2008 First Quarter Results
Caisse network profitability up 29% but Desjardins Group’s combined income affected by additional ABCP charge
Financial highlights
Surplus earnings before member dividends of $67 million for the first three months of the year following a $220 million write-down ($150 million after income taxes) related to asset-backed commercial paper (ABCP) holdings.
First quarter 2008 profitability up 29% for the caisse network.
Tier 1 capital ratio still among the best in the industry.
Assets grew by 9.6% to $149.8 billion.
For the three months ended March 31 |
|||
|---|---|---|---|
2008 |
2007 |
Change |
|
Surplus earnings before member dividends |
$67M |
$265M |
(74.7%) |
Surplus earnings before member dividends excluding ABCP impact |
$217M |
$265M |
(18.1%) |
Return on equity |
2.9% |
12.4% |
--- |
 |
|||
Other financial data
For the three months ended March 31 |
|||
|---|---|---|---|
2008 |
2007 |
Change |
|
Assets |
$149.8B |
$136.7B |
9.6% |
Equity |
$9.4B |
$8.8B |
6.9% |
Tier 1 capital ratio |
14.04% |
14.18% |
--- |
Growth in total loans |
8.5% |
7.1% |
--- |
Growth in total deposits |
8.5% |
8.1% |
--- |
|
|||
2008 first quarter results
Lévis (Québec), May 15, 2008 – For the first three months of 2008, Desjardins Group, the largest integrated cooperative financial group in Canada, announced surplus earnings before member dividends of $67 million. Return on equity was 2.9% compared to 12.4% on a year-over-year basis. It is important to note the solid profitability of the caisse network, whose surplus earnings grew by 29% from $139 million in the first quarter of 2007 to $179 million in the first quarter of 2008.
Desjardins Group’s combined income was down, however, primarily as a result of an additional write-down of 11% or $220 million ($150 million after income taxes) relating to asset-backed commercial paper (ABCP) for the first quarter of 2008, which mainly affected Personal and Commercial segment results. As you may recall in 2007, to safeguard its members and clients, Desjardins Group repurchased ABCP assets in the money market investment funds managed by it and in the securities lending operations of Desjardins Trust clients for which it had not originally assumed the risk. Had it not been for this write-down, combined surplus earnings before member dividends would have totalled $217 million, and the return on equity would have been 9.2%.
In addition, other specific items affected the Personal and Commercial segment’s profitability in the first quarter, namely a $27 million decline in income resulting from the change in the fair value of derivatives and the ineffectiveness of hedge accounting, as well the write-off of $25 million in deferred charges. Furthermore, insurance and securities activities saw their profits shrink due to lower investment income and unfavourable conditions on capital markets since the beginning of the year.
Every quarter, Desjardins Group must establish the most accurate estimate possible of the amount that will be recorded for payment of member dividends at the end of the fiscal year. The Group therefore recorded a $122 million provision for member dividends for the first quarter of 2008, compared to $111 million a year earlier.
Desjardins is one of the best capitalized financial institutions in Canada: it exceeded its own minimum target capitalization with a Tier 1 capital ratio of 14.04% as at March 31, 2008, compared to 14.18% a year ago. The total capital ratio was 13.25% as at March 31, 2008, compared to 14.13% as at March 31, 2007. Caisse centrale Desjardins continues to enjoy investment grade credit ratings from Standard & Poor’s (AA-) and Moody’s (Aa1), reflecting the financial soundness of Desjardins Group and its caisse network.
“Our caisse network’s performance is noteworthy as it continues to be solid with strong growth in operating income and effective cost control,” stated Desjardins Group Chair of the Board, President and CEO Monique F. Leroux. “This performance, however, was clouded by an additional ABCP write-down, which had an impact on Desjardins Group’s combined income. This is why we must remain vigilant with regard to the current situation on the capital markets. Despite the specific items that have affected its profitability, Desjardins remains a financial institution that enjoys excellent financial health supported by a solid foundation. This is, in fact, confirmed by its excellent credit ratings and enviable reputation in the market.”
As for revenues, net interest income rose to $809 million, up $27 million or 3.5% from the corresponding quarter in the previous year, primarily due to higher business volume. Net insurance premiums grew by $87 million or 9.6% because of brisk growth in both general insurance and life and health insurance. Other income was affected by the $319 million decline in investment income due primarily to the ABCP write-down. The lower investment income was also attributable to the life and health subsidiary, which posted lower returns coupled with a decline in the market value of its investments (which was offset by an equivalent drop in expenses related to claims, benefits, annuities and changes in insurance provisions). Finally, the $17 million or 9.8% drop in income from brokerage, investment fund and trust services was primarily the result of the unfavourable conditions on capital markets, which influenced member behaviour and in turn adversely affected Desjardins Securities’ income.
Overall, Desjardins Group’s total income stood at $2,172 million for the first quarter of 2008, down $192 million or 8.1% on a year-over-year basis.
Provisions for credit losses stood at $44 million, unchanged from a year ago. The quality of Desjardins’ loan portfolio remains excellent with a ratio of gross impaired loans to gross loans of 0.40%.
Expenses related to claims, benefits, annuities and changes in insurance provisions totalled $823 million for the first quarter of 2008, up $33 million or 4.2% from the year-earlier period. This increase was, however, partially offset by the decline in the life and health subsidiary’s investment income, as previously mentioned.
Non-interest expense amounted to $1,212 million for the first three months of 2008, up $55 million or 4.8% from the first quarter of 2007, as a result of effective control over operating expenses.
Given the write-down of ABCP securities recorded against investment income, the productivity ratio, i.e., the Group’s non-interest expense to total income, net of expenses related to claims and insurance benefits, was 89.8% at the end of the first three months of fiscal 2008, compared to 73.5% for the corresponding period a year earlier. If the impact of the write-down of ABCP securities and of other specific items on the financial results for the first quarter were not included, the productivity ratio would be substantially the same as it was a year ago.
Lastly, Desjardins Group’s total assets stood at $149.8 billion as at March 31, 2008, compared to $136.7 billion a year ago, i.e., an increase of $13.1 billion or 9.6%. Strong domestic demand in Québec and Ontario, which to date has offset the severe downturn in their international trade, has created an environment conducive to Desjardins Group’s business development.
Key first quarter events
Change to Desjardins Group’s senior management
In March 2008, an electoral college made up of Desjardins caisse representatives from all the Québec regions as well as Ontario elected Monique F. Leroux as Chair of the Board, President and CEO of Desjardins Group for an initial four-year term of office beginning on March 29, 2008. She succeeds Alban D'Amours who had held this position since March 25, 2000. In addition, on May 9, 2008, Raymond Laurin was appointed Chief Financial Officer of Desjardins Group, replacing Ms. Leroux.
Capital markets and ABCP
Desjardins Group holds investments on the Canadian market for non-bank sponsored asset-backed commercial paper, although it never issued this type of financial product to its clients. Moreover, Desjardins also holds investments in Canadian bank-sponsored asset-backed commercial paper (bank sponsored ABCP) issued by vehicles, notably certain trusts, that have experienced distress in early 2008.
Capital markets were volatile during the first quarter of 2008; in February, several trusts that were part of the Montréal Accord, were downgraded by Dominion Bond Rating Service (DBRS); the Montréal Accord saw its deadline extended and certain bank sponsored ABCP structures also experienced difficulties. On March 17, the Superior Court of Ontario issued an Initial Order and a Meeting Order and established the overall restructuring process under the Companies’ Creditors Arrangement Act (CCAA), following the proceedings filed under the CCAA.
Desjardins Group updated the fair value of its ABCP holdings as at March 31, 2008. The deterioration of the capital markets and new conditions associated with the restructuring plan proposed on March 20 by the Pan-Canadian Investors Committee led to a decline in value of 11% or $220 million ($150 million after income taxes), recorded in the first quarter of 2008, in addition to the write-downs announced in the third and fourth quarters of 2007.
Including the securities originally held by Desjardins Group and the securities purchased from the funds managed by Desjardins Group and from securities lending activities clients, but excluding the investments related to certain guaranteed-capital term savings products, Desjardins Group held as at March 31, 2008, ABCP securities subject to the restructuring plan having an amortized cost of $1,662 million before write-down.
Lastly, on April 25, the holders of non-bank sponsored ABCP overwhelmingly voted in favour of the proposed restructuring plan.
Funding
During the first quarter of 2008, Caisse centrale Desjardins, as Desjardins Group’s treasurer, filed a short form base shelf prospectus with Canadian provincial securities regulators in order to issue medium-term notes over a 25-month period after obtaining a receipt for the short form shelf prospectus, for an amount up to C$5 billion. Caisse centrale will use the net proceeds from the medium-term notes issue in the performance of its duties as financial agent for Desjardins Group, in particular in lending operations to its members, medium-sized businesses and large corporations, and public and parapublic entities.
Caisse centrale Desjardins also successfully launched two public issues of medium-term deposit notes on the European market during the quarter for a total of close to C$1.3 billion. In March 2008, Caisse centrale redeemed a €76 million subordinated debenture (C$119 million).
In addition, during the first three months of 2008, Desjardins Group’s deposits outstanding were up 8.5% from a year earlier. Furthermore, loans of more than $500 million have been securitized since the beginning of the year.
Results by business segment
Personal and Commercial
This segment primarily consists of the caisse network, the Fédération des caisses Desjardins du Québec, Caisse centrale Desjardins, the Fonds de sécurité Desjardins, Capital Desjardins inc., Desjardins Trust and the Ontario federation and caisses.
The caisse network turned in an outstanding financial performance, with surplus earnings up 29% from $139 million in the first quarter of 2007 to $179 million in the first quarter of 2008.
However, given the $196 million decline in value ($134 million after income taxes) of ABCP holdings, surplus earnings before member dividends for the Personal and Commercial segment as a whole totalled $35 million for the first quarter ended March 31, 2008, compared to $189 million in the corresponding quarter of 2007.
For the first three months of 2008, total income for this segment was $1,027 million, down $137 million or 11.8% compared to a year earlier. Net interest income rose by $29 million or 3.7% to $813 million, chiefly because of higher business volume.
Other income totalled $214 million for the first quarter of 2008, down $166 million or 43.7% from the year-earlier period. Although other income was boosted by an $8 million or 9.3% increase in revenue from credit card activities and a $22 million increase in revenue from securitization activities, growth in other income was nonetheless affected by the ABCP write-down as well as by the $27 million decrease in income resulting from the change in the fair value of derivatives and the ineffectiveness of hedge accounting.
The provisions for credit losses for the first quarter of 2008 totalled $44 million, unchanged from a year earlier. The ratio of gross impaired loans to the gross loan portfolio remained stable.
Non-interest expense rose to $929 million, up $75 million or 8.8% from the same period in 2007. Nearly 30% of this increase stemmed from higher salaries and fringe benefits, largely due to the annual indexation of salaries. The $25 million write-off of deferred charges also affected this item.
In addition, Caisse centrale Desjardins contributed $31.3 million to the Personal and Commercial segment for the first three months of 2008, up 29% on a year-over-year basis.
In the area of financing activities, the Personal and Commercial segment turned in a solid performance in credit activities in the first quarter of 2008. In fact, loans outstanding, net of the allowance for credit losses, amounted to $95.7 billion as at March 31, 2008, an increase of 9.7% or $8.5 billion since a year ago. Residential mortgages, which increased 6.6% or $3.4 billion on an annual basis to $54.6 billion as at March 31, 2008, were partially responsible for this growth. The housing sector, both in Québec and in Ontario, had a good start to the year.
The Personal and Commercial segment also fared well in the area of loans to businesses and governments during the first quarter of 2008. Loans outstanding in this segment rose 18.5% or $4.0 billion on an annual basis to $25.5 billion as at March 31, 2008.
Private-sector financing, an area specific to Caisse centrale Desjardins, saw its outstandings grow by 12% since the beginning of 2008, especially because of large disbursements in several files in which Caisse centrale acted as banking syndication and co-syndication agent.
Desjardins Group’s securitized mortgage loan program, introduced in September 2005, continued successfully, with mortgage loans provided by the Desjardins caisse network in Québec and Ontario, and by Desjardins Credit Union. During the first quarter, Caisse centrale participated in the $539-million issue under the Canada Mortgage Bonds program of the Canada Mortgage and Housing Corporation, bringing the cumulative total to more than $3.5 billion.
Deposits outstanding in the Personal and Commercial segment totalled $98.2 billion as at March 31, 2008, up significantly by 9.1% or $8.2 billion. Savings from individuals, which accounted for 68.1% of the segment’s deposit liabilities at the end of the first quarter, rose by 5.7% or $3.6 billion on an annual basis to $66.9 billion as at March 31, 2008. Deposits by businesses and governments grew 32.7% or $5.0 billion during the same period, to $20.3 billion as at March 31, 2008.
Another source of financing available to the Personal and Commercial segment is primarily deposits related to securities issued on capital markets, which fell 3.7% or $424 million on an annual basis, to $10.9 billion as at March 31, 2008. These deposits accounted for 11.1% of the segment’s deposit liabilities on the same date.
Lastly, the Personal and Commercial segment is also quite active in the sale of off-balance sheet savings products, such as investment funds and other securities. However, the volatility of the stock markets during the first quarter of 2008 (e.g.: the S&P/TSX index fell 3.5% since the end of 2007) was not conducive to the sale of these products. Despite these difficult conditions, the Personal and Commercial segment fared reasonably well given that outstanding investment funds and assets under management in the securities brokerage segment remained relatively stable, recording a slight decrease of 1.1% or $263 million on an annual basis, for a total of $25.5 billion as at March 31, 2008.
Life and Health Insurance
For the first quarter of 2008, the contribution of Desjardins Financial Security (DFS) to the Group’s combined results was $35.0 million compared to $48.0 million in 2007. Insurance premium income for this period totalled $618.1 million, up $64.7 million or 11.7%, while insurance sales stood at $51.1 million.
DFS’s net earnings amounted to $36.3 million as at March 31, 2008, for a return on equity of 21.5%, one of the best in the financial services industry.
As was the case for several other major financial institutions in Canada, DFS was affected by the turbulence and uncertainty on capital markets. Investments held in the form of ABCP were written down by $13.6 million, affecting net earnings by the same amount.
In group insurance, group and business insurance premiums amounted to $392.8 million, up $53.9 million from the corresponding period of 2007. Sales totalled $41.3 million.
In individual insurance, the volume of gross premiums rose to $120.2 million, for an increase of $3.8 million on a year-over-year basis. Sales totalled $9.8 million.
In Savings, aggregate sales of $312.1 million were $55.3 million lower than in 2007 for the same period. In individual savings, total sales amounted to $93.7 million, up $9.0 million from the first three months of 2007. In group retirement savings, sales totalled $55.4 million, equivalent to their level in March 2007.
Lastly, assets under management and administration totalled $22.5 billion.
General Insurance
For the first quarter of 2008, Desjardins General Insurance Group (DGIG) recorded a net loss of $2.2 million, versus net earnings of $27.6 million in the corresponding period of 2007.
This decline in profitability was due to higher claims experience in home insurance, because of bad weather conditions in the first quarter, and in business insurance, as a result of more frequent claims and an increase in their average cost. The automobile insurance claims experience was similar to that of 2007, if the effect of the discount rate on the measurement of provisions for claims is excluded.
Gross premiums written, totalling $348.1 million, were up 7.1% as a result, among other things, of group insurance business development and growth in new business in the individual market in Ontario.
The operating expense ratio was higher because of additional costs related to the organization’s strategic initiatives, but this ratio still compares favourably to that of the industry.
In spite of the increase in the value of bonds, because of the interest rate cuts in recent months, investment income was down $9.6 million from the first quarter of 2007 due to the decline in value recognized on ABCP securities and losses on the disposal of common shares, in contrast to the very favourable stock market in the first quarter of 2007.
Securities Brokerage, Asset Management, Venture Capital and Other
The Securities Brokerage, Asset Management and Venture Capital segment primarily encompasses the operations of Desjardins Securities, Desjardins Asset Management and Desjardins Venture Capital.
This segment recorded a net loss of $4 million overall for the first quarter of 2008 as against net earnings of $9 million a year earlier primarily due to unfavourable capital markets.
Lastly, the combined results of Desjardins Group also take into account the various consolidation adjustments not reflected in the results of the business segments, including recognition of the Group’s employee future benefits expense, which
declined $17 million after income taxes compared to the corresponding period in 2007, primarily after certain actuarial assumptions were updated.
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 clients 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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Information (for journalists only):
André Chapleau
Director, Information and Media Relations
514-281-7229
1-866-866-7000, ext. 7229
Raymond Laurin
Chief Financial Officer Desjardins Group
