September 30, Message from management

Transcription

1 Financial Report Third Quarter 2010 September 30, 2010 Head Office 1170 Peel Street, Suite 600 Montreal, Quebec, Canada H3B 0B1 Tel.: Internet address: Reuters: CCDX Telerate: 3107 Telex: Swift: CCDAMM ISSN Toronto Office 145 King Street West, Suite 2750 Toronto, Ontario, Canada M5H 1J8 Tel.: ISSN Calgary Office 110-9th Avenue SW, Suite 410 Calgary, Alberta, Canada T2P 0T1 Tel.: Entities outside canada Desjardins Bank N.A. Head Office - Hallandale Beach 1001 East Hallandale Beach Blvd. Hallandale Beach, Florida, U.S.A Tel.: Pompano Beach Branch 2741 East Atlantic Blvd. Pompano Beach, Florida, U.S.A Tel.: Lauderhill Branch 7329 West Oakland Park Blvd. Lauderhill, Florida, U.S.A Tel.: Caisse centrale Desjardins U.S. Branch 1001 East Hallandale Beach Blvd., Suite 200 Hallandale Beach, Florida, U.S.A Tel.: Desjardins Florida Loan Center Inc. 1001, East Hallandale Beach Blvd. Hallandale Beach, Floride, É.-U Tel. : Message from management Caisse centrale Desjardins ( Caisse centrale ) posted net income of $35.4 million for the third quarter of 2010, up 6% from the same period in All business segments contributed to these good results. Year-to-date net income of $100.8 million was much higher than anticipated as a result of the strategies adopted and business development efforts, which generated spinoffs more quickly than expected. For instance, the new integrated customer relationship management approach has already shown results. Owing to the efforts and close cooperation of dedicated corporate financing teams, we have increased our participation in bank syndicates and acted as co-lead manager or syndication agent. Since capital market conditions are currently more favourable, total approved corporate banking credits grew by close to 9% in the past year. In the government institutional financing sector, profit margins have expanded since the beginning of the year, and outstandings were up during the quarter. Most of the business segments and the files shared with the Desjardins caisse network via Desjardins Acceptances accounted for this growth. In addition, income from banking, international and foreign exchange services grew by 13% over the first nine months of 2009, as a result of business development efforts to obtain and renew major accounts. The direct access service to our traders, still available on very competitive conditions, maintained a high popularity rating and showed solid progress for the year to date in terms of new subscribers and volume. Overall, Caisse centrale s assets grew by $5.2 billion since the beginning of the year to total $27.8 billion as at September 30, Liquidities were also up by $1.5 billion in the same period to reach $6.8 billion at the end of the third quarter, or 25% of total assets, largely exceeding regulatory standards. The growth of the loan portfolio in 2010 was attributable in particular to the outstandings in favour of Desjardins entities. In the third quarter, Caisse centrale issued fixed-rate, medium-term deposit notes in the amount of $1 billion on the U.S. market. Desjardins Group has therefore become the first Canadian cooperative financial institution to issue senior debt in that country. Since the beginning of 2010, Caisse centrale has completed four deposit note issuances on the Canadian, U.S. and European markets for a total of $3.5 billion. The aim of these issuances is to support Desjardins Group s development and the growth of its customer base, while extending the term of the deposits and diversifying their sources and their distribution. Even with the growth experienced by its assets, Caisse centrale continues to be very highly capitalized, as shown by its capital/asset ratio, determined under the Basel II regulatory framework. The ratio was 6.2% as at September 30, 2010, while the standard to be met was 5.0%. The total capital ratio, also determined under the Basel II regulatory framework and based on risk-weighted assets, was 18.9%, versus a standard of 8.0%. Monique F. Leroux, FCA, FCMA Chair of the Board of directors and Chief Executive Officer of Caisse centrale Desjardins Raymond Laurin, CA Chief Financial Officer of Caisse centrale Desjardins and Senior Vice-President, Finance and Treasury Executive Division and Office of the CFO

2 Management s discussion and analysis Financial Report n Third Quarter 2010 n September 30, 2010 This Management s Discussion and Analysis ( MD&A ) compares the financial position of Caisse centrale Desjardins ( Caisse centrale ) as at September 30, 2010 and December 31, 2009, as well as the results of operations for the three- and nine-month periods, 2010 and 2009, prepared in accordance with Canadian generally accepted accounting principles ( GAAP ). This report is dated November 10, 2010 and, unless otherwise indicated, all figures are stated in Canadian dollars. It was prepared according to the requirements of National Instrument , Continuous Disclosure Obligations, of the Canadian Securities Administrators. It should be noted that following the announcement of Desjardins Group s new organizational structure, Caisse centrale brought the analyses in this MD&A into line with the new business segments set up by Desjardins Group. Financial reporting is now done according to these major business segments, namely Business Services and Desjardins Group Treasury. Additional information about Caisse centrale Desjardins is available on the SEDAR website at where the Annual Information Form of Caisse centrale Desjardins is also found. ACCOUNTING POLICIES AND ESTIMATES Critical accounting policies and estimates The significant accounting policies used by Caisse centrale are summarized in Note 2 to the audited consolidated financial statements as at December 31, Explanations regarding certain accounting policies considered to be critical because they are key to understanding the financial position and results of operations of Caisse centrale are presented on page 21 of the 2009 Annual Report. These policies require management to make assumptions and estimates that are subjective and complex since they concern critical issues. No significant change was made to these assumptions and estimates during the first nine months of Please refer to the Annual Report for more information. Changes in accounting policies The new accounting standards adopted in 2010 and the future changes in accounting policies to be adopted are described in Note 2 to Caisse centrale s unaudited quarterly consolidated financial statements. Adoption of International Financial Reporting Standards Effective January 1, 2011, Caisse centrale will be required to adopt the International Financial Reporting Standards ( IFRS ) in effect, at that date, as the accounting framework for the preparation of its annual and interim financial statements. Caisse centrale will adopt the IFRS starting January 1, 2011 and will release its first IFRS consolidated financial statements for the first quarter ending March 31, 2011, as well as comparative information, an opening statement of financial position as at January 1, 2010, and transitional reconciliations. Starting on page 24 of its 2009 Annual Report, Caisse centrale published a summary of the main implications of the IFRS changeover for its current accounting policies, which may have an impact on its results, its financial position or its operations. These main implications reflect the most recent assumptions, estimates and expectations of Caisse centrale s management. Given, however, developments in some standards, the unavailability of certain market data and the schedule for completing certain solutions, Caisse centrale is unable, at this stage, to provide a reasonable estimate of the overall financial implications of the IFRS transition on its financial position and results because the impact of the IFRS conversion will depend on the accounting options elected, general economic conditions and the conditions prevailing in the financial sector on the transition date. However, among the implications identified in Caisse centrale s IFRS transition program, those that are likely to be the most significant and/or have the most unfavourable impact on Caisse centrale s results, financial position (especially regulatory capital), and operations concern the accounting for mortgage loan securitization transactions and employee benefits as well as hedge accounting. The Autorité des marchés financiers issued a notice to allow an irrevocable election to be made on the IFRS changeover date in order to mitigate the impact of IFRS adoption on regulatory capital ratios.. As a result of this election, retained earnings and the reserve can be adjusted quarterly on a straight-line basis from the IFRS changeover date to December 31, 2012 for the purpose of calculating regulatory capital ratios. Caisse centrale plans to make this election as of the IFRS adoption date. Through Desjardins Group s training program, Caisse centrale will continue its training sessions during the next quarter for its Audit Commission and its staff, including, among others, finance department staff and the personnel of certain areas particularly affected by the IFRS transition, such as credit service employees. Training aims to transfer the knowledge gained in the IFRS transition program to the reporting units. Raising IFRS awareness throughout Caisse centrale will be a priority until December 31, Caisse centrale will complete its IFRS communication plan by the end of the year. Caisse centrale will, moreover, finalize the implementation of its new processes and internal controls over financial reporting, as well as the upgrading of its performance measures, variable compensation plans and budget process. Internal and external auditors, as well as Desjardins Group s governance team, support Caisse centrale in its IFRS transition by conducting reviews of the processes and accounting positions related to IFRS. Until December 31, 2011, Caisse centrale will continue to monitor IFRS developments, adjusting its transition plan if necessary. The progress made to date is in line with the established schedule and is reported on a regular basis to management as well as to Caisse centrale s Audit Commission. Caisse centrale will report the quantitative impact of IFRS adoption on the financial statements when the final decisions have been made. 2

3 For more information about Caisse centrale s IFRS transition program, please refer to its 2009 Annual Report, and specifically to page 23, for the key components of its transition plan. NON-GAAP MEASURES Caisse centrale uses both generally accepted accounting principles ( GAAP ) and non-gaap measures to assess and comment on its financial performance. The Canadian Securities Administrators require that issuers caution readers that non-gaap measures do not have standardized meanings and are unlikely to be comparable to similar measures presented by other companies. In its MD&A, Caisse centrale s management reports amounts adjusted for certain particular items. Amounts and measurements presented on that basis are considered useful because they can better reflect operating results. INTERNAL CONTROL OVER FINANCIAL REPORTING During the interim period, 2010, no changes were made to internal control over financial reporting that materially affected or were likely to materially affect our internal control activities over financial reporting. ECONOMIC REVIEW Even though the concern coming out of the eurozone last spring has largely dissipated, the global economy is nevertheless experiencing a second half-year that is more difficult than the first. A number of data indeed show that economic growth has slowed, particularly in the United States, the United Kingdom, Japan and China. Canada has also not been spared because of the strong trading relationship with its neighbour south of the border. The weakness of the U.S. economy is particularly worrisome. During the previous economic cycle, credit grew quickly in the United States, and consumers were strongly inclined to spend, which supported not only U.S. economic growth but also that of its trade partners. The current situation is quite different. Despite extremely low interest rates, credit is still on the decline in the United States, and consumers are more inclined to save. The housing sector, which had generated a great deal of economic activity before the crisis, is having a hard time recovering, and weak job creation is not helping the picture. In Canada, domestic demand is more robust than in the United States, thereby compensating for weak exports. Signs of a slowdown are nonetheless multiplying. Home purchases are down slightly after a burst of energy at the end of 2009 and at the beginning of this year. The gradual disappearance of temporary factors that had supported demand in the housing sector (lower market interest rates, early purchases made to beat changes in regulations, etc.) is clearly starting to have an effect. The Canadian economy must also contend with the gradual windingdown of government stimulus packages and more lacklustre growth in consumer spending. Employment has quickly recovered in the country in the past few quarters; however, since the jobs lost during the recession have all been recovered, monthly gains are currently smaller. The Canadian Prairies continue to capitalize on higher commodity prices and renewed investment in resource exploration and extraction. In Ontario, the economy is benefiting from a revival in the auto sector. However, since the number of vehicles manufactured is now practically the same as it was before the crisis, the potential for gain is currently not as significant, especially since auto sales in the United States are still relatively depressed. The slide in the residential sector is more evident in Ontario and in British Columbia, where the introduction of a harmonized sales tax in July had prompted people to speed up their home-buying plans. In Quebec, the start of a new expansion phase has given way to shaky growth, at the same time as a plethora of more disappointing consumer statistics. Retail sales were subject to a correction after exceptional growth at the beginning of the year. Sales of existing homes have also plummeted. The economic slowdown affecting several countries has prompted central banks to be more cautious. In Canada, interest rates started their upward trend in June but the Bank of Canada did not lose any time initiating a pause. In the United States, discussions have focused on a new round of easing measures, which did not fail to increase the demand for U.S. Treasury securities and push down bond interest rates. Stock exchanges managed nonetheless to perform well. The Bank of England also left the door open to more easing, while the Bank of Japan has already followed suit. The Central European Bank has preferred to stay on the sidelines. The outlook for increased monetary easing in the United States has led to the depreciation of the U.S. dollar, much to the chagrin of a number of countries. A round of competitive devaluations and an era of protectionism are now distinct possibilities. The euro is one of the currencies that benefited from the U.S. dollar s weakness; and the loonie is hovering around parity again. COMMENTS ON THE CONSOLIDATED BALANCE SHEETS As at September 30, 2010, Caisse centrale s total assets stood at $27.8 billion, up $5.2 billion or 23% from December 31, Liquidities comprised of cash, investments with financial institutions and securities, totalled $6.8 billion as at September 30, 2010, up $1.5 billion from December 31, 2009, largely as a result of the deposit issuances on capital markets since the beginning of the year. Through these issuances, Caisse centrale will be able to support the growth of the Desjardins network over the next few months. It should be noted that trading activity strategies deployed by arbitragers also increased the securities held for trading, compared to December 31, The ratio of liquidities to total assets was 25% as at September 30, 2010, versus 23% at the end of fiscal 2009, a level that amply satisfies regulatory requirements. 3

4 The loan portfolio, including customers liability under acceptances, stood at $16.7 billion as at September 30, 2010, up $2.9 billion or 21% from December 31, Continuing to act as Desjardins Group s treasurer, Caisse centrale has had to meet strong demand for liquidity from the Desjardins network since the start of the year. Loans to members and other Desjardins entities were up by $3.1 billion from December 31, In addition, business loans outstanding fell by $314.4 million, as some one-time loans made at year-end matured in Lastly, the public and parapublic sector loan portfolio, including customers liability under acceptances, has declined by $469.5 million or 17% since the start of the year. Deposits totalled $18.1 billion as at September 30, 2010, up $3.3 billion from December 31, This increase was mainly the result of the mediumterm deposit issuances made since the beginning of the year. Caisse centrale in fact launched four issues totalling $3.5 billion on Canadian, U.S. and European markets. It should be pointed out that during the quarter, 2010, Caisse centrale became the first Canadian cooperative financial institution to issue senior debt on the U.S. market. As already mentioned, the main aim of these issuances was to meet the Desjardins network s liquidity needs. Lastly, it is noteworthy that Caisse centrale participated, as agent, in a new issue under the National Housing Act (NHA) Mortgage-Backed Securities Program for $363.2 million. Finally, capital of $300 million was injected on June 30, 2010, bringing total capital stock to $1.6 billion at the end of the third quarter. This additional capital will provide Caisse centrale with the flexibility it needs to ensure the development of its operations. COMMENTS ON THE CONSOLIDATED STATEMENTS OF INCOME AND MEMBERS EQUITY Comparison of the third quarters of 2010 and 2009 Net income for the three-month period, 2010 was $35.4 million, versus $33.3 million for the corresponding quarter in Gross income stood at $64.5 million, down $9.2 million from the prior year. The decline in gross income was basically due to Desjardins Group Treasury, whose performance, it must be noted, had been exceptional in This segment s income was down $12.8 million from the corresponding period in As you may remember, the previous year s results had greatly benefited from the easing in the Bank of Canada s monetary policies, considerably pushing up this segment s margins. Even though this quarter s results were higher than expected, they were still lower than those of the previous year because of the return to more normal market conditions. growth in the margin on business loan as well as public and parapublic sector loan portfolios due to the higher profit margin. Credit fee income grew by $1.2 million on a year-over-year basis because of additional loan commitments, which generated higher standby fee revenue. Caisse centrale recognized a recovery of $13.5 million on the provision for credit losses during the third quarter of 2010, which was $12.4 million more than the recovery of $1.1 million for the corresponding period in The decline in the business loan portfolio and the improved economic outlook accounted for the recovery recorded during the quarter. Overall, the quality of the loan portfolio remained excellent, with gross impaired loans representing 0.2% of total loans. Non-interest expense totalled $23.2 million in the third quarter, up $1.3 million from the corresponding period a year earlier. IFRS conversion costs as well as the fees incurred for the deposit note issuances largely accounted for the $1.4 million increase under Fees. In addition, the $1.0 million decline in Salaries and fringe benefits from the previous year was attributable to an additional incentive compensation charge recorded in 2009 because of excellent financial results. Lastly, the $0.3 million increase in outsourcing and processing service fees was due to higher transaction volumes. The efficiency ratio stood at 36.0% for the current quarter, a level that was more favourable than expected. Dividends paid to Desjardins Group amounted to $9.1 million for the third quarter of 2010, down $0.3 million from This slight decline was due to the lower volume of foreign exchange transactions. Under the Act respecting the Mouvement Desjardins (the Constituent Legislation), the Board of Directors of Caisse centrale may declare interest on capital shares; it then determines the terms of payment. The Board of Directors of Caisse centrale has applied the principle of declaring, as remuneration of capital stock, an amount corresponding to its nonconsolidated net income, including recovery of related income taxes. This remuneration is distributed on a pro rata basis according to the number of shares held. For the third quarter of 2010, $45.1 million was declared as remuneration of capital stock, versus $43.8 million for the same period the previous year. As at September 30, 2010, an amount of $132.5 million was recorded as remuneration of capital stock payable on the balance sheet. Overall, the amounts paid to the Desjardins network, including other member payments, totalled $54.2 million for the third quarter of 2010, compared to $53.2 million for the corresponding period in Caisse centrale s contribution to the Desjardins network, as a percentage of capital stock, therefore represented an annualized return of 13.5% for the three months, 2010, versus 16.4% a year earlier. In addition, gross income for the Business Services segment rose by $3.9 million or 14% to total $31.4 million for the third quarter of This outstanding performance was partly attributable to the $1.0 million 4

5 Comparison of the first nine months of 2010 and 2009 Net income for the nine-month period, 2010 totalled $100.8 million, versus $116.5 million for the year-earlier period. Gross income stood at $213.3 million, down $38.6 million from the previous year. Desjardins Group Treasury s gross income totalled $113.0 million, down $50.9 million from $163.9 million for the nine-month period ended September 30, This decline was essentially attributable to the management of securitized assets and to trading activities that generated lower margins than in the previous year because of tighter monetary policies in Foreign exchange income for this segment generated additional income of $2.4 million as a result of certain U.S. dollar-traded positions. In addition, the Business Services segment s operations generated gross income of $94.8 million, up $13.5 million from the corresponding period in Credit fee income, up $4.7 million as a result of growth in loan commitments, and foreign exchange income, up $2.1 million due to the increase in volumes transacted with the Desjardins network, largely accounted for the Business Services segment s excellent performance. Also noteworthy was the $1.2 million increase in net interest income on the business loan portfolio as a result of a higher profit margin. Caisse centrale recognized a $16.0 million recovery on the provision for credit losses during the first nine months of 2010, compared to a $3.9 million provision for the corresponding period in The recovery recognized in 2010 was partly attributable to a $4.7 million decline in the specific allowance following a drop in impaired loans outstanding as a result of the collection of certain loans. Moreover, the decline in the business loan portfolio and the improvements in economic conditions since the beginning of the financial crisis accounted for the lower general allowance. It should be noted, however, that a $3.7 million provision was recognized for the U.S. subsidiaries personal loan portfolio. Non-interest expense for the first nine months of 2010 stood at $68.1 million, down $2.7 million from 2009, as a result of the decrease in salaries and fringe benefits due to the recognition of an additional incentive compensation charge in Also noteworthy was the $0.7 million increase under Fees attributable in particular to IFRS conversion costs. The efficiency ratio was 31.9% for the first nine months of 2010, a level that was more favourable than expected. Dividends paid to Desjardins Group, including dividends paid on the interest margin redistributed on participating loans, totalled $28.9 million for the first nine months of 2010, up $2.1 million from the same period a year earlier as a result of the higher volume of foreign exchange transactions. Caisse centrale s contribution declared as remuneration of capital stock for the first nine months of 2010 was $132.5 million, versus $105.2 million the previous year. It should be noted that in 2009, the remuneration had been reduced by the amount of the loss for the previous fiscal year, accounting for the increase in the current year. As a percentage of capital stock, this contribution, including other payments to the Desjardins network, represented an annualized return of 15.5% for the nine months, 2010, compared to 13.7% for the corresponding period in It should be remembered that capital stock was increased by $300 million following an issuance of new shares on June 30, COMMENTS ON THE CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Comparison of the third quarters of 2010 and 2009 For the quarter, 2010, Caisse centrale s consolidated comprehensive income stood at $53.9 million, versus $55.0 million for the corresponding period in Other comprehensive income totalled $18.5 million for the period, versus $21.8 million in This decrease was related to the change in the fair value of available-for-sale securities. Comparison of the first nine months of 2010 and 2009 For the nine months, 2010, Caisse centrale s consolidated comprehensive income stood at $130.6 million, versus $157.4 million for the corresponding period in Other comprehensive income totalled $29.8 million for the period, versus $40.9 million in This decrease was primarily due to the net change in unrealized gains and losses on available-for-sale securities. COMMENTS ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS Comparison of the third quarters of 2010 and 2009 For the quarter, 2010, cash flows from operating activities totalled $1.2 billion, whereas in 2009, these activities had generated cash flows of $931.5 million. The change was chiefly attributable to changes in securities held for trading and the net change in the amounts receivable and payable to brokers and dealers. Cash flows used in financing activities amounted to $33.0 million for the quarter, 2010, as opposed to $1.5 billion in 2009, primarily as a result of the net change in deposits. For the third quarter of fiscal 2010, cash flows used in investing activities amounted to $1.3 billion, whereas these activities had generated cash flows of $411.1 million in This change was mainly the result of the net increase in loan volume. Comparison of the first nine months of 2010 and 2009 For the nine-month period, 2010, cash flows from operating activities totalled $184.5 million, down $778.9 million from the same period a year earlier, mainly as a result of the net change in securities held for trading. 5

6 Cash flows from financing activities amounted to $4.1 billion for the period, 2010, while in 2009, the cash flows used in these activities had totalled $479.4 million. The net increase in deposits, attributable to Caisse centrale s new issues totalling $3.5 billion on Canadian, U.S. and European markets, as well as the share issue in the amount of $300 million, accounted for the increase in cash flows from financing activities. For the first nine months of fiscal 2010, cash flows used in investing activities amounted to $4.2 billion, versus $675.8 million in 2009, as a result of the net increase in loan volume to date in CAPITALIZATION Section 46 of the Act respecting the Mouvement Desjardins provides that Caisse centrale must maintain an adequate capital base consistent with sound and prudent management, in accordance with the standards of the Fédération des caisses Desjardins du Québec (the Fédération ), which were approved by the Autorité des marchés financiers. According to these standards, Caisse centrale must at all times maintain capital in accordance with the following ratios: a) its total capital must be greater than or equal to 5% of its total assets, adjusted according to the standards; b) its total capital must be greater than or equal to 8% of its risk-weighted assets, of which at least one half is Tier I capital. Member federations, however, formally undertook to maintain, pro-rated to their respective holding, Caisse centrale s total capital at a minimum level of (i) 5.5% of its total assets, or if higher, at (ii) 8.5% of its risk-weighted assets, as determined in accordance with established standards. As at September 30, 2010, the capital/asset ratio, determined under the Basel II regulatory framework, was 6.22%, versus 6.86% as at December 31, Tier I capital and total capital ratios, determined under the Basel II regulatory framework and based on risk-weighted assets, were respectively 17.9% and 18.9%, compared to 15.4% and 16.5% at the end of the previous year. As at September 30, 2010, credit risk and market risk were assessed using a standardized approach, whereas operational risk was calculated using the basic indicator approach. On June 30, 2010, Caisse centrale issued capital in the amount of $300 million. The issued and outstanding capital stock of Caisse centrale was therefore composed of 1,587,203 Class A capital shares and 600 qualifying shares. 6

7 Additional credit risk data Table I COMPOSITION OF REGULATORY CAPITAL (in thousands of dollars) As at September 30, 2010 Tier I capital Capital stock $ 1,587,206 General reserve 20,845 Retained earnings (1,562) Total Tier 1 capital $ 1,606,489 Tier II capital Qualifying general allowance $ 92,784 Total Tier II capital $ 92,784 Total capital $ 1,699,273 1 Related to securitization exposure rated lower than BB- or unrated. Table II RISK-WEIGHTED ASSETS (in thousands of dollars) As at September 30, 2010 Credit risk Exposures 1 assets Risk-weighted Average risk-weighting rate (%) Sovereign borrowers $ 4,848,390 $ % Financial institutions 16,731,346 3,342, Business 4,482,513 3,596, Mortgages 186,065 73, Other retail exposures 7,683 5, Securitization 140,701 29, Equities 32,714 32, Trading portfolio 378,873 90, Other assets 4,597, , Total credit risk $ 31,405,365 $ 7,704, % Market risk 814,413 Operational risk 2 478,733 Total risk-weighted assets $ 8,997,585 1 Net exposure, after credit risk mitigation (net of specific allowances under the standardized approach, but not under the advanced approach, in accordance with the Guideline). 2 The basic indicator approach was used to assess operational risk. 7

8 Table III RISK EXPOSURE BY ASSET CLASS (in thousands of dollars) As at September 30, 2010 Used exposure Unused exposure Off-balance sheet exposure 1 Total Net exposure 2 Standardized approach Sovereign borrowers $ 3,850,107 $ 527,243 $ 1,565,325 $ 5,942,675 $ 4,848,390 Financial institutions 13,548,692 2,390,993 3,241,498 19,181,183 16,731,346 Business 2,605,953 1,789, ,708 4,512,743 4,482,513 Mortgages 186, , ,065 Other retail exposures 662, ,420 7,683 Securitization 140, , ,701 Equities 32,714 32,714 32,714 Trading portfolio 858, , ,873 TOTAL $ 21,026,452 $ 4,707,518 $ 5,783,470 $ 31,517,440 $ 26,808,285 1 Including repo-style transactions, over-the-counter derivatives and other off-balance sheet exposures. 2 After impact of credit risk mitigation (CRM) techniques, including the use of collateral, guarantees and credit derivatives. Table IV GROSS EXPOSURE BY ASSET CLASS AND RISK WEIGHTS 1 (in thousands of dollars) As at September 30, % 20% 35% 50% 75% 100% Other Total Sovereign borrowers $ 5,942,675 $ $ $ $ $ $ $ 5,942,675 Financial institutions 19,330,440 19,330,440 Business 126,410 4,374,792 25,164 4,526,366 Mortgages 173,555 13, ,061 Other retail exposures 662, ,420 Securitization 140, ,702 Equities 32,714 32,714 Trading portfolio 37, ,796 8,713 24, ,940 TOTAL $ 5,980,649 $ 20,384,902 $ 173,555 $ 8,713 $ 662,420 $ 4,445,385 $ 25,694 $ 31,681,318 1 Exposure before specific allowances for losses and CRM. 8

9 RISK MANAGEMENT Counterparty and issuer risk Approximately 65% of the securities in all the securities portfolios held by Caisse centrale are issued or guaranteed by public or parapublic entities. The portfolios are mainly with Canadian issuers and counterparties of extremely high quality. Desjardins Group s Risk Management Executive Division sets the maximum exposure for each counterparty and issuer based on quantitative and qualitative criteria. The amounts are then allocated to various Desjardins Group components based on their investment needs. Market risk Market risk refers to the risk of changes in the fair value of financial instruments resulting from fluctuations in the parameters affecting this value; in particular, interest rates, exchange rates and their volatility. Caisse centrale is exposed to market risk primarily through positions taken in the course of its traditional financing and trading activities. It has adopted policies that set out the principles, limits and procedures to use in managing market risk. Interest rate risk management Caisse centrale is exposed to interest rate risk, which represents the potential impact of interest rate fluctuations on net interest income and the economic value of equity. Dynamic and prudent management is applied to achieve the objective of optimizing net interest income while minimizing the negative impact of interest rate movements. The established policies describe the principles, limits and procedures that apply to interest rate risk management. Simulations are used to measure the impact of different variables on changes in net interest income and the economic value of equity. The Desjardins Group Asset/Liability Committee ( Asset/Liability Committee ) is responsible for analyzing and approving the Desjardins Group global matching strategy on a monthly basis while respecting the parameters defined in interest rate risk management policies. In connection with the non-trading portfolio, Table V presents the potential impact of a sudden and sustained 100-basis-point increase or decrease in interest rates on the economic value of equity and the strategies approved by the Asset/Liability Committee. Table V INTEREST RATE SENSITIVITY (before income taxes) (in thousands of dollars) September 30, 2010 June 30, 2010 September 30, 2009 Impact of a 100-basis-point increase in interest rates on the economic value of equity $ (28,524) $ (30,932) $ (44,521) Impact of a 100-basis-point decrease in interest rates on the economic value of equity 28,642 31,561 44,246 The extent of the interest rate risk depends on the gap between cash flows from assets, liabilities and off-balance sheet financial instruments. The situation presented reflects the position as at that date and may change depending on the interest rate environment. Management of market risk related to trading activities Valueat-risk Market risk management for trading portfolios is done on a daily basis and is governed by a specific policy. The main tool used to measure the market risk of trading portfolios is Value-at-Risk (VaR), which represents an estimate of the potential loss for a certain period of time at a given confidence level. A Monte Carlo VaR is calculated daily, using a 99% confidence level, on trading portfolios for a holding horizon of one day. It is therefore reasonable to expect a loss exceeding VaR once every 100 days. The calculation of VaR is based on historical data for a one-year interval. 9

10 Table VI presents the aggregate VaR for Caisse centrale s trading activities by risk category as well as the diversification effect, which represents the difference between aggregate VaR and the sum of the VaR for the various risk categories. Interest rate and foreign exchange risks are the two risk categories to which Caisse centrale is exposed. The definition of a trading portfolio meets the various criteria set out in the Basel Accord. Table VI VaR BY RISK CATEGORY (trading portfolio) As at September 30, 2010 For the quarter, 2010 As at June 30, 2010 For the quarter ended June 30, 2010 (in thousands of dollars) Average High Low Average Foreign exchange $ 103 $ 111 $ 367 $ 5 $ 21 $ 73 Interest rate ,094 Diversification effect 1 (95) (97) N/A 2 N/A 2 (14) (73) Aggregate VaR $ 872 $ 709 $ 903 $ 452 $ 734 $ 1,094 1 Risk reduction related to diversification, namely the difference between the sum of the VaR of the various market risks and aggregate VaR. 2 Not applicable: The highs and lows of the various market risk categories can refer to different dates. As at September 30, 2010, the aggregate VaR was $872,416, with the interest rate VaR being the largest component. This aggregate VaR was higher than its quarterly average of $709,260, and it was also higher than its June 30, 2010 level of $734,000. Risk mitigation due to diversification amounted to $95,000 as at September 30, Back testing Back testing is conducted to validate the VaR model used by comparing the VaR daily with profits or losses ( P&L ) of Caisse centrale portfolios. Caisse centrale carries out back testing daily, applying a hypothetical P&L to its trading portfolios. The hypothetical P&L is calculated by determining the difference in value attributable to changes in market conditions between two consecutive days. The portfolio mix between these two days remains static. The following chart presents changes in VaR for trading activities as well as the income related to these activities. During the third quarter of 2010, losses never exceeded VaR. (in millions of dollars) (0.5) (1.0) (1.5) July 02/10 July 09/10 July 16/10 July 23/10 July 30/10 Aug. 06/10 Aug. 13/10 Aug. 20/10 Aug. 27/10 Sept. 03/10 Sept. 10/10 Sept. 17/10 Sept. 24/10 Actual trading revenue Aggregate Monte Carlo VaR 99% 10

11 ADDITIONAL INFORMATION CONCERNING CERTAIN RISK EXPOSURES In order to give external users a better idea of Caisse centrale s exposure to risk related to current market events, it was decided to use the best practices issued and promoted by the Financial Stability Board (FSB), formerly known as the Financial Stability Forum (FSF). The Forum was founded in 1999 by G7 finance ministers and central bank governors to promote international financial stability through information exchange and international cooperation in the supervision of capital markets and the surveillance of financial institutions. In March 2009, FSF decided to expand membership to include all G20 countries, in addition to Spain and the European Commission. Since then, it has been called the Financial Stability Board (FSB). These best practices include enhanced disclosure of risks related to financial instruments which markets consider to be of higher risk, such as special purpose entities, subprime residential mortgage loans, Alt-A loans, collateralized debt obligations, commercial mortgage-backed securities and leveraged finance loans. Caisse centrale used these recommendations as a guideline in making the disclosures below. Caisse centrale s exposure to subprime residential mortgage loans (defined as loans to borrowers with a high credit risk profile) through its U.S. subsidiary amounted to $1.1 million as at September 30, 2010 (December 31, 2009: $1.3 million). A single loan is currently in default. Alt-A mortgage loan exposure (defined as loans to borrowers with nonstandard income documentation) was $51.8 million as at September 30, 2010 (December 31, 2009: $60.3 million). The exposure to leveraged finance loans (defined as loans to large corporations and finance companies whose credit rating is between BB+ and D and whose level of debt is very high compared to other companies in the same industry) was $80.6 million as at September 30, 2010 (December 31, 2009: $111.0 million), and is in the form of disbursed and undisbursed commitments. Leveraged finance loans are generally used to achieve a specific objective, such as making an acquisition, or effecting a takeover or share buy-back. Besides securities guaranteed by the Government of Canada, Caisse centrale has collateralized debt obligations with a face amount of $140.3 million (December 31, 2009: $270.4 million). The fair value of collateralized debt obligations as at September 30, 2010 was $140.2 million (December 31, 2009: $254.1 million). None of the securities held are directly backed by subprime residential mortgage loans. Caisse centrale is not exposed significantly to commercial mortgage-backed securities. Caisse centrale participates in the Canada Mortgage and Housing Corporation s Mortgage-Backed Securities Program. These transactions involve the use of off-balance sheet arrangements with special purpose entities. The special purpose entity used by Caisse centrale is Canada Housing Trust, set up under the Canada Mortgage Bond Program. These arrangements are described in detail in the Off Balance Sheet Arrangements on page 44 of the 2009 Annual Report. Table VII presents information concerning unconsolidated special purpose entities. The securities held by Caisse centrale, as mentioned in the table, are amounts invested in hedge funds under certain Desjardins Group guaranteed-capital savings programs. During the quarter, Desjardins Group continued its plan to withdraw the amounts invested in these hedge funds. Table VII Unconsolidated special purpose entities (in thousands of dollars) As at September 30, 2010 Unconsolidated special purpose entities As at June 30, 2010 (in thousands of dollars) Exposure of Caisse centrale Total assets of special purpose entities Loans by Caisse centrale to entities included in the scope of consolidation of Desjardins Group 1 $ 916,518 $ 24,611,878 Securities held by Caisse centrale, including $11,293 in entities included in the scope of consolidation of Desjardins Group 12,340 37,107 1 Caisse centrale has a guarantee from the Fédération for $779,

12 QUARTERLY FINANCIAL RESULTS The table below presents summary income statement information for the most recent eight quarters of Caisse centrale (in thousands of dollars) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 (For the quarter) CONSOLIDATED STATEMENTS OF INCOME Net interest income $ 59,468 $ 59,010 $ 60,599 $ 57,991 $ 65,440 $ 62,087 $ 59,387 $ 54,583 Other income 5,056 14,257 14,875 4,468 8,286 33,403 23,301 (76,232) Provision for credit losses (recovery) (13,529) (10,898) 8,420 8,749 (1,143) 2,739 2,265 5,090 Non-interest expense 23,223 21,438 23,412 30,522 21,960 27,507 21,323 20,639 Net income (loss) before other payments to the Desjardins network and income taxes 54,830 62,727 43,642 23,188 52,909 65,244 59,100 (47,378) Other payments to the Desjardins network 9,113 10,175 9,565 9,175 9,459 8,914 8,427 9,618 Net income (loss) before income taxes 45,717 52,552 34,077 14,013 43,450 56,330 50,673 (56,996) Income taxes (recovery) 10,304 13,342 7,934 3,172 10,193 12,537 11,178 (11,581) Net income (loss) $ 35,413 $ 39,210 $ 26,143 $ 10,841 $ 33,257 $ 43,793 $ 39,495 $ (45,415) 12

13 CAUTION CONCERNING PROSPECTIVE STATEMENTS Caisse centrale Desjardins public communications often include oral or written forward-looking statements. Such forward-looking statements concerning Caisse centrale Desjardins activities and strategies may be contained in this MD&A, and may be incorporated in other filings with Canadian regulators or in any other communications. Forward-looking statements may include comments with respect to Caisse centrale Desjardins objectives, strategies to achieve those objectives, expected financial results (including those in the area of risk management), and the outlook for Caisse centrale Desjardins operations and the Canadian and Quebec economies. Such statements are typically identified by words or phrases such as believe, expect, anticipate, intend, estimate, plan, and may ; words and expressions of similar import, and future and conditional verbs. By their very nature, such statements involve assumptions, inherent risks and uncertainties, both general and specific. It is therefore possible that the predictions, projections or other forward-looking statements may not materialize or may prove to be inaccurate because of a number of factors and that actual results may differ materially. A number of factors beyond our control could influence the accuracy of the forward-looking statements in this MD&A. These factors include legislative or regulatory developments in Quebec, Canada or globally, such as changes in fiscal and monetary policies; new reporting guidance and liquidity regulatory guidance, or interpretations of such guidance; and amendments to risk-based capital guidelines. There are also factors linked to changes in economic and financial conditions in Quebec, Canada or globally, including the unemployment rate, changes in interest rates and exchange rates; significant capital market volatility and interruptions causing a liquidity shortage in various markets, particularly trade between Quebec and the United States; the ability of third parties to comply with their obligations to Caisse centrale Desjardins; consumer spending; credit demand; the effects of increased competition in a market open to globalization; competition from new entrants and established competitors; fraud, including the use of new technologies in unprecedented ways against Caisse centrale Desjardins, its members or its customers; legal or regulatory procedures; consumer saving habits; and the effect of possible international conflicts, including terrorism, or natural disasters. Lastly, there are operational risk factors, such as risk management models with intrinsic limitations; technological changes; the development and timely marketing of new products and services; the ability to collect accurate and complete information on customers and counterparties; the ability to form and integrate strategic alliances and acquisitions; changes in accounting policies and methods that Caisse centrale Desjardins uses to report its financial position and results of operations, including uncertainties associated with the significant accounting assumptions and estimates; the effect of applying future accounting changes; the ability to attract and retain key officers; and management s ability to foresee and manage the risks associated with the preceding factors. It is important to note that the above-mentioned list of factors that could influence future results is not exhaustive. Other factors could have an adverse effect on results. Although Caisse centrale Desjardins believes that the expectations expressed in these forward-looking statements are reasonable, it can give no assurance or guarantee that these expectations will prove to be correct. Caisse centrale Desjardins cautions readers against placing undue reliance on forward-looking statements when making decisions. Caisse centrale Desjardins does not undertake to update oral or written forward-looking statements that could be made from time to time by or on behalf of Caisse centrale Desjardins, except as required under applicable securities legislation. The purpose of the forward-looking statements contained in this report is to help members understand Caisse centrale Desjardins financial position as at the dates indicated or for the periods ended on such dates, as well as its strategic priorities and objectives, and these statements may not be appropriate for other purposes. 13

14 CONSOLIDATED BALANCE SHEETS (in thousands of dollars) September 30, 2010 (unaudited) December 31, 2009 ASSETS Cash and deposits with financial institutions $ 321,782 $ 196,321 Securities (note 5) Available for sale 3,645,030 2,788,804 Held for trading 2,858,390 2,311,342 6,503,420 5,100,146 Loans (note 6) 16,438,662 13,079,747 Other Derivative financial instruments (note 8) 2,383,357 2,819,219 Customers liability under acceptances 260, ,500 Other assets 1,884, ,768 4,528,143 4,220,487 $ 27,792,007 $ 22,596,701 LIABILITIES AND MEMBERS EQUITY Deposits Payable on demand $ 2,848,495 $ 2,714,943 Payable on a fixed date 15,283,431 12,121,239 18,131,926 14,836,182 Other Derivative financial instruments (note 8) 2,708,168 2,724,607 Acceptances 260, ,500 Obligations related to securities sold short 167,060 Commitments under repurchase agreements 1,647, ,595 Other liabilities 3,388,175 1,803,484 8,003,532 6,432,246 Members equity 1,656,549 1,328,273 $ 27,792,007 $ 22,596,701 The accompanying notes are an integral part of these quarterly consolidated financial statements. On behalf of the Board, Monique F. Leroux, FCA, FCMA Chair of the Board and Chief Executive Officer Denis Paré Vice-Chair of the Board 14

15 CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the three-month periods For the nine-month periods (in thousands of dollars) Interest income Loans $ 68,719 $ 46,947 $ 168,566 $ 186,792 Securities 54,448 53, , ,760 Interest expense 123, , , ,552 Deposits 63,699 34, , ,638 63,699 34, , ,638 Net interest income 59,468 65, , ,914 Other income Service charges on chequing and deposit accounts 4,802 4,485 14,249 12,969 Foreign exchange income 8,524 9,084 32,757 27,937 Trading activities (note 9) (12,667) (9,217) (23,064) 18,824 Net gains (losses) on available-for-sale securities 1,609 1,972 2,868 (4,373) Fees on Desjardins Acceptances 16 Credit fees 1, ,820 2,642 Management fees ,740 1,485 Other ,818 5,490 5,056 8,286 34,188 64,990 Gross income 64,524 73, , ,904 Provision for credit losses (recovery) (note 6) (13,529) (1,143) (16,007) 3,861 Non-interest expense 78,053 74, , ,043 Salaries and fringe benefits 9,889 10,876 28,060 33,535 Premises, equipment and furniture, including depreciation 3,502 3,874 11,054 12,009 Outsourcing of processing services 2,782 2,433 7,933 7,326 Fees 3,279 1,839 7,474 6,780 Other 3,771 2,938 13,552 11,140 23,223 21,960 68,073 70,790 Net income before other payments to the Desjardins network and income taxes 54,830 52, , ,253 Other payments to the Desjardins network 9,113 9,459 28,853 26,800 Net income before income taxes 45,717 43, , ,453 Income taxes 10,304 10,193 31,580 33,908 Net income $ 35,413 $ 33,257 $ 100,766 $ 116,545 The accompanying notes are an integral part of these quarterly consolidated financial statements. 15