Desjardins Group Posts Surplus Earnings for the Second Quarter of $408
Million, Up 21%

LÉVIS, QC, Aug. 16 /CNW Telbec/ -

    
     Surplus earnings for the six-month period increased 73% to $789 million
    

Financial highlights

    
    - Strong balance sheet, with $12.4 billion in equity, up 10.7% since
      December 31, 2009.
    - Tier 1 capital ratio of 16.7% after the first six months of the year.
    - Quality loan portfolio, with a ratio of impaired loans to gross loans
      of 0.45%, one of the best in the industry.
    - Assets up 10.4% to $173.5 billion at the end of the first six months of
      the year.
    - Issues by Capital Desjardins of $900 million of senior notes, maturing
      in 2020, and issues by Caisse centrale Desjardins of fixed-rate medium-
      term deposit notes, maturing in 2015, in an amount of $500 million.
    

Key financial data

    
    -------------------------------------------------------------------------
    (Unaudited figures,
     in millions of $ or    For the three months       For the six months
     as a %)                   ended June 30              ended June 30
    -------------------------------------------------------------------------
    Operating Income       2010     2009   Change     2010     2009   Change
    Total income         $2,943   $2,772      6.2%  $5,741   $5,017     14.4%
    Combined surplus
     earnings before
     member dividends      $408     $338     20.7%    $789     $455     73.4%
    Return on equity       13.6%    13.4%       -     13.5%     9.2%       -
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                         June 30,  December 31,
    Financial Position                      2010          2009        Change
    -------------------------------------------------------------------------
    Assets                              $173,500      $157,203          10.4%
    Equity                               $12,395       $11,197          10.7%
    Tier 1 capital ratio                    16.7%         15.9%            -
    Total capital ratio                     17.5%         15.9%            -
    Impaired loans ratio                    0.45%         0.46%            -
    -------------------------------------------------------------------------
    

2010 second quarter results

For the second quarter ended June 30, 2010, Desjardins Group, the largest cooperative financial group in Canada, reports combined surplus earnings before member dividends of $408 million, as compared to a surplus of $338 million one year earlier, an increase of 20.7%. Return on equity was 13.6%, compared with 13.4% for the same quarter of 2009.

"These results are proof that our strategic planning provided us with the right directions and allowed us to report better profitability with a view to sustainable prosperity," said Monique F. Leroux, Chair of the Board, President and CEO of Desjardins Group. "I commend the efforts made by the caisses and our business segments to attain levels of growth that have often surpassed our objectives. More than ever before, Desjardins can look confidently to the future and achieve its cooperative mission for the benefit of its members and clients."

The Personal Services and Business and Institutional Services segment played a major role in these good results, contributing $215 million of the combined surplus earnings for the quarter, before member dividends, due in part to business growth in the caisse network. The caisses capitalized on the favourable economic environment, which helped increase outstanding personal and commercial loans, and growth was strong on credit card and point-of-sale financing activities.

The Wealth Management and Life and Health Insurance segment contributed $85 million while the contribution from the Property and Casualty Insurance was $28 million. The Other segment contributed $80 million, which came from the positive change in the fair value of the restructured notes portfolio (ABTN) and treasury activities.

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 estimate is based on potential surplus earnings in the caisse network. The Group therefore recorded a $71 million provision for member dividends for the second quarter of 2010, vs. the $41 million provision recorded a year earlier.

Increase in total income

Total income stood at $2,943 million at the end of the second quarter of 2010, up $171 million or 6.2%. Net interest income grew 16.7% to $966 million, due in part to strong business development in the Desjardins caisse network and to credit card and point-of-sale financing activities.

Other income increased 3.9% in the second quarter to $922 million, compared to $887 million in the same quarter of 2009. This growth was due in part to a $47 million increase in trading income, most of which was offset by higher actuarial liabilities applicable to life and health insurance activities. Finally, this item also benefited from a $23 million or 16.5% increase in income from brokerage, investment fund and trust services.

Moderate increase in non-interest expense

Non-interest expense stood at $1,308 million, $33 million or 2.6% more than the same quarter of 2009. Much of this growth stemmed from increased salaries and fringe benefits that resulted, in large part, from the annual indexation of salaries.

Provisions for credit losses stood at $43 million for the second quarter of 2010, a $2 million decline from the second quarter of 2009.

Expenses related to claims, benefits, annuities and changes in insurance provisions totalled $1,040 million, up $60 million or 6.1% compared to the same quarter of 2009. This increase was essentially due to increased investment income from life and health insurance activities.

The productivity ratio was 68.7% at the end of the second quarter, compared to 71.1% one year earlier. Desjardins Group's productivity ratio is calculated as non-interest expense over total income, net of claims and insurance benefits.

Results for the first six months of 2010

For the six-month period ended June 30, 2010, Desjardins Group posted surplus earnings before member dividends of $789 million compared to $455 million one year earlier. This represents an increase of 73.4%. Return on equity attained 13.5% compared to 9.2% for the first six months of 2009.

This performance was the result of greater loans outstanding, mainly in the caisse network, as well as the performance of the insurance companies and improved market conditions. It was also due to the strong growth experienced in credit card and point-of-sale financing activities as well as a $64 million positive change in the fair value of the restructured asset-backed term notes (ABTN) portfolio compared to the first six months of 2009.

"Business development has continued at a sustained pace since the start of the year; this, combined with rigorous cost management, has allowed us to report the best six-month results in Desjardins Group's history," said Ms. Leroux. "I would also like to mention various initiatives that have lifted our capitalization well beyond the thresholds recommended by regulatory authorities. Not only has Desjardins continued to hold its own among the best capitalized financial institutions in the country, above all it is building a strong foundation for future growth."

The provision for member dividends at the end of the six-month period was $147 million, compared to $106 million at the end of the same period in 2009.

Desjardins Group's total income stood at $5,741 million at the end of the first six months of 2010, a 14.4% increase over the same period of 2009.

Net interest income was $1,907 million, for an increase of $284 million or 17.5% from the same period of 2009. In a highly competitive environment, net premiums grew 2.0% to $2,104 million. Other income stood at $1,730 million, up $399 million or 30.0%, compared to the first six months of 2009, due in part to a $384 million increase in investment income. However, the increased investment income in the life and health insurance subsidiary also affected expenses related to claims, benefits, annuities and changes in insurance provisions. Income from brokerage, investment fund and trust services benefited from better market conditions, increasing 23.6% to $325 million.

Non-interest expense for the first six months of 2010 totalled $2,621 million, up 5.0% from the same period of 2009. Over half of this increase was due to higher salaries and employee benefits as a result of the annual indexation of salaries and expenses related to agreements reached on pay equity.

Expenses related to claims, benefits, annuities and changes in insurance provisions stood at $1,933 million at the end of the first six months of 2010, up $164 million or 9.3% compared to one year earlier, in line with the growth in business volumes. It should be noted that a large part of this increase was due to higher investment income reported by the life and health insurance subsidiary, as mentioned above.

Desjardins Group's productivity ratio was 68.8% for the first six months compared to 76.8% for the same period of 2009 due to strong income growth, rigorous control of expenses and ongoing efforts to improve productivity throughout the Group.

Quality loan portfolio

The quality of Desjardins Group's loan portfolio remains excellent. Provisions for credit losses for the first six months of 2010 stood at $108 million, for a slight $3 million increase over the same period of 2009.

As at June 30, 2010, gross impaired loans outstanding was $517 million, up $8 million from December 31, 2009. The ratio of gross impaired loans to the gross loan portfolio stood at 0.45% at the end of the first six months, virtually unchanged from December 31, 2009. This ratio remains one of the best in the industry.

Asset growth of 10.4%

At the end of the first six months of 2010, Desjardins Group had $173.5 billion in total assets, up 10.4% or $16.3 billion. Canada's foremost cooperative financial group therefore continued to maintain a high rate of expansion through the second quarter. The improved economic environment in Québec and Ontario, and more specifically the strength in the residential market, created a distinctly favourable context for business development.

In financing activities, the loan portfolio, net of the allowance for credit losses, grew 3.3% or $3.6 billion in the first six months of 2010, to $113.6 billion as at June 30, 2010. These good results were due to the caisse network's performance in housing credit. Due to its leading role in financing the residential market - particularly in Québec - since the start of the year, Desjardins has been able to profit from sustained growth in new construction as well as the resale market for existing houses. As at June 30, 2010, outstanding residential mortgage loans stood at $71.5 billion, up 5.6% or $3.8 billion compared to the end of 2009. This credit category represented 62.4% of the total credit portfolio as at this date.

Desjardins Group is still active in the consumer, credit card and other personal loans market. Its portfolio of outstanding loans grew 0.8% or $142 million since the end of 2009 to $17.1 billion as at June 30, 2010. Desjardins is also active in business and government financing; its outstanding loans to business and governments stood at $26.0 billion at the end of the second quarter, a decline of 1.2% or $303 million.

Savings recruitment grows close to 6%

In savings recruitment activities, outstanding deposits totalled $112.2 billion at the end of the first six months of 2010 compared to $106.2 billion at the end of 2009, an increase of over 5.7% or $6.0 billion. More specifically, personal savings grew 2.1% or $1.6 billion, to $77.0 billion. It should be mentioned that at 68.6% of the total savings portfolio, personal savings is clearly the main source of financing for Desjardins Group's expansion.

Desjardins Group's outstanding deposits by businesses and governments grew 14.2% or $3.3 billion since December 31, 2009, to $26.1 billion as at June 30, 2010. Savings from deposit-taking and other institutions, such as securities issued on capital markets, grew 15.3% or $1.2 billion during the same period, to $9.1 billion.

Increase in off-balance sheet savings

Following a lacklustre first quarter for Canada's stock markets, with the S&P/TSX index rising only 2.5% since the end of 2009, the second quarter proved even more difficult, with the index falling 6.2% from where it stood on March 31, 2010. Despite this difficult environment, Desjardins was able to perform rather well in the market for off-balance sheet products. The Group's assets under administration or under management and its securities grew 2.5% or $1.0 billion since the end of 2009, to a total of $42.6 billion as at June 30, 2010.

A strong capital base

Desjardins Group's Tier 1 capital ratio, assessed under the regulatory framework of Basel II, was 16.7% as at June 30, 2010 compared to 15.9% as at December 31, 2009. This was above the Group's capitalization target of 15.0% and still one of the best ratios in the industry. The total capital ratio was 17.5% as at June 30, 2010, compared to 15.9% as at December 31, 2009.

Funding and capital supply

In order to support the Group's growth and development, on May 5, Capital Desjardins inc. completed the issue of $900 million in subordinated debentures at a rate of 5.187%, maturing in 2020. It was the third issuance made by this subsidiary under a base shelf prospectus dated June 30, 2008 that has a ceiling of $2.0 billion. The program was renewed with the filing of a new base shelf prospectus, dated July 30, for a maximum amount of $3.0 billion.

Caisse members also participated in the capitalization of their financial cooperative by purchasing permanent shares, sales of which reached $454.1 million in the first six months of 2010. Since September 2009, $1.1 billion of these shares have been sold.

On the other hand, in order to extend the average term of institutional deposits and better diversify their distribution, on June 3, 2010, Caisse centrale Desjardins completed the issue of $500 million of fixed-rate medium-term deposit notes, maturing in 2015. This is the first issue of notes to be made by Caisse centrale Desjardins under its simplified base shelf prospectus, dated April 13, 2010, under which it plans to issue an additional $5.0 billion in notes, bringing the program to a total of $6.4 billion.

This is the second issue made on the Canadian market since the start of 2010. In February, Caisse centrale Desjardins issued $400 million of floating-rate medium-term deposit notes in two tranches: $275 million and $125 million, maturing in 2012 and 2013, respectively.

The numerous capital funding programs on Canadian and international markets since the start of 2009 have allowed Desjardins Group to complete issues of close to $6.6 billion. One of the goals of this record level of transactions on institutional markets over an 18-month period was to better diversify the Group's sources of financing.

Results by business segment

Personal Services and Business and Institutional Services

This segment includes "Personal Services," which is the global caisse network activities related to developing, marketing and distributing the service offer for individuals, including financing and savings activities as well as payment cards. The segment also comprises "Business and Institutional Services," which is responsible for integrating the offer for mid-sized and large businesses, including financing, securities, venture capital, and specialized and advisory services.

The Personal Services and Business and Institutional Services segment ended the second quarter of 2010 with $215 million in surplus earnings before member dividends. This was 27.2% or $46 million more than the same period of 2009.

The segment's total income was $1,335 million, for an increase of 12.7% or $150 million over the same quarter of 2009. This increase was due to business volume growth in personal and business and institutional financing, credit card financing and point-of-sale financing.

For the first six months of 2010, the segment's surplus earnings before member dividends were $410 million, up $135 million or 49.1% from the same period of 2009.

Total income for the segment grew $287 million or 12.2% to $2,637 million. This includes a $197 million or 12.9% increase in net interest income, which was mainly due to strong growth in outstanding loans in the caisse network combined with a higher intermediation margin.

Furthermore, the strong growth in activities related to personal services, and more specifically in mortgage loans, was due to increased housing starts and an improved resale market, combined with low interest rates. This had a positive impact on outstanding mortgage loans, which grew $3.0 billion in the first six months of 2010, compared to $2.3 billion during the same period of 2009.

In addition, the economic recovery stimulated growth in outstanding loans in business and institutional services. Credit card and point-of-sale financing activities also benefited from the recovery in consumer spending, as well as a wider net interest spread.

Other income grew 11.0%, or $90 million, compared to the first six months of 2009, due in part to a gain realized on the sale of a block of shares, an increase in the number of files in the Immigrant Investor Program, greater transaction volumes (which generated additional services fees), as well as commissions paid to the caisses by the Wealth Management and Life and Health Insurance segment and the Property and Casualty Insurance segment.

Provisions for credit losses increased slightly by 4.8% or $5 million compared to the first six months of 2009, despite strong growth in outstanding loans.

Non-interest expense grew $116 million or 6.2%, in part due to higher growth in personnel-related expenses following the completion of agreements on pay equity and the usual increases in salaries and employee benefits.

Wealth Management and Life and Health Insurance

This segment is responsible for the design and distribution of specialized savings products and life and health insurance. It provides support for the integrated distribution of wealth management products and services throughout the caisse network, and it distributes specific products through complementary channels. This segment also helps Desjardins Group grow across Canada.

During the second quarter, the Wealth Management and Life and Health Insurance segment presented surplus earnings before member dividends of $85 million, up 54.5% or $30 million from the same quarter of 2009.

Total income for the segment was $1,282 million, up $114 million or 9.8% compared to the same period of 2009. This increase was mainly due to life and health insurance activities, where investment income grew $65 million.

Non-interest expense grew $46 million or 13.7%. This increase was essentially due to higher commissions on sales of savings products, remuneration paid to the caisses, and salaries and employee benefits.

During the first six months of 2010, this segment recorded surplus earnings before member dividends of $160 million, compared to $93 million posted for the same period in 2009, for an increase of 72.0%. This growth was mainly due to strong business in insurance and annuities and an increase in net assets under management.

The segment's total income was $2,448 million, up $388 million or 18.8% compared to the first six months of 2009. This was due in part to life and health insurance activities, including net premiums, which rose $25 million. Other income grew $363 million or 58.2%, due mainly to a $266 million increase in investment income. This growth was offset in part by higher actuarial liabilities. Furthermore, the increase in income from fees earned on asset management and the distribution of savings, brokerage services and wealth management products totalled $96 million.

The $217 million increase in expenses related to claims, benefits, annuities and changes in insurance provisions was due to an increase in the fair value of matched investments, which generate an increase in actuarial liabilities.

Non-interest expense had grown $88 million during the six months, for the same reasons as those given for the segment's quarterly results.

Property and Casualty Insurance

This segment is responsible for the design and distribution of property and casualty (P&C) insurance products as well as related client services. It works with the caisse network, supports product distribution in the caisse network and helps grow Desjardins Group's P&C insurance activities across Canada.

The Property and Casualty Insurance segment contributed $28 million to Desjardins Group's results during the second quarter of 2010, unchanged from the second quarter of 2009.

For the second quarter of 2010, the segment's surplus earnings before non-controlling interests and member dividends were $31 million, unchanged from the same quarter of 2009.

During the first six months, the segment's surplus earnings before non-controlling interests and member dividends were $87 million, for an increase of $48 million or 123.1% from the first six months of 2009. These results were due to the good climatic conditions of the last few months, which resulted in fewer insurance claims and, as a result, lower expenses, which are mainly attributable to claims experience.

Total income for the segment was $765 million, up $14 million or 1.9% compared to the first six months of 2009 due to an increase in the number of policies issued and a higher average premium. This growth was also due to the positive impacts of a new advertising campaign in Ontario for the Desjardins General Insurance brand. During the first six months of 2010, the caisse network contributed $37 million in gross premiums written, an amount similar to that recorded for the first six months of 2009. On the other hand, a $7 million decline in other income was essentially due to a restructuring of the portfolio in 2009 that resulted in gains on the disposal of bonds and by a lower effective yield on the bond portfolio due to lower interest rates.

Other

The "Other" segment consists mainly of treasury activities related to the operations of Caisse centrale Desjardins. The segment is also responsible for all ABTN securities held by Desjardins Group and records consolidation adjustments for all the components of Desjardins Group. Since the second quarter, this segment also includes the activities of Capital Desjardins and Fonds de sécurité Desjardins, which were previously presented in the Personal Services and Business and Institutional Services segment.

The Other segment posted $80 million in net surplus earnings for the second quarter. This represents a $6 million or 7.0% decline from the same quarter of 2009.

In combined results for the first six months, the Other segment recorded $141 million in net surplus earnings, up $89 million or 171.2% compared to the first six months of 2009. This increase was due in part to a positive change in the fair value of the restructured ABTN portfolio.

The Other segment's treasury activities for the first six months had contributed net surplus earnings of $50 million, $14 million less compared to the first six months of 2009, a period during which market conditions were particularly favourable.

In addition, the combined results of Desjardins Group take into account various consolidation adjustments such as the adjustment related to the Group's employee future benefits expense and the application of hedge accounting, which were up $5 million and $35 million after taxes, respectively, compared to the first six months of 2009.

Desjardins, 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 the economic and social well-being of people and communities. For more information, visit www.desjardins.com.

For further information: (for journalists only): André Chapleau, Director, Media Relations, Desjardins Group, 514-281-7229, 1-866-866-7000, ext. 7229, [email protected]; Raymond Laurin, Senior Vice-President, Finance, Treasury and Chief Financial Officer, Desjardins Group