Desjardins reports its best year ever in 2007 with surplus earnings up 11%, at $1.1 billion and a provision for member dividends up 23%, at $592 million
All the components, caisses and subsidiaries contributed to this excellent performance.
Financial highlights
- Surplus earnings before member dividends reached $273 million in the fourth quarter of 2007 and $1,101 million for the whole year 2007.
- At $592 million, provision for dividends was up $109 million or 22.6% in 2007.
- The caisse network turned in an excellent financial performance with surplus earnings before dividends for 2007 ahead by 28% over 2006.
- The Tier 1 capital ratio is still one of the best in the industry.
- Return on equity amounted to 12.3% in 2007, compared to 12.1% in 2006.
- The productivity ratio improved due to better cost control and a sharp increase in operating income.
- Assets grew 11.6% to $144.1 billion.
- Desjardins Funds set a sales record at $1.9 billion, up 63% over 2006, bringing total assets to $12.2 billion.
For the years
ended December 31 |
For the quarters
ended December 31 |
|||||
|---|---|---|---|---|---|---|
2007 |
2006 |
Change |
2007 |
2006 |
Change |
|
Surplus earnings before member dividends |
$1,101 M |
$988 M |
11.4% |
$273 M |
$284 M |
(3.9%) |
Provision for member dividends |
$592 M |
$483 M |
22.6% |
$177 M |
$135 M |
31.1% |
Return on equity |
12.3% |
12.1% |
---- |
11.8% |
13.3% |
---- |
 |
||||||
Other financial data:
2007 |
2006 |
Change |
|
|---|---|---|---|
Assets |
$144.1 B |
$129.1 B |
11.6% |
Equity |
$9.3 B |
$8.6 B |
8.5% |
Tier 1 capital ratio |
14.17% |
14.18% |
---- |
Growth in total loans |
7.6% |
7.5% |
---- |
Growth in total deposits |
8.6% |
5.8% |
---- |
Sponsorships, donations and scholarships |
$72 M |
$64 M |
12.5% |
|
|||
Key accomplishments in 2007
- Achieved and even exceeded most of the objectives in the 2006-2008 Strategic Plan;
- Generated excellent profitability with a $113 million or 11.4% increase in surplus earnings before member dividends despite the difficult financial markets environment in the second half of 2007;
- Remained a dominant player in Québec with a market share of 39.2% in residential mortgages, 42.5% in farm credit and 44.1% in personal savings at year-end;
- Made significant strides in Canada-wide development by, among other things, concluding a transaction that brought Northwest Funds and Ethical Funds together in a strategic partnership and by developing the group insurance business through Desjardins Financial Security;
- In January 2007 opened Carrefour Desjardins and the Desjardins Mid-Market Business Centre in Greater Montréal;
- Productivity ratio improved by 2.3% as a result of better cost control and a sharp increase in operating income, particularly in the caisse network;
- Achieved $175 million in financial and operational synergies across the Group, beating the objective by a wide margin; and
- Continued with the mortgage securitization program, which has raised nearly $3 billion since September 2005.
Results for fourth quarter 2007
Lévis, (Québec) March 3, 2008 - For the fourth quarter ended December 31, 2007, Desjardins Group, the largest integrated cooperative financial group in Canada, announced $273 million in surplus earnings before member dividends, compared to $284 million for the same quarter in 2006. Return on equity (surplus earnings before member dividends over average equity) stood at 11.8%, against 13.3% in the same quarter of the previous year.
"Despite the slight decrease and in light of the problems on the financial market, we are very satisfied with these fourth quarter results. The caisse network made a tremendous contribution to the Group's profitability with an increase in earnings of approximately 17% over the same quarter of the previous year. Our life and health insurance subsidiary also played a big role in our combined results with a jump in earnings of approximately 38%," stated Alban D'Amours, president and chief executive officer of Desjardins Group.
However, these solid gains were offset by a reduction in the fair value of investments due to the combination adjustments presented in the "Other" segment.
The provision for member dividends was up 31.1% to $177 million in the fourth quarter, compared with $135 million in the same year-earlier period.
Net interest income amounted to $821 million, an increase of $21 million or 2.6% over the same quarter in 2006, fuelled by volume growth. Insurance and annuity premiums rose $74 million (or 8.3%) and $16 million (or 21.3%) respectively, pushing total net insurance premiums up by $90 million or 9.7% over the fourth quarter of 2006. As a result of two non-recurring gains described further on, other income rose due to the $15 million or 9.4% increase in income from brokerage, mutual fund and trust services, the $12 million or 13.2% growth in income from lending fees and credit card service revenues and the $118 million increase in investment income due to a gain in the fair value of investments.
Thus, Desjardins Group's total income advanced $170 million or 6.8% to $2,687 million in the last quarter of 2007, compared to the same quarter of the previous year.
The provision for credit losses was $65 million in the fourth quarter of 2007, versus $45 million for the same quarter in 2006.
Fourth quarter expenses related to claims, benefits, annuities and changes in insurance provisions reached $1,063 million, an increase of $184 million or 20.9% over the previous year, due to the rise in the fair value of investments.
Non-interest expenses totalled $1,242 million, up $46 million or 3.8% from the fourth quarter of the previous year, reflecting good control over operating expenses.
Lastly, two substantial gains were recorded in the fourth quarter of 2007, more than offsetting the non-bank sponsored asset-backed commercial papers (non-bank ABCP) write-down.
Quarterly highlights
Non-recurring gains recorded in the fourth quarter of 2007 in the Personal and Commercial segment
VISA global restructuring
As part of a global restructuring concluded on October 3, 2007, Visa Canada Association, Visa USA Inc. and Visa International Service Association became subsidiaries of a new global entity, Visa Inc. In exchange for its membership interest in Visa Canada
Association, the Fédération des caisses Desjardins du Québec (FCDQ) received Visa Inc. shares and, as a result, recorded a gain of $72 million ($64 million after taxes). This amount was calculated following an independent valuation
and the determination of the number of shares allocated to the FCDQ; the gain may be subject to readjustment depending on the final percentage of the FCDQ's investment in Visa Inc.
Northwest Funds and Ethical Funds
It bears mentioning that in the third quarter of 2007, Desjardins Group and Canada's provincial credit union centrals pooled their strengths, their resources and their distribution networks to accelerate the growth of Northwest Funds and Ethical Funds.
This strategic partnership between two Canadian cooperative systems led to the creation of a national investment firm with $5.5 billion in assets under management, poised to become one of the fastest-growing mutual fund companies in the country. Setting
up the partnership generated a pre-tax gain of $45 million ($37 million after taxes) in the fourth quarter of 2007.
Non-bank ABCP issue
In August 2007, non-bank ABCP trading came to a halt due to a standstill decreed as part of what has been termed the Montréal Accord. During the last half of the year, Desjardins assumed assets held as non-bank ABCP in order to shelter members and clients from the uncertainty prevailing on the markets. On December 23, 2007, a committee of investors from across the country charged with finding a solution to this problem announced an agreement in principle on the global restructuring of non-bank ABCP, subject to certain conditions. The committee expects to complete the restructuring in March 2008.
In light of this agreement and the evolution of the financial markets, Desjardins Group revaluated its non-bank ABCP holdings as at December 31, 2007 and took a write-down of $116 million ($79 million after taxes) in the fourth quarter in addition to the one announced at the end of the third quarter.
Thus, Desjardins recorded a $273 million ($186 million after taxes) or a decline of approximately 16% in the value of its ABCP holdings in the second half of 2007. At year-end, the total non-bank ABCP held directly by Desjardins Group stood at $1.7 billion, excluding securities held as part of investments associated with certain capital guaranteed savings products.
Despite this situation, Desjardins maintains an excellent capitalization and its Tier 1 capital ratio is approximately 450 basis points above the Canadian bank median.
2007 Year End Results
For the year ended December 31, 2007, Desjardins Group announced $1,101 million in combined surplus earnings before member dividends, a $113 million or 11.4% increase over the $988 million recorded in 2006. Return on equity reached 12.3%, versus 12.1% for the previous year. Excluding the impact of non-recurring items and non-recurring gains in the fourth quarter, surplus earnings before member dividends were up 20% to $1,186 million and return on equity stood at 13.3%.
The provision for member dividends was $592 million, versus $483 million for the previous year, a sharp increase of 22.6%. Moreover, $72 million, or $8 million more than the previous year, were returned to the community in the form of sponsorships, donations and scholarships.
"The fact is that our efforts to improve our performance are increasingly yielding tangible results notwithstanding the liquidity crunch in 2007," said Mr. D'Amours. "All the components of our integrated cooperative financial group, with the caisse network leading the way, contributed to this success and helped Desjardins post its best year ever. The caisse members, ultimate owners, and communities where they live will benefit from record dividend payments as well as sponsorships, donations and scholarships, reflecting an unparalleled cooperative performance."
Desjardins is still one of the best capitalized financial institutions in Canada with a Tier 1 capital ratio of 14.17% as at December 31, 2007, surpassing its capitalization target and still one of the best in the industry. The total capital ratio was 13.59%, compared to 14.33% at the end of 2006, primarily due to the repayment on June 1, 2007 of $500 million of Capital Desjardins Series B subordinated debt and the inclusion of ABCP in the Group's balance sheet in the second half of 2007.
The excellent profitability in 2007 stems from good financial performances on the part of the caisse network and all the Desjardins Group components. The Personal and Commercial segment's financial performance improved owing to higher operating income combined with effective control of operating expenses. The caisse network did particularly well, recording a sharp increase of approximately 24%. The same was true for the insurance subsidiaries, whose contribution to the Group's combined results surged 44.5% for the life and health insurance subsidiary and 17.8% for the general insurance subsidiary. The former benefited from, among other things, growth in group insurance sales, favourable claim experience, a solid investment performance and improved unit costs, while the latter generated a respectable return on its investments and had favourable claim experience.
Noteworthy is the ongoing work of all of the Group's components to widen the gap between revenue and expense growth (also called operating leverage). These sustained efforts, combined with the positive impact of the work done to improve financial, real estate and operational synergies, helped improve overall productivity.
As for revenues, largely fuelled by business growth, net interest income reached $3,245 million, up $164 million or 5.3%. Insurance premiums rose $263 million or 7.6% while annuity premiums fell $127 million or 34.1%, resulting in a $136 million or 3.7% increase in net insurance premiums over 2006. Other income rose due to the two non-recurring gains described earlier, as well as increases of $99 million or 16.7% in income from brokerage, mutual fund and trust services, and $55 million or 16.9% from lending fees and credit card service revenues.
However, these sharp increases were offset by a $296 million drop in investment income, primarily due to the impairment loss recorded with respect to the accounting changes concerning the life and health insurance subsidiary's financial instruments (a decrease that was offset by an equivalent decrease in expenses related to claims, benefits, annuities and changes in insurance provisions) as well as the non-bank ABCP write-down.
Overall, Desjardins Group's total income reached $9,635 million in 2007, a 2.5% increase over the previous year.
The provision for credit losses was $197 million, versus $139 million in 2006. Desjardins Group's loan portfolio continued to be of excellent quality, with a ratio of gross impaired loans to the gross loan portfolio of 0.41%.
Expenses related to claims, benefits, annuities and changes in insurance provisions stood at $3,171 million in 2007, down $171 million or 5.1% from the previous year due to the decrease in annuity activities coupled with the life and health insurance subsidiary's decline in investment income, as previously noted.
Non-interest expenses were $4,666 million in 2007, an increase contained at 3.4% versus 2006, due to effective control of operating expenses.
The productivity ratio (i.e. Desjardins Group's non-interest expenses over total income, net of expenses related to claims and insurance benefits) improved by 2.3% to 72.2%, against 74.5% in 2006, as a result of better operating leverage. Excluding the effect of the ABCP write-down charged against earnings and the non-recurring gains recorded in the fourth quarter of 2007, the productivity ratio would have been 71.8%.
Finally, Desjardins Group's total assets grew to $144.1 billion as at December 31, 2007, compared to $129.1 billion a year earlier, a sharp increase of approximately $14.9 billion or 11.6%. The Group's expansion continued at a good pace, on the strength of relatively vigorous credit demand and strong savings recruitment.
Results by business segment
Personal and Commercial
This segment mainly comprises the caisse network in Québec and Ontario, Caisse centrale Desjardins, Fonds de sécurité Desjardins, Capital Desjardins Inc., Desjardins Trust, the Fédération de l'Ontario and the
Fédération des caisses Desjardins du Québec, which includes the following business units: Desjardins Card Services, Mutual Fund Services, Financial Engineering Services and Desjardins Payroll and Human Resources Services.
For the fourth quarter ended December 31, 2007, the Personal and Commercial segment posted $230 million in surplus earnings before member dividends, compared with $204 million recorded at the same time a year ago. Profitability was impacted by a $96 million ($65 million after taxes) decrease in the value of the non-bank ABCP, which however, was more than offset by the non-recurring gains of $117 million ($101 million after taxes) recorded in the fourth quarter.
Total income rose by $53 million or 4.4% for the last quarter of 2007 while net interest income grew $37 million or 4.6%. Other income advanced $16 million or 3.9% over the same quarter in 2006 due to increases of $21 million in income from brokerage, mutual fund and trust services, and $12 million in credit card service revenues. As mentioned earlier, two non-recurring gains were recorded but partially offset by the ABCP write-down.
For the year 2007, surplus earnings before member dividends in this segment reached $794 million, $42 million or 5.6% more than in 2006. This excellent financial performance stems from, among other things, higher operating revenues, good expense control, improved profitability of the caisse network and solid investment fund sales.
Total segment income rose $306 million or 6.8% over 2006 to $4,802 million. Fuelled by volume growth, net interest income advanced $180 million or 5.8% to $3,271 million.
Other income reached $1,531 million, up 9% or $126 million over the previous year. Income from brokerage, mutual fund and trust services was ahead $74 million, mainly due to an increase of approximately 17% in Desjardins Funds outstanding in relation to December 31, 2006. Income from credit card activities picked up $55 million thanks to solid volume growth. Lastly, other income includes the two non-recurring gains mentioned earlier.
The provision for credit losses stood at $197 million for 2007, compared to $139 million for the previous year. The ratio of gross impaired loans to total gross loans remained stable.
Non-interest expenses were $3,445 million, $142 million or 4.3% more than in 2006. Close to 65% of this amount stems from the increase in salaries and fringe benefits due mostly to the annual salary indexation.
Caisse centrale Desjardins contributed $112.3 million to the Personal and Commercial segment's earnings, a 17% increase over the previous year.
On the financing side, the segment had an excellent year, with the current loan portfolio, net of the cumulative provision for credit losses, growing 8.7% (or $7.5 billion) to $94.1 billion as at December 31, 2007, fuelled by a 13.8% (or $2.9 billion) surge in the credit outstanding granted to businesses and governments, which totalled $24.2 billion at year-end 2007.
The segment's vitality in the housing market also contributed to these good results. The unexpected rebound in residential construction in Québec translated into a 1.4% increase in the number of housing starts in 2007 (48,553 in 2007 versus 47,877 in 2006) after two consecutive years of decline, combined with a new sales record for resale homes (80,338 transactions in 2007 against 72,520 in 2006), created a favourable context for business development. The Personal and Commercial segment seized the opportunity and racked up a solid increase of 7.4% (or $3.8 billion) in outstanding residential mortgage loans, which reached $54.5 billion at year-end. Thanks to this performance, the segment saw its share of the housing market rise 0.2% to 38.9% in Québec.
In the area of large corporation financing, business activity reserved to Caisse centrale Desjardins (CCD), new authorized business reached more than $2 billion at year-end, due to the authorization of several mandates to act as a bank syndicate and co-agent. This performance stems from, among other things, Caisse centrale's ability to support companies in new markets, both in Canada and in the U.S. As such, new authorized loans to businesses operating in new markets accounted for more than 48% of the volume of authorized cases, some of which involved CCD's U.S. branch.
Caisse centrale Desjardins' mortgage securitization program, set up in September 2005, continued successfully in 2007 thanks to the participation of the caisses in Québec and Ontario, as well as Desjardins Credit Union. Thus, this past year, CCD participated in four Canada Mortgage and Housing Corporation (CMHC) mortgage bond issues, bringing to close to $3 billion the total amount securitized to date.
Caisse centrale Desjardins' assets grew 16% over the previous year to $20.4 billion at year-end due to its role as Desjardins Group's Treasurer. CCD continues to enjoy investment grade credit ratings from Standard and Poor's (AA-) and Moody's (Aa1), and its capitalization remains excellent, with Tier 1 capital and total capital ratios determined based on risk-weighted assets and commitments of 11.1% and 13.2%, respectively, at December 31, 2007.
Finally, in February 2008, Caisse centrale Desjardins successfully completed two debt issues on the European markets totalling nearly $1.3 billion in order to meet the liquidity needs of the Desjardins network.
At the end of 2007, the segment's outstanding deposits totalled $96.3 billion, up 9.2% (or $8.1 billion) over the previous year. This sharp increase is attributable to a 27.8% (or $4.5 billion) jump in business and government deposits, which stood at $20.9 billion at year-end. Individual savings, which make up most of the segment's deposits (68.3%), rose slightly faster in 2007, i.e., 5.8% (or $3.6 billion), to reach $65.8 billion as at December 31, 2007.
Another source of financing available to the Personal and Commercial segment, deposits related to securities issued on the financial markets dipped 0.7% (or $72 million) to $9.7 billion as at December 31, 2007, representing 10.1% of the segment's asset liabilities at the end of the fourth quarter.
Finally, the Personal and Commercial segment is quite active in the sale of off-balance sheet savings products such as investment funds and other securities. The bearish stock market, particularly in the second half of the year, along with uncertainty surrounding the resolution of the financial crisis and growing recession risks in the U.S., was not conducive to the sale of these products. That said, the segment still solidly outperformed the industry (e.g., up 5% in Québec). For example, outstanding mutual funds and assets held in custody rose $2.3 billion or 10.4% to $24.8 billion as December 31, 2007.
Life and health insurance
For the fourth quarter of 2007, Desjardins Financial Security (DFS) contributed $53.4 million to Desjardins' results, compared to $38.9 million in 2006, an increase of 37.2%. Premiums income grew 12.9% to $611.2 million while insurance sales totalled $38.8 million.
Net earnings were up sharply at DFS in 2007. The portion attributable to the ultimate shareholders, the Desjardins caisses, rose $65.3 million to $211.1 million, generating a 27.5% return on equity, still one of the best in the financial services industry. This improved profitability stems from growth in group insurance sales, positive claim experience, good cost control and a solid investment performance.
Gross premiums advanced 12.2% or $265.6 million to $2,445.2 million. Total income reached $3,222.7 million, down slightly by $5 million from 2006. New insurance sales totalled $415.7 million, up $50.9 million over the previous year, due to large group insurance contracts signed outside Québec. In individual savings, total sales grew 4.5% or $48.2 million to $1,110.6 million, driven by sales of the Helios and Millenia segregated funds, mutual funds and group retirement savings products.
Lastly, assets under management and administration amounted to $22.6 billion, up 8.5% since the beginning of the year.
General insurance
For the fourth quarter of 2007, Desjardins General Insurance Group (DGIG) contributed $8 million to the Group's results, compared to $18.8 million for the previous year. This decrease is explained by lower underwriting profits due to less favourable claim experience in automobile insurance, which however, was partially offset by improved claim experience in housing insurance since no major event was recorded in this area during the quarter. Operating expenses rose due to major investments made in projects associated with strategic issues. Return on equity was 7.4%, against 17.4% a year earlier.
For 2007, DGIG's contribution totalled $126.2 million, versus $106.6 million for 2006. Return on equity rose to 26.7% from 25.2% for the previous year, making DGIG one of the most profitable general insurance companies in Canada.
The insurance results are a big part of this enviable performance. In fact, favourable claim experience in housing insurance more than offset the increase in operating expenses stemming from major investments made to boost the company's competitive edge. The auto insurance segment fared well despite a slight deterioration in claim experience due to lower rates and higher claim costs.
Gross premiums written rose $1,429.1 million over the $1,412.4 million recorded in 2006 despite lower auto insurance rates, particularly in Québec.
Investment income climbed $25.6 million over 2006 on the strength of higher equity returns and a new asset allocation strategy. Interest income advanced thanks to growth in the bond portfolio.
Securities, asset management, venture capital and other
This segment primarily encompasses the operations of Desjardins Securities, Desjardins Asset Management and Desjardins Venture Capital.
For the fourth quarter of 2007, Desjardins Securities recorded $59.7 million in income, an 18.3% decrease from the $73.1 million recorded for the same quarter in 2006. The subsidiary posted a net loss of $3.6 million, in comparison with a net profit of $0.1 million for for the same quarter of the previous year. Income growth, and by extension, profitability, was held back by the liquidity crisis and its impact on the financial markets.
For 2007, Desjardins Securities achieved income of $291 million, versus $273 million in 2006, a gain of 6.6% or $18 million. Although revenues from personal brokerage services advanced, trading activities were held back by the bear stock markets, particularly in the fourth quarter.
Desjardins Securities posted net earnings of $0.6 million for 2007, compared to a net loss of $6.1 million in 2006. This is the sixth straight year of sales growth for this subsidiary, which continues to actively recruit customers and develop new markets.
Desjardins Asset Management reported $3 million in net earnings for the fourth quarter of 2007 and $16 million for the year, compared to $17 million for the previous year. It will be recalled that this subsidiary had recorded a dilution gain in 2006 due to its interest in a company subject to significant influence. Excluding this gain, net earnings were $1 million more than the previous year, an increase largely fuelled by higher management fees. Assets under management grew by nearly 9% from $46.7 billion as at December 31, 2006 to $50.8 billion at year-end.
As a result of fluctuations in the value of venture capital investments due mainly to market developments and a weaker manufacturing outlook, Desjardins' investment funds managed by Desjardins Venture Capital recorded a net loss of $1 million for the fourth quarter of 2007, compared to a net gain of $2 million for the corresponding year-earlier quarter, bringing the cumulative net loss to $3 million for 2007, compared to a net gain of $2 million for 2006.
Desjardins Group's combined results also reflect various combination adjustments that were not included in the business segment results, particularly the employee future benefits expense, which was down $31 million after taxes from 2006, primarily due to the updating of certain actuarial assumptions. This decrease was offset by a reduction in the fair value of investments arising from the consolidation adjustments presented in the "Other" segment.
Relying on the strength of its cooperative difference, its network of subsidiaries and its financial equilibrium, Desjardins Group seeks to become the leading financial institution in terms of meeting the needs of members and customers and fostering business development through an accessible, effective and comprehensive service offering. Desjardins Group's mission is to contribute to the economic and social well-being of both individuals and communities.
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