, gross impaired loans outstanding were $505 million, down $15 million from December 31, 2011. The gross impaired loans ratio, as a percentage of the total gross loan portfolio, was 0.39% at the end of the second quarter, down from the ratio of 0.41% as at December 31, 2011. Desjardins Group continues to have one of the best gross impaired loans ratios in the Canadian banking industry.

Individual allowances for credit losses totalled $159 million, resulting in a total coverage ratio of 31.5% as at June 30, 2012, up 0.9 basis points from the ratio as at December 31, 2011. The collective allowance amounted to $313 million as at June 30, 2012, an increase of $6 million compared to December 31, 2011. An allowance for off-balance sheet arrangement exposures of $98 million as at June 30, 2012, and of $92 million as at December 31, 2011 was recognized under "Other liabilities - Other" in the Combined Statements of Financial Position.

Impaired loans by borrower category

(in millions of dollars and as a percentage)


As at June 30, 2012

As at December 31, 2011


Gross loans

Gross impaired loans

Individual allowances

Net impaired loans

Net impaired loans

Residential mortgages

$

83,245

$

  128

$

14

$

114

$

120

Consumer, credit card and other personal loans


18,110


93


36


57


52

Business and government


27,725


284


109


175


189

Total

$

129,080

$

505

$

159

$

346

$

361

As a percentage of gross loans




0.39 %




0.27 %


0.29 %

 

 

COVERAGE RATIO(1)

(as a percentage)


As at June 30,

2012

As at December 31,

2011

Residential mortgages

10.9

%

                  9.1

%

Consumer, credit card and other personal loans

38.7


                 42.2


Business and government

38.4


                 36.6


Total coverage ratio

31.5


                 30.6


(1)   The coverage ratio is the sum of the individual allowances for each impaired loan, divided by the total balance of gross impaired loans.

 

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.

Desjardins Group is exposed to market risk primarily through positions taken in the course of its traditional financing and savings recruitment activities. It is also exposed to market risk through its trading activities. Desjardins Group and its components have adopted policies that set out the principles, limits and procedures to use in managing market risk.

Interest rate risk management

Desjardins Group 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.

Sound and prudent management is applied to achieve the objective of optimizing 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 effect of different variables on changes in net interest income and the economic value of equity.

Assumptions used in the simulations are based on an analysis of historical data and on the effects of different interest rate conditions on changes in the data. These assumptions concern changes in the asset and liability structure, including modelling for non-maturity deposits, member behaviour and pricing. 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 pre-tax impact 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.

 

Interest rate sensitivity (before income taxes)

(in millions of dollars)


As at June 30, 2012

As at December 31, 2011


Net interest income(1)

Economic value of equity(2)

Net interest income(1)

Economic value of equity(2)

Impact of a 100-basis-point increase in interest rates

$

31

$

11

$

56

$

118

Impact of a 100-basis-point decrease in interest rates


(66)


(26)


(87)


(71)

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

(2)  Represents 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 quarters depending on the preferences of members and clients, and the application of policies on interest rate risk management.

Some items in the Combined Statements of Financial Position are considered non interest rate-sensitive instruments, such as investments in equities, non-performing loans, non-interest-bearing deposits, non-maturity deposits with an interest rate not indexed according to a specific rate such as the prime rate, and equity. As required in our policies, our management practices are based on conservative assumptions regarding the maturity profile used in our models in order to determine the interest rate sensitivity of products.

Management of market risk related to trading activities - Value at risk

The management of market risk on trading portfolios is handled on a daily basis and outlined in 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 for a certain period of time at a given confidence level.

A Monte Carlo VaR is calculated daily, using a 99% confidence level, on the trading portfolios for 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 the trading activities by risk category as well as the diversification effect, which represents the difference between aggregate VaR and the sum of the VaR for different risk categories. Equity, interest rate and foreign exchange risks are the three risk categories to which Desjardins Group is exposed. The definition of a trading portfolio meets the criteria defined in the Basel Capital Accord.

 

VaR by risk category (trading portfolio)

(in millions of dollars)


As at
June 30, 2012

For the quarter ended

June 30, 2012

As at March 31, 2012

For the quarter ended

March 31, 2012



Average

High

Low


Average

High

Low

Equities

$

0.2

$

0.3

$

0.5

$

0.2

$

0.3

$

0.3

$

0.5

$

0.2

Foreign exchange


0.1


0.1


0.2



0.1


0.1


0.2


Interest rate


1.7


3.5


6.6


1.6


3.6


3.9


7.9


2.3

Diversification effect(1)


(0.2)


(0.4)


N/A(2)


N/A(2)


(0.3)


(0.4)


N/A(2)


N/A(2)

Aggregate VaR

$

1.8

$

3.5

$

6.6

$

1.6

$

3.7

$

3.9

$

7.8

$

2.4

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

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

As at June 30, 2012, the aggregate VaR was $1.8 million, the interest rate VaR being the largest component. This aggregate VaR was lower than its quarterly average of $3.5 million. Risk mitigation related to diversification amounted to $0.2 million as at June 30, 2012.

Back testing

To validate the VaR model used, back testing is conducted daily by comparing the VaR with the profits or losses (P&L) on the portfolios.

Desjardins Group carries out 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 chart below presents changes in VaR for trading activities as well as P&L related to these activities. During the second quarter of 2012, the hypothetical P&L was not exceeded.

 

http://www.rns-pdf.londonstockexchange.com/rns/1236K_-2012-8-15.pdf

 

LIQUIDITY RISK

Liquidity risk refers to Desjardins Group'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 Combined Statements of Financial Position.

Managing liquidity 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. Desjardins Group and its components have established policies describing the principles, limits, risk appetite and tolerance levels as well as the procedures that apply to liquidity risk management.

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

Sources of financing

Core funding, which includes capital, long-term liabilities and a diversified deposit portfolio, is the foundation upon which Desjardins Group's liquidity position depends. As at June 30, 2012, Desjardins Group's deposits outstanding totalled $128.5 billion, an increase of $5.1 billion, or 4.1%, over December 31, 2011. Deposits primarily from individuals, business and government make up the main source of reliable funding, and are Desjardins Group's preferred category of funds. This solid base alone accounted for 90.8% of deposit liabilities as at June 30, 2012. Furthermore, in order to maintain stable and diversified funding, Desjardins Group diversifies its sources of financing from institutional capital markets. Desjardins Group also raises financing, mainly on institutional capital markets through Capital Desjardins inc. for subordinated bonds, and through Caisse centrale Desjardins for money market instruments, commercial paper, medium-term deposit notes, covered bonds and securitization of the caisse network's mortgage loans.

In keeping with its extension strategy for institutional funding and its mission as Desjardins Group's treasurer, Caisse centrale Desjardins issued debt securities in the first half of 2012 on the U.S. market, namely US$1.5 billion of medium-term covered bonds. Desjardins Group's presence on the U.S. market helps expand its pool of institutional investors, since several new major international players were interested in this issue.

Caisse centrale Desjardinsalso participated in Mortgage-Backed Securities Program subject to the National Housing Act, under the Canada Mortgage Bonds Program. Caisse centrale Desjardins was active on this market with a total participation of $652 million for the first two quarters of 2012. The main objective of the program is to obtain a source of long-term financing at the lowest price on the market.

Extending the average term of institutional funding is an attractive strategy through which Desjardins Group can maintain its objectives even during periods of economic and financial instability.

Note that on June 1, 2012, Capital Desjardins inc. called all its outstanding Series C Senior Notes due in 2017, in the amount of $300 million. 

In addition, through the Fédération des caisses Desjardins, Desjardins Group issued capital shares amounting to $291 million as at June 30, 2012.

Credit ratings of securities

Desjardins Group's financial strength is reflected in the excellent credit ratings of the securities issued by Caisse centrale Desjardinsand Capital Desjardins inc.

Caisse centrale Desjardins, a reporting issuer, and Capital Desjardins inc., a venture issuer, boast excellent credit ratings from rating agencies. In fact, their ratings are among the best of the major banking institutions in Canada.

The reports of the rating agencies deal primarily with Desjardins Group on a combined basis, since the credit ratings of Caisse centrale Desjardins and Capital Desjardins inc. are backed by the financial strength of Desjardins Group.

Rating agencies maintained Desjardins Group's credit ratings during the second quarter, once again recognizing its very strong capitalization, the stability of its operating surplus earnings, its leading role in local markets and the quality of its assets. Since the beginning of the year, Moody's Investors Service (March 15, 2012), DBRS (June 26, 2012) and Standard & Poor's (February 13, 2012 for Capital Desjardins inc. and July 27, 2012 for the Caisse centrale Desjardins) have confirmed the credit ratings of the securities issued by Desjardins Group.

The high credit ratings reflect the financial strength of Desjardins Group and its network of caisses, and ensure its credibility and reputation among institutional investors. The borrowing programs set up by Caisse centrale Desjardins and Capital Desjardins inc. provide Desjardins Group with access to diversified capital by client, market, maturity, currency and region.

 

 

 

 


DBRS

Standard
& Poor's

Moody's

INVESTORS SERVICE

Fitch

Caisse centrale Desjardins





Short-term

R-1 (high)

A-1+

P-1

F1+

Medium- and long-term, senior

AA

AA-

Aa1

AA-

Capital Desjardins inc.





Medium- and long-term, senior

AA (low)

A+

Aa2

A+

 

ADDITIONAL INFORMATION CONCERNING EXPOSURE TO CERTAIN RISKS

The tables below provide more details about more complex financial instruments that have a higher risk.

 

 

ASSET-BACKED SECURITIES

(in millions of dollars)


As at June 30, 2012

As at December 31, 2011


Notional

amounts

Fair

value

Notional

amounts

Fair

value

Commercial mortgage-backed securities(1)

$

244

$

259

$

249

$

260

Financial asset-backed securities(2)


71


66


71


59

(1)   These securities are presented in the Combined Statements of Financial Position under "Securities at fair value through profit or loss".

(2)   None of the securities held are directly backed by subprime residential mortgages. These securities are presented in the Combined Statements of Financial Position under "Securities at fair value through profit or loss" and "Available-for-sale securities".

 

Derivative financial instruments

(in millions of dollars)


As at June 30, 2012

As at December 31, 2011


Notional amounts

Positive value

Negative value

Notional amounts

Positive value

Negative value

Credit default swaps(1)

$

603

$

$

4

$

601

$

$

8

Total return swaps(2)


6




8



(1)   Credit default swaps are presented in the Combined Statements of Financial Position 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 Combined Statements of Financial Position as derivative financial instruments.

 

Leveraged finance loans and subprime loans

(in millions of dollars)


As at June 30,

2012

As at December 31,

2011

Leveraged finance loans(1)

$

163

$

90

Alt-A mortgages(2)


41


43

Subprime residential mortgages(3)


1


1

 

(1)   Leveraged finance loans are defined as 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)   These loans are defined as loans to borrowers with non-standard income documentation. Alt-A mortgages are recorded on the Combined Statements of Financial Position under "Loans - Residential mortgages" and are measured at amortized cost.

(3)   Subprime residential mortgages are defined as mortgages to borrowers with a high credit risk profile. Only one of these loans is currently in default. Subprime residential mortgages are recorded on the Combined Statements of Financial Position under "Loans - Residential mortgages" and are measured at amortized cost.

 

 

ADDITIONAL INFORMATION

 

Controls and procedures

During the interim period ended June 30, 2012, Desjardins Group did not make any changes to its internal control over financial reporting that have materially affected, or are likely to materially affect, its activities. 

 

RELATED PARTY DISCLOSURES

In the normal course of business with related parties, Desjardins Group offers financial services, enters into agreements for operating services and pays its key management personnel compensation. Such related party transactions are explained in Note 34, "Related party disclosures", to Desjardins Group's annual Combined Financial Statements, on pages 203 and 204 of the 2011 Annual Report.

 

Critical accounting policies and estimates

Desjardins Group's unaudited Condensed Interim Combined Financial Statements were prepared in accordance with IFRS, which constitute GAAP for Desjardins Group. The significant accounting policies are described in Note 2, "Significant accounting policies", to Desjardins Group's annual Combined Financial Statements, on pages 129 to 145 of the 2011 Annual Report.

Some of these policies are of particular importance in presenting Desjardins Group's financial position and results of operations since they require management to make assumptions and estimates that may involve uncertainties and since any change to these assumptions and estimates could have a significant impact on the Interim Combined Financial Statements of Desjardins Group. Pages 112 to 116 of the 2011 Annual Report provide explanations for such accounting policies. No material change was made to these assumptions, estimates or accounting policies during the first six months of 2012.

 

Future accounting changes

Accounting standards issued but not yet effective as at December 31, 2011 are discussed in Note 3, "Future accounting changes", to Desjardins Group's annual Combined Financial Statements on pages 146 and 147 of the 2011 Annual Report. In addition, during the first six months of 2012, the IASB issued the following amendments:

Annual improvements

In May 2012, the IASB issued amendments to several standards as part of its annual improvement process. Except for the amendment to IAS 32, "Financial Instruments: Presentation", these amendments are minor and will have no impact on Desjardins Group's results and financial position.

The amendment to IAS 32 clarifies that the income tax consequences of dividends should now be recognized in accordance with IAS 12, "Income Taxes". Therefore, when certain conditions are met, the income tax consequences of dividends must be presented in profit or loss rather than in equity. Desjardins Group will have to apply this amendment retrospectively for the year beginning January 1, 2013.

 

MATERIAL EVENT

TMX Group

On July 31, 2012, Maple Group Acquisition Corporation (Maple), an entity in which Desjardins Group has a stake as an investor along with 12 other Canadian financial institutions and pension funds, announced that the offer to purchase all shares of TMX Group Inc. (TMX Group) had been successful following the tender of 91% of the TMX shares then outstanding for a cash consideration of $50 per TMX Group share. The offer was also extended for an additional 10 days to August 10, 2012, for the TMX Group shareholders who have not yet tendered their shares to the offer. Under the transaction, Desjardins Group's equity commitment is for a maximum of $97.6 million, or 4.7%. The scheduled cash payments for the TMX Group shares acquired by Maple under the offer will be made on August 10, 2012. Furthermore, Maple completed the acquisition of Alpha Trading Systems Inc., Alpha Trading Limited Partnership, and The Canadian Depository for Securities Limited on August 1, 2012.

 


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