Desjardins Group posts strong performance in the second quarter, reporting $402 million in surplus earnings

By blending cooperative and financial performance, Desjardins contributes to the sustainable prosperity of communities

LÉVIS, QC, Aug. 10, 2012 /CNW Telbec/ -

Highlights

• Surplus earnings of $402 million in the second quarter of 2012, up 13.9% from the same quarter of 2011.
• Giving a total of $90 million back to members and the community, including the provision for member dividends, donations, sponsorships and bursaries.
• Residential mortgages outstanding increased $3.6 billion or 4.5% since the start of the year, to $83.2 billion.
• Quality loan portfolio, with a gross impaired loans ratio of 0.39%.
• On June 18, the Federation launched an issue of capital shares in an amount up to $1.2 billion.
• Tier 1 capital ratio of 16.1% as at June 30, 2012.
• Credit ratings maintained by rating agencies.
• Acquiring an interest in the Maple Group Acquisition Corporation, representing a $97.6 million commitment.
• Named the "Best Corporate Citizen in Canada in 2012" by Corporate Knights magazine.
• The Desjardins brand appears for the first time among the 50 most valuable brands in Canada, as ranked by Brand Finance Canada.
• Desjardins Financial Security was ranked 3^rd among the Canadian firms rated as best by their brokers, according to Investment Executive magazine.
• Western Financial Group Inc. acquired Hodges & Company Insurance Services Ltd., a network of brokers specialized in commercial insurance and based in British Columbia.

Key Financial Data

COMBINED INCOME (Unaudited, in millions of dollars and as a percentage)
	Three-month periods ended June 30							Six-month periods ended June 30
		2012			2011		Change			2012			2011		Change
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%
Surplus earnings before member dividends	$	402		$	353		13.9%		$	823		$	710		15.9%
Return on equity		11.1%			11.5%					11.5%			11.7%

FINANCIAL POSITION AND KEY RATIOS (Unaudited, in millions of dollars and as a percentage)
	As at June 30, 2012			As at December 31, 2011
Assets	$	193,987		$	190,137
Equity	$	14,888		$	14,027
Tier 1 capital ratio^(1)		16.1%			17.3%
Total capital ratio		18.8%			19.3%
Gross impaired loans/gross loans ratio		0.39%			0.41%

(1)	The decline resulted from the end of the application of the deferred treatment prescribed by the Autorité des marchés financiers, effective in 2012, of equity related to investments in insurance subsidiaries.

Results for the second quarter of 2012

For the second quarter ended June 30, 2012, Desjardins Group (www.desjardins.com) posted surplus earnings before member dividends of $402 million, compared to $353 million one year earlier, a 13.9% increase. Return on equity was 11.1%, compared to 11.5% for the same quarter of 2011.

Desjardins pursues growth for the benefit of its members and clients and, through this strong performance, makes a tangible contribution to the sustainable prosperity of the communities where it is present.

At the end of the quarter, $90 million was recorded as given back to members and the community, an amount similar to that for the same quarter of 2011. This includes donations, sponsorships and bursaries as well as a $67 million provision for member dividends, which is similar to the amount for the same period of 2011.

The caisse network, Desjardins Card Services and the Property and Casualty Insurance segment continued to post strong business volume growth, allowing Desjardins Group to pursue business development in its various market segments.

The second quarter was also marked by increased other income due to growth in credit card activities, commission income on insurance sales and a more favourable claims experience in the Property and Casualty Insurance segment compared to the second quarter of 2011.

"The Desjardins caisses 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."

Surplus income up 13.9%

Total income for the second quarter stood at $3,350 million, an increase of $119 million or 3.7% from the same period of 2011.

Net interest income declined slightly to $963 million, compared to $979 million for the same quarter last year. This was primarily due to a low interest rate environment combined with strong competition in mortgage lending. However, a $7.5 billion or 6.1% increase in all loans outstanding over the last year helped offset this decline.

Net premiums increased 4.6% to $1,295 million due to business growth in insurance activities. This was mainly due to various growth initiatives in property and casualty insurance.

Other income stood at $1,092 million, up $78 million or 7.7% compared to the same quarter of 2011. This was mainly due to growth in credit card activities and commission income on insurance sales generated by Western Financial Group Inc.

The provision for credit losses totalled $62 million, down $21 million or 25.3% compared to the same quarter of 2011, primarily due to adjustments related to changes in provisioning parameters.

Expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities stood at $1,425 million, up $148 million or 11.6%, from the same period last year. This change was essentially due to an increase in actuarial provisions in the Wealth Management and Life and Health Insurance segment.

The decline in provisions related to the investment portfolio reduced non-interest expense by $73 million or 5.2% compared to the same quarter last year, to $1,342 million. However, this decline was offset by annual growth in salaries and fringe benefits as a result of annual indexing.

The productivity index improved considerably, to 69.7% compared to 72.4% for the same quarter of 2011. It should be recalled that this index is 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. The index improved as a result of growth in operating income and the performance of investments in the second quarter, combined with the tight control exercised over non-interest expense.

Results for the first six months of 2012

For the six-month period ended June 30, 2012, Desjardins Group posted $823 million in surplus earnings before member dividends compared to $710 million one year earlier, up 15.9%.

Return on equity was 11.5% compared to 11.7% for the same period of 2011.

A total of $159 million was given back to members and the community, including donations, sponsorships and bursaries as well as a $118 million provision for member dividends, compared to a $136 million provision for the same period last year. It should be recalled that an $18 million downward adjustment to the 2011 provision was recognized in the first quarter of 2012.

Total income stood at $6,202 million, up $234 million or 3.9% compared to the first six months of 2011. Net premiums for the insurance segments grew $126 million or 5.3% to $2,523 million. On the other hand, despite a growing loan portfolio, pressure on interest rates resulted in lower net interest income, which stood at $1,921 million. This was $25 million or 1.3% less than in the first six months of 2011.

Other income came to $1,758 million, up $133 million or 8.2% compared to the same six months of 2011. This increase was mainly due to growth in credit card activities and commission income on insurance sales generated by Western Financial Group Inc.

The provision for credit losses increased $17 million or 13.4% from the same period of 2011, primarily as a result of increased loans outstanding in the Personal Services and Business and Institutional Services segment and recoveries made in the first six months of 2011.

Expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities came to $2,171 million, up $73 million or 3.5% compared to the same period last year.

Non-interest expense totalled $2,812 million, down $9 million.

The productivity index was 69.8% compared to 72.9% for the same six months of 2011, for the same reasons as given for the second quarter.

Growth strategy gives positive results

Desjardins Group actively pursues development opportunities across Canada and elsewhere in the world, with convincing results. For example, the Group opened a representation office in Paris; entered into an agreement with Coast Capital Savings, an important financial cooperatives in Western Canada, for card services; implemented a service offer to support the development of cooperatives and mutuals; and, finally, launched an investment program to improve the Group's technological infrastructure and accelerate the digital transition underway in its caisse and subsidiary network. Furthermore, Desjardins Group, through its subsidiary Western Financial Group, acquired Hodges & Company Insurance Services Ltd., a broker network specialized in commercial insurance that is based in Victoria, British Columbia. This represented Western Financial Group's ninth acquisition since joining the Group.

Quality loan portfolio

The quality of Desjardins Group's loan portfolio remains excellent. Gross impaired loans stood at $505 million at the end of the second quarter, down $15 million from December 31, 2011. The ratio of gross impaired loans to the total gross loan portfolio was 0.39% at the end of the second quarter, down from the 0.41% posted as at December 31, 2011, but Desjardins Group still has one of the best ratios in Canadian banking.

Assets grow 2.0%, to $194.0 billion

Desjardins Group's total assets grew $3.9 billion, or 2.0%, since December 31, 2011, to $194.0 billion. This increase was mainly due to growth in the loan portfolio, particularly in the residential mortgage market.

Desjardins Group performed well in this market in the first six months of the year. Residential mortgage loans outstanding grew $3.6 billion or 4.5% since December 31, 2011, to $83.2 billion as at June 30, 2012. This type of financing accounted for 64.5% of the portfolio at the end of the quarter, 30.0% of which was guaranteed by governments and other public and parapublic institutions.

The portfolio of consumer loans, credit card finance and other personal loans stood at $18.1 billion as at June 30, 2012, up $125 million or 0.7% since the end of 2011. Loans to business and government came to $27.7 billion, down $223 million or 0.8% from December 31, 2011.

Growth in savings recruitment

At the end of the first six months of 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, personal savings, which represent 66.1% of the total savings portfolio, grew $2.4 billion or 2.9%, to $84.9 billion.

Savings recruitment also includes deposits made by businesses and government. Deposits in this category 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 issued on capital markets, declined $38 million or 0.3% since the beginning of the year, to $11.9 billion.

Funding supply

In the interests of sound and prudent management, Desjardins Group diversifies its sources of financing on the institutional capital market.

To this end, Caisse centrale Desjardins issued debt securities in the U.S. market in the first six months of 2012. This includes issuing medium-term covered bonds in an amount of US$1.5 billion.

Furthermore, Caisse centrale Desjardins took part in the securitization market for mortgage loans guaranteed by the federal government under the Canada Housing Trust Program. Its participation in new issues totalled $652 million in the first six months of 2012.

On June 1, 2012, Capital Desjardins inc. redeemed all its outstanding Series C subordinated notes for an amount of $300 million. These securities were to mature in 2017.

A strong capital base

Desjardins Group is one of the best capitalized financial institutions in Canada, with Tier 1 and total capital ratios, measured under the Basel II regulatory framework, of 16.1% and 18.8%, respectively, as at June 30, 2012. As at December 31, 2011, these ratios were 17.3% and 19.3%.

Since the implementation of Basel II, Desjardins Group has applied the deferred treatment prescribed by the Autorité des marchés financiers. Under this treatment, which was in force until the end of fiscal 2011, equity related to investments in the Group's insurance subsidiaries made before January 1, 2007 was fully deducted from Tier 2 capital. Effective 2012, this equity must be deducted in equal shares of 50% from Tier 1 capital and Tier 2 capital.

Ending application of this deferred treatment trimmed 143 basis points off the Tier 1 capital ratio during the second quarter of 2012, but the total capital ratio was unchanged.

On June 18, 2012, for the first time in its history the Federation implemented a program to issue capital shares, in an amount up to $1.2 billion. As at June 30, 2012, $291 million in capital shares had been issued. These shares are currently included in Tier 1 capital under Basel II, and they meet the proposed regulatory capital requirements under the Basel III Capital Accord as Tier 1 common equity.

Results by business segment

Personal Services and Business and Institutional Services

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

At the end of the second quarter of 2012, surplus earnings before member dividends attributable to the Personal Services and Business and Institutional Services segment were $201 million, up 1.0% or $2 million from the same period of 2011.

The segment reported total income of $1,314 million, a slight decline from the second quarter of 2011. Net interest income fell slightly due to the ongoing low interest rate environment and strong competition in the residential mortgage market. The impact was mitigated by an increase in residential mortgages and business loans outstanding. Other income declined $18 million or 4.3%, the result of lower trading income and gains on available-for-sale securities due to financial market volatility, but the decline was offset by growth in credit card activities, which increased other income.

The provision for credit losses stood at $62 million, down $21 million or 25.3% compared to the same period of 2011. This decline was primarily due to adjustments related to changes in provisioning parameters.

Non-interest expense increased $8 million or 0.8% compared to the same period of 2011. The change stemmed from growth in salaries and fringe benefits as a result of business growth and annual indexing.

For the first six months of 2012, surplus earnings attributable to the Personal Services and Business and Institutional Services segment were $390 million, down $40 million or 9.3% from the first six months of 2011.

The segment reported total income of $2,677 million, a slight decline of $24 million from the same period of 2011. This takes into account a $29 million or 1.6% decrease in net interest income. Other income came to $859 million, up $5 million or 0.6% compared to the first six months of 2011.

The provision for credit losses grew $17 million or 13.4% from the same period of 2011. This increase resulted in part from the increase in loans outstanding and recoveries made in the first six months of 2011.

Non-interest expense increased $19 million or 1.0%, for the same reasons as given for the second quarter.

Wealth Management and Life and Health Insurance

The Wealth Management and Life and Health Insurance segment offers a range of services tailored to individuals', groups' and business's changing needs for asset management and financial security. These products and services are distributed to members of the caisse network and clients of complementary distribution networks, but also through financial planners in the caisse network and by phone, online and via applications for mobile devices.

At the end of the second quarter of 2012, the segment's surplus earnings stood at $49 million, down $24 million or 32.9% compared to the same quarter of 2011. This performance was mainly due to financial market volatility, the low interest rate environment and a deteriorating claims experience in long-term disability insurance.

An $89 million increase in investment income from life and health insurance activities helped bring the segment's total income to $1,541 million, up $122 million or 8.6%. This increase in investment income was nevertheless partly offset by an increase in investment contract liabilities included in expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities. In addition, net insurance premiums grew $25 million, which was offset by a $16 million reduction in net annuity premiums.

Expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities came to $1,088 million, up $149 million or 15.9% compared to the same quarter of 2011. This change was essentially due to a $154 million increase in actuarial provisions included under "Insurance and investment contract liabilities," including an increase in the fair value of investments.

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

After six months, the segment's surplus earnings before member dividends were $110 million, down $26 million or 19.1% compared to the same period in 2011.

Total income for the segment stood at $2,491 million, up $43 million or 1.8%, mainly due to a $66 million increase in net insurance premiums. Net annuity premiums declined $43 million compared to the first six months of 2011.

Expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities increased $47 million or 3.1% compared to the first six months of 2011 for the same reasons as given for the second quarter.

Non-interest expense increased $22 million or 2.8% to $802 million at the end of the first six months of 2012.

Property and Casualty Insurance

The Property and Casualty Insurance segment directly offers a line of automobile and home insurance products to the public, members of partner groups and businesses. In addition to being sold through the caisse network, these products are distributed across Canada through several Client Contact Centres, over the Internet, via applications for mobile devices and by a large financial services and insurance product network operated through Western Financial Group Inc.

The segment's surplus earnings before member dividends for the second quarter were $47 million, up $24 million or 104.3% compared to the same quarter of 2011. This increase came mainly from increased net premiums and an improved claims experience.

Total income for the segment stood at $568 million for the second quarter of 2012, an increase of $63 million or 12.5% compared to the same period of 2011. This performance was attributable to a $49 million increase in net premiums as a result of growth in the number of policies issued. It stemmed from growth initiatives targeting mass-market clienteles and groups, both in Quebec and across Canada; the development of white label partnerships; the insurance offer for businesses; and an increase in the average premium in certain market segments. Other income grew $15 million, due in large part to increased commission revenues.

Expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities increased $9 million or 2.7% compared to 2011. The change was mainly due to growth in the portfolio of automobile insurance policies in Ontario, which was largely offset by an improved claims experience. The loss ratio was 70.4% for the second quarter of 2012, down 5.9 basis points compared to the same period of 2011. This was above all due to more favourable weather conditions and the resulting reduction in claims, as well as an increase in the average earned premium compared to the same period of 2011.

Non-interest expense increased $22 million or 15.4%, mainly due to growth in the activities of Western Financial Group Inc., increased salaries and fringe benefits as a result of a larger workforce and annual indexing, as well as increased computer expenses incurred to support business growth.

For the first six months of 2012, this segment's surplus earnings were $117 million, up $53 million or 82.8% from the same period of 2011. This was mainly due to a more favourable claims experience.

The segment's total income came to $1,101 million, an increase of $171 million or 18.4% compared to the same period of 2011. This performance was due to the same reasons as given for the quarter, plus the greater gains realized on disposals of investments in the first quarter.

Expenses related to claims, benefits, annuities and changes in insurance and investment contract liabilities increased $31 million compared to the same period of 2011, for the same reasons as given for the quarter.

Non-interest expense increased $79 million or 32.8%, mainly due to the consolidation of Western Financial Group Inc. in an amount of $59 million, increased salaries and fringe benefits and higher computer expenses.

Other

The "Other" category comprises financial information that is not specific to any one business segment. It consists mainly of treasury activities related to the operations of Caisse centrale Desjardins and financial intermediation between the caisses' liquidity surpluses and needs. The segment also includes the Federation's support functions, the activities of Capital Desjardins inc., those of the Fonds de sécurité Desjardins, and operating results related to the asset-backed term notes (ABTN) held by Desjardins Group. It also includes Desjardins Technology Group, which brings together all Desjardins Group's IT-related activities. This category captures various consolidation adjustments as well as eliminations of inter-segment balances.

At the end of the second quarter of 2012, the Other category posted $105 million in surplus earnings. They were mainly due to treasury activities, net favourable impacts related to changes in the fair value of derivatives associated with hedging activities, and lower provisions on the investment portfolio.

At the end of the first six months of 2012, the Other category posted $206 million in surplus earnings. They were mainly due to the $79 million positive change in the fair value of the ABTN portfolio, net of hedging positions, treasury activities, and lower provisions on the investment portfolio.

Cooperating in building the future

Ranked 18^th among the World's 50 Safest Banks 2012 by Global Finance magazine, Desjardins Group, the leading cooperative financial group in Canada, inspires trust around the world through the commitment of its people, its financial strength and its contribution to sustainable prosperity. Desjardins Group's mission is to contribute to improving economic and social well-being of people and communities. For more information, visit: www.desjardins.com.

 

SOURCE: DESJARDINS GROUP

(for journalists only):

André Chapleau
Director, Media Relations
Desjardins Group
514-281-7229 - 1-866-866-7000, ext. 7229
[email protected]
  
Daniel Dupuis, CPA, CA
Senior Vice-President, Finance and Chief Financial Officer
Desjardins Group