Desjardins Caisse centrale Financial Report Second Quarter 2013 June 30, 2013 MESSAGE FROM MANAGEMENT SHARP INCREASE IN NET INCOME FOR THE FIRST SIX MONTHS OF 2013 Highlights of the second quarter: Net income of $39.4 million for the second quarter of 2013 compared to $33.6 million for the second quarter of 2012. Total income of the Business and Institutional Services segment increased $3.5 million or 8.8% compared to the same period in 2012. The Autorité des marchés financiers (AMF) has identified Desjardins Group as a domestic systemically important financial institution. Highlights of the first six months: Total capital ratio of 17.3% and capital/asset ratio of 6.9% as at June 30, 2013. Net income of $78.7 million for the first six months of 2013 compared to $58.5 million for the same period in 2012. Total income of the Business and Institutional Services segment increased $7.3 million or 9.5% compared to the first six months of 2012. In the first six months of 2013, CCD s net income amounted to $78.7 million, up $20.2 million compared to the same period in 2012. This positive result is attributable to good performance in all segments and a lower provision for credit losses. The Business and Institutional Services segment continued sound and prudent growth, posting $83.7 million in total income for the first six months of the year compared to $76.4 million in the first six months of 2012. This increase was primarily the result of growth in the business loan portfolio. Total income in the Treasury segment was up slightly, to $68.5 million for the first six months of 2013 compared to $67 million for the first six months of 2012. This was a significant growth considering the pressure exerted by a continuing low interest rate environment. It is also worth noting that CCD issued $500 million of medium-term deposit notes in the Canadian market in the second quarter, with a response from the financial market that demonstrates our financial strength. As at June 30, 2013, CCD posted $32.7 billion in assets, up 11.8% from December 31, 2012. In the second quarter, CCD issued $300 million of additional shares of capital stock in order to maintain its sound capitalization and sufficient leeway to support the growth of Desjardins Group. CCD s capitalization has therefore increased since March 31, 2013, with a total capital ratio of 17.3% and a capital/asset ratio of 6.9% as at June 30, 2013. These ratios were measured under the Basel III regulatory framework. Desjardins: a domestic systemically important financial institution Desjardins Group was designated as a domestic systemically important financial institution. This designation demonstrates our importance in the Quebec and Canadian financial system. Desjardins Group remains one of the best capitalized financial institutions in Canada and one of the strongest in the world. As Desjardins Group s treasurer and financial agent, CCD will continue to manage operations with rigour and diligence while maintaining a high level of capitalization. Monique F. Leroux, C.M., O.Q., FCPA, FCA Chair of the Board and Chief Executive Officer of Caisse centrale Desjardins L.-Daniel Gauvin General Manager of Caisse centrale Desjardins
TABLE OF CONTENTS Message from management 6Balance sheet review 8Additional information 1Management s Discussion and Analysis 1Basis of presentation of financial information Changes in the regulatory environment and caution concerning forwardlooking statements Economic environment and outlook 1Balance sheet management 1Capital management Analysis of cash flows Off-balance sheet arrangements Controls and procedures Related party disclosures Critical accounting policies and estimates Future accounting changes Review of financial results Risk management Unaudited Condensed Interim Consolidated Financial Statements Analysis of CCD s results Risk management Summary of interim results Additional information related to exposure to certain risks
MANAGEMENT S DISCUSSION AND ANALYSIS The mandate of Caisse centrale Desjardins (CCD) is to provide institutional funding for the Desjardins network and to act as financial agent, especially by supplying interbank exchange services, including clearing house settlements. CCD s activities on the Canadian and international markets complement those of other Desjardins Group entities. This Management s Discussion and Analysis (MD&A), dated August 8, 2013, presents the results of the analysis of the key elements of, and changes in, CCD s Consolidated Balance Sheets for the period ended June 30, 2013, in comparison to the previous period. This MD&A should be read in conjunction with the unaudited Condensed Interim Consolidated Financial Statements (the Interim Consolidated Financial Statements), including the notes thereto, as at June 30, 2013, and CCD's 2012 Annual Report containing Management's Discussion and Analysis and the audited Annual Consolidated Financial Statements (the Annual Consolidated Financial Statements). Additional information on CCD, including CCD s Annual Information Form, is available on the SEDAR website at www.sedar.com. Further information is also available on CCD s website at www.desjardins.com/caissecentrale; however, none of the information presented on these websites is incorporated by reference into this report. BASIS OF PRESENTATION OF FINANCIAL INFORMATION The annual and interim consolidated financial statements are prepared by CCD s management in accordance with Canadian generally accepted accounting principles (GAAP) and the accounting requirements of the Autorité des marchés financiers in Quebec (AMF), which do not differ from GAAP. International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), constitute GAAP for CCD. Therefore these Interim Consolidated Financial Statements of CCD have been prepared in accordance with IFRS and, more specifically, in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting. For further information about accounting policies, see the annual and interim Consolidated Financial Statements. CCD modified certain accounting policies on January 1, 2013, the effective date of new standards. The retrospective application of these modifications led to certain changes in the Interim Consolidated Financial Statements. For more information, see Note 3, Changes in accounting policies in the interim consolidated financial statements. CCD issues financial information in compliance with the Regulation 52-109 respecting Certification of Disclosure in Issuers Annual and Interim Filings, which is prescribed by the Canadian Securities Administrators (CSA). Additional information on controls and procedures is presented in the Additional information section of this MD&A. Unless otherwise indicated, all amounts are presented in Canadian dollars and originate mainly from CCD's annual and interim Consolidated Financial Statements. To assess its performance, CCD uses and presents both IFRS measures and various non-ifrs financial measures. These non-ifrs financial measures, other than the regulatory ratios, do not have standardized definitions and are not directly comparable to similar measures used by other companies and may not be directly comparable to any prescribed IFRS measures. These non-ifrs measures may be useful to investors, including the analysis of financial performance. These measures are defined as follows: Productivity index The productivity index is used to measure efficiency and is equal to the ratio of non-interest expense to total income, expressed as a percentage. A lower ratio indicates greater productivity. CHANGES IN THE REGULATORY ENVIRONMENT AND CAUTION CONCERNING FORWARD- LOOKING STATEMENTS Changes in the regulatory environment In June 2013, the AMF determined that Desjardins Group met the criteria to be designated a domestic systemically important financial institution (D-SIFI), which would subject Desjardins Group to additional obligations. As a D-SIFI, beginning on January 1, 2016, Desjardins Group will be subject to an additional Tier 1a capital requirement corresponding to 1% of riskweighted assets. Therefore, from January 1, 2016, Desjardins Group s Tier 1a capital target will be 8%. Other major obligations include that, based on the recommendations issued by the Enhanced Disclosure Task Force of the Financial
Stability Board and contained in the document Enhancing the Risk Disclosures of Banks, Desjardins Group is continuing to develop its external disclosures and is currently working on integrating these recommendations into its risk management disclosure framework. Furthermore, Desjardins Group will be obliged to produce its living will, detailing the actions to be taken to restore its financial position in the event of a crisis. Note that the Office of the Superintendent of Financial Institutions has also determined that Canada s six major financial institutions meet the criteria for designation as domestic systemically important financial institutions. In addition, Desjardins Group continues to monitor changes in capital and liquidity requirements under global standards developed by the Basel Committee on Banking Supervision (Basel III). Regulations in the United States represent an important part of the regulatory environment of financial institutions, even of foreign institutions, with U.S. operations. Such regulations are constantly changing and place Desjardins Group under new obligations, including compliance with requirements under the Foreign Account Tax Compliance Act (FATCA), which was designed to combat tax evasion in the United States. FATCA requires that financial institutions identify and qualify account holders who are U.S. taxpayers for disclosure to the competent authorities. Following adoption in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), many rules have come into force to implement the various parts of these regulations. Some of these rules apply to Desjardins Group as a foreign financial institution with U.S. operations. Other rules designed to implement articles on trading swaps and proprietary trading (the Volcker rule) must also be taken into account. Desjardins Group continues to closely monitor changes in the regulatory environment and commits the effort and budgets required to ensure compliance with all the rules to which it is subject. Caution concerning forward-looking statements CCD s public communications often include oral or written forward-looking statements. Such forward-looking statements are contained in this MD&A, and may be incorporated in other filings with Canadian regulators or in any other communications. Forward-looking statements in this MD&A include, but are not limited to, comments with respect to CCD s objectives regarding financial performance, its priorities, its operations, the review of economic conditions and markets, as well as the outlook for the Canadian, U.S., European and other international economies. These forward-looking statements include those appearing under the Economic environment and outlook, Review of financial results, Balance sheet review and Additional information sections. Such statements are typically identified by words or phrases such as believe, expect, anticipate, intend, estimate, 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, due to many factors, these predictions, projections or other forward-looking statements as well as CCD s objectives and priorities may not materialize or may prove to be inaccurate, and that actual results differ materially. A number of factors beyond CCD s control could influence the accuracy of the forward-looking statements in this MD&A. These factors include those discussed in the Risk management section of the 2012 Annual Report, in particular, credit, counterparty and issuer, market, foreign exchange, liquidity, operational, strategic and reputation risks. Additional risk factors include environmental risk, legislative or regulatory developments in Quebec, Canada or globally, such as changes in fiscal and monetary policies, reporting guidance and liquidity regulatory guidance, or interpretations thereof, and amendments to and new interpretations of capital guidelines. There are also factors related to changes in economic and financial conditions in Quebec, Canada or globally, including the unemployment rate; the geographic concentration of operations; changes in interest rates and exchange rates; trade between Quebec and the United States; the ability of third parties to comply with their obligations to CCD; consumer spending; credit demand; the effects of increased competition in a market open to globalization; as well as competition from new entrants and established competitors. There is also fraud, including the use of new technologies in unprecedented ways against CCD, its members or its clients; environmental risk; legal or regulatory procedures and lawsuits; consumer saving habits; the effect of possible international conflicts, including terrorism or natural disasters; and new developments. Furthermore, there are also operational risk factors, such as risk management models with intrinsic limitations, technological changes, service disruptions caused by Internet or other technologies, the ability to design new products and services and bring them to market in a timely fashion, the ability to collect complete and accurate information on clients and counterparties, as well as the ability to perform and integrate strategic acquisitions and alliances. Lastly, there are also changes to the accounting policies CCD uses to present its balance sheet and operating results, including the uncertainties associated with significant accounting assumptions and estimates, as well as changes to estimates; the impact of applying future accounting
changes; the ability to recruit and retain key officers, including members of senior management; and management s ability to foresee and manage risk factors. It is important to note that the above list of factors that could influence future results is not exhaustive. Other factors could have an adverse effect on results. Additional information about these and other factors is found in the Risk management section of the 2012 Annual Report. Although CCD believes that the expectations expressed in these forward-looking statements are reasonable, it cannot guarantee that these expectations will prove to be correct. CCD cautions readers against placing undue reliance on forward-looking statements when making decisions. Any forward-looking statements contained in this report represent the views of management only as at the date hereof, and are presented for the purpose of assisting members and analysts to understand CCD s Consolidated Balance Sheets as at the dates indicated or its results for the periods then ended, as well as its strategic priorities and objectives. These statements may not be appropriate for other purposes. CCD does not undertake to update any oral or written forward-looking statements that may be made from time to time by or on behalf of CCD, except as required under applicable securities legislation. ECONOMIC ENVIRONMENT AND OUTLOOK Financial, economic and political stability around the world was sorely tested in the first half of 2013. Recession continued in the euro zone and is expected to last until the fall. The People s Bank of China was forced to intervene to allay certain concerns over its financial system and, at the same time, re-igniting fears over the strength of the Chinese economy. Diverging trends in the economic indicators for many regions of the world suggest that global economic growth would be moderate in 2013 at 3.1%. A low real GDP growth forecast of 1.0% for the industrialized countries will be offset by 4.8% growth in the emerging and developing countries. In the U.S., despite relatively modest growth in the first half of 2013, several sectors of the economy are showing encouraging signs. Household consumption and the residential real estate market are improving, supported by greater consumer confidence and relatively sustained job creation. However, exports have suffered due to uncertainties in the global economic environment, and the manufacturing sector is experiencing difficulties. Government spending continues to hinder economic growth in the U.S., which should be slightly below 2.0% in 2013. Uncertainties still surround the strength of the U.S. recovery. Much of the growth in Canada is coming from an improved trade balance. In contrast, domestic demand has been slow. Despite a recent upturn in job creation, households are hesitating in certain areas of consumer spending, such as durable goods. Household debt appears to have peaked and may begin gently trending downwards. Governments remain very cautious about spending and, more and more, businesses appear to be adopting similar behaviour in their investments. A slowdown in the residential real estate market remains the most likely scenario, even though it remains surprisingly resilient. Canada s real GDP is expected to grow 1.8% in 2013. It should also be under 2.0% in Quebec and Ontario. The Quebec economy started the year on the right foot. Real GDP grew 1.8% on an annualized basis in the first quarter, supported by consumer spending and an improved trade balance. Exports weakened, but an even stronger fall in imports reduced the foreign trade deficit. Business investment declined nonetheless, following a period of sustained growth. The Quebec economy continues to perform well despite a difficult global economic environment. The Desjardins Leading Index an indicator of the future direction of the Quebec economy over a period of approximately six months posted a second consecutive gain in May, suggesting that the expansion cycle may continue but at a more moderate rate. Even if Quebec housing starts were stronger in the second quarter than in the first, the mid-year review is rather negative. Housing starts in the first six months were down 24.6% from the same period in 2012. The weakness in the new construction segment will continue in the second half of the year, since the pool of properties in the resale market is growing and selling times are getting longer. The annual increase in prices continues to slow, and even fell under 1.0% in June. Our forecast is still based on prices rising 2.2% in 2013. The condominium market in Montreal and Quebec City is showing signs of an imbalance and is being monitored closely. Recent comments made by the Chairman of the U.S. Federal Reserve concerning a tapering of securities purchases provoked turmoil in the financial markets. Bond yields in the U.S. and Canada rose markedly, affecting certain mortgage rates. The Canadian dollar suffered from the effects of these changes and fell below US$0.95 temporarily, but it could return to parity within approximately 12 months. The major central banks are expected to maintain very accommodative monetary conditions for some time yet. The U.S. Federal Reserve is not expected to change its key interest rates before 2015, and the Bank of Canada may only begin tightening its monetary policy at the end of 2014 through increases in its overnight rate. The stock markets, some of which recently rose to record highs, could do well this year. The S&P 500 could post a return of approximately 15% for 2013. This is far better than the expected return on the S&P/TSX, which has been hit by weaker demand for raw materials.
REVIEW OF FINANCIAL RESULTS ANALYSIS OF CCD S RESULTS Comparison of the second quarters of 2013 and 2012 CCD recorded net income of $39.4 million for the quarter ended June 30, 2013, compared to $33.6 million for the corresponding period in 2012. Note that all segments contributed to this $5.8 million increase in net income. Total income For the three-month period ended June 30, 2013, CCD s total income stood at $80.5 million, up $10.1 million or 14% from total income for the same quarter of 2012. This performance was all the more noteworthy because it was achieved despite the adverse effects of the current low interest rate environment, which created major challenges to income growth, in particular the return on CCD's liquid assets. Therefore, the Business and Institutional Services segment's total income was $43.2 million for the quarter ended June 30, 2013, up $3.5 million compared to the same period in the previous year. The sound and prudent growth strategy put forward by the Business and Institutional Services segment resulted in growth of business loan portfolio outstandings, which generated a $3.7 million increase in net interest margin compared to the previous year. It is nevertheless noteworthy that the increase in net interest income was partly offset by a $0.6 million decline in loan fee income and stand-by fee income compared to the same period of 2012. Finally, it should be mentioned that income generated by foreign exchange activities increased due to a higher volume of transactions compared to the same period a year earlier. The total income of Desjardins Group's Treasury segment rose by $6.3 million or 22% to $35.1 million for the second quarter of 2013. It is worth noting that trading strategies employed by traders have a significant impact on the nature of income generated by the segment and can affect both components of total income net interest income and other income from one period to the next. In this respect, gains on securities held in the trading portfolio and presented in Other income were higher than those reported in the second quarter of 2012, and the net interest income generated by the same portfolio fell since the second quarter of 2012. However, overall these activities generated $0.7 million more income than in the same period of 2012, despite less favourable market conditions. This income growth mitigated the unfavourable impact of the low interest rate environment on the return of the securities portfolio. Compared to last year, the segment s results also benefited from lower unrealized losses on certain derivative financial instruments used to hedge foreign currency deposit issuances. Finally it should be mentioned that income from the portfolio of loans to the Federation and Desjardins entities increased $0.5 million compared to the same period last year, due to growth in loan volumes. Provision for credit losses During the quarter ended June 30, 2013, CCD recorded a $6.4 million provision for credit losses, compared to a recovery of credit losses of $0.9 million for the same period in 2012. The provision recorded in the current quarter was due to an increase in outstanding business loans and commitments, and to the credit risk assessment. For the corresponding period in 2012, these same factors were offset by changes in the parameters used in the valuation model for the collective allowance, and this resulted in a recovery. Non-interest expense and other items Non-interest expense totalled $29.0 million for the three-month period ended June 30, 2013, up $1.8 million compared to the corresponding period in 2012. Salaries and fringe benefits amounted to $9.2 million for the second quarter, up $1.1 million compared to the second quarter of 2012. This increase in employee-related expenses was due to the annual indexing of salaries and growth in performance-based compensation, as evidenced by increased income in certain segments. Expenses for premises, equipment and furniture were up $0.8 million over the corresponding quarter in 2012 because of an additional depreciation expense related to management applications implemented in the beginning of the year. Finally, the Other heading posted a $0.9 million increase compared to the second quarter of 2012, due to higher expenses incurred to support activity growth. In addition, as a result of the implementation of the sales tax harmonization agreement between Canada and Quebec on January 1, 2013, CCD no longer recovers the provincial sales tax paid on taxable expenses, which accounts for part of the increase in non-interest expense compared to the previous year. The productivity index improved overall and was 36.0% in the second quarter, compared to 38.6% in the corresponding quarter of 2012.
Payments to the Desjardins network and remuneration on capital stock In cooperation with the Desjardins network, CCD offers a broad spectrum of banking and financing services and treasury products. Payments made to the Desjardins network for such services amounted to $10.0 million for the second quarter of 2013, down $0.2 million from 2012. In addition, under the Act respecting the Mouvement Desjardins, CCD s Board of Directors may declare interest on capital shares; it then determines the terms of payment. As a result, CCD declares remuneration on capital stock in an amount corresponding to the lesser of its non-consolidated net income and its consolidated retained earnings, including recovery of related income taxes. This remuneration is distributed pro rata to the number of shares held by each member. For the second quarter of 2013, $39.2 million was declared as remuneration on capital stock, compared to $34.5 million for the corresponding period in 2012. As at June 30, 2013, $72.7 million was recorded in the Consolidated Balance Sheets as remuneration on capital stock payable. Overall, CCD's contribution to the Desjardins network therefore totalled $49.2 million for the second quarter of 2013, compared to $44.7 million for the corresponding period in 2012. Comparison of the first six months of 2013 and 2012 CCD recorded net income of $78.7 million for the six-month period ended June 30, 2013, up $20.2 million or 34.5% compared to the corresponding period in 2012. Total income For the six-month period ended June 30, 2013, CCD s total income stood at $156.4 million, up $9.2 million from the first six months of 2012. This performance was all the more notable because it was achieved despite the adverse effects of the current low interest rate environment, which created major challenges to income growth, in particular the return on CCD's liquid assets. Therefore, the Business and Institutional Services segment's total income was $83.7 million for the six months ended June 30, 2013, up $7.3 million or 9.5% compared to the same period in the previous year. The sound and prudent growth strategy put forward by the Business and Institutional Services segment resulted in growth of business loan portfolio outstandings, which generated a $6.5 million increase in net interest margin compared to the same period of the previous year. Also noteworthy is the $0.8 million increase in loan fee income compared to the same period in 2012, as a result of new business growth. Finally, it is worth noting that income generated by foreign exchange activities increased because of a greater volume of transactions compared to the first six months of 2012. The total income of Desjardins Group's Treasury segment rose by $1.5 million to $68.5 million at the end of the first six months of 2013. Reflecting the performance of traders in trading activities and the management of asset/liability matching, income from these activities grew by $3.8 million compared to the first six months of 2012. This income growth mitigated the unfavourable impact of the low interest rate environment on the return of the securities portfolio. Furthermore, unrealized losses on certain derivative financial instruments used for hedging foreign currency deposit issuances were down $2.9 million from one year earlier. Income from the portfolio of loans to the Federation and Desjardins entities increased $0.6 million compared to the same period of the previous year. Provision for credit losses During the six months ended June 30, 2013, CCD recorded a provision for credit losses of $4.8 million, compared to $15.8 million for the same period in 2012. The provision recorded in the current six months, due to the increase in outstanding business loans and commitments as well as the credit risk increase, was partially offset by favourable changes in the parameters used to establish the collective allowance. The provision recognized in the same period in 2012 was due to an increase in outstanding business loans and commitments and to an additional provision as a result of higher credit risk. Non-interest expense and other items Non-interest expense totalled $56.8 million for the six-month period ended June 30, 2013, up by $3.3 million compared to the corresponding period in 2012. Salaries and fringe benefits amounted to $18.8 million for the first six months, up by $1.3 million compared to the previous year. This increase in employee-related expenses was due to the annual indexing of salaries and growth in performance-related compensation, as evidenced by increased income in certain segments. Expenses for premises, equipment and furniture increased $1.5 million from the corresponding six months of 2012 because of an additional
depreciation expense related to management applications implemented in the first quarter of 2013. Furthermore, the Other heading posted a $1.6 million increase compared to the first six months of 2012, due to higher expenses incurred to support activity growth. Finally, as a result of the implementation of the sales tax harmonization agreement between Canada and Quebec on January 1, 2013, CCD no longer recovers the provincial sales tax paid on taxable expenses, which also partially accounts for the increase in non-interest expense compared to 2012. The productivity index for the first six months of 2013 was 36.3%, relatively unchanged from the corresponding period of 2012. Payments to the Desjardins network and remuneration on capital stock In cooperation with the Desjardins network, CCD offers a broad spectrum of banking and financing services and treasury products. Payments made to the Desjardins network for such services amounted to $19.4 million for the first six months of 2013, down $0.4 million from 2012. In addition, under the Act respecting the Mouvement Desjardins, CCD s Board of Directors may declare interest on capital shares; it then determines the terms of payment. As a result, CCD declares remuneration on capital stock in an amount corresponding to the lesser of its non-consolidated net income and its consolidated retained earnings, including recovery of related income taxes. This remuneration is distributed pro rata to the number of shares held by each member. For the first six months of 2013, $72.7 million was declared as remuneration on capital stock, compared to $60.1 million for the corresponding period in 2012. Overall, CCD's contribution to the Desjardins network therefore totalled $92.1 million for the first six months of 2013, compared to $79.9 million for the corresponding period in 2012. SUMMARY OF INTERIM RESULTS The table below summarizes CCD s results for the most recent eight quarters. RESULTS OF THE MOST RECENT EIGHT QUARTERS 2013 2012 (2) 2011 (2) (in thousands of dollars) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 (For the quarter) Statements of income Net interest income $ 62,636 $ 62,485 $ 67,352 $ 69,313 $ 74,159 $ 67,893 $ 66,435 $ 62,866 Other income 17,859 13,447 10,138 6,028 (3,795) 8,933 21,220 18,030 Provision for credit losses (recovery) 6,380 (1,601) (12,171) 3,768 (928) 16,715 6,530 5,070 Non-interest expense 28,987 27,826 26,117 26,385 27,163 26,304 30,168 24,355 Other payments to Desjardins network 10,033 9,358 9,065 10,355 10,212 9,621 9,733 11,036 Operating income $ 35,095 $ 40,349 $ 54,479 $ 34,833 $ 33,917 $ 24,186 $ 41,224 $ 40,435 Income taxes 4,949 8,639 13,090 9,198 8,179 5,124 10,431 9,636 Income tax recovery on remuneration on capital stock (9,212) (7,614) (11,604) (7,564) (7,842) (5,828) (9,705) (8,993) Net income $ 39,358 $ 39,324 $ 52,993 $ 33,199 $ 33,580 $ 24,890 $ 40,498 $ 39,792 Total assets $ 32,723,276 $ 31,122,430 $ 29,280,712 $ 33,266,485 $ 30,013,842 $ 30,661,164 $ 29,988,020 $ 28,261,870 Capital ratios (1) Tier 1 capital ratio (3) 16.7% 15.0% 16.5% 17.1% 17.9% 18.3% 18.9% 16.7% Total capital ratio 17.3 15.6 17.2 17.8 18.8 19.2 19.6 17.5 (1) Since January 1, 2013, capital ratios have been calculated according to Basel III capital standards. (2) Restated data; refer to Note 3 of the Interim Consolidated Financial Statements for more information. (3) Capital included in Tier 1 is all Tier 1a capital. CCD has no Tier 1b capital.
BALANCE SHEET REVIEW BALANCE SHEET MANAGEMENT As at June 30, 2013, CCD s total assets stood at $32.7 billion, up $3.4 billion since December 31, 2012. Liquidities, comprised of cash and deposits with financial institutions and securities, totalled $7.4 billion as at June 30, 2013, relatively unchanged from December 31, 2012. The liquidity/total asset ratio was 23% as at June 30, 2013, down from 25% at the end of fiscal 2012. It should be noted, however, that this liquidity level amply meets regulatory requirements and provides CCD with the manoeuvring room it needs to support the growth of the Desjardins network. A very high percentage of the securities held by CCD are investment-grade securities that could be sold off very quickly, if necessary, to meet increased demand for funding from the caisse network and clients. The loan portfolio, including clients liability under acceptances, totalled $21.1 billion as at June 30, 2013, up $2.0 billion since December 31, 2012. As Desjardins Group s treasurer, CCD ensures funding for the Desjardins network. Loans granted to Desjardins Group entities totalled $13.8 billion and $12.4 billion, respectively, as at June 30, 2013 and December 31, 2012, and represented close to 40% of CCD s assets. The business loan portfolio grew by $711.5 million or 21% since the beginning of the year, to $4.1 billion at the end of the first six months of 2013. Note that CCD continues to have an excellent loan portfolio. Gross impaired loans stood at $19.6 million as at June 30, 2012, or less than 0.1% of the gross loan portfolio. The fair value of derivative financial instruments reported as assets increased by $294.0 million since December 31, 2012, mainly because of changes in interest rates. This also accounted for the increase in the fair value of derivative financial instruments reported as liabilities. As at June 30, 2013, CCD had $26.1 billion in outstanding deposits compared to $22.6 billion as at December 31, 2012. In the first six months of 2013, CCD participated in Canada's National Housing Act Mortgage-Backed Securities Program in an amount of $857.9 million as part of the Canada Mortgage Bonds (CMB) Program. CCD also issued medium-term notes in an amount of $500.0 million on the Canadian market. The balance of the difference was due to the seasonal increase in deposits payable on demand. Lastly, in order to maintain sound capitalization, in June 2013 CCD issued shares of capital stock in an amount of $300 million, bringing total capital stock to $2.2 billion. CAPITAL MANAGEMENT Capital management is crucial to CCD's financial management and takes into account its obligations under the standards established by the Federation, economic and financial conditions, its risk profile, and its cooperative difference and objectives. CCD advocates prudent management of its capital. Its purpose is to maintain higher capital ratios than the regulatory capital ratios of the Canadian banking industry, the standards set by the Federation, and internal targets. Basel III The new Basel III regulatory framework increases capital requirements (the minimum levels to be met). This new framework, combined with global liquidity standards, forms an essential part of the global financial reform program. Even though the program includes a transition period from 2013 to 2019, in order to mitigate the impact of the new capitalization rules, the AMF expected CCD to comply with the 2019 minimum levels for Tier 1a capital commencing in the first quarter of 2013. The AMF expects CCD to comply with the 2019 minimum levels for Tier 1 and total capital ratios commencing in the first quarter of 2014. Should these targets not be met, the AMF may impose measures that could take the form of restrictions on distributions. CCD was already well capitalized as at June 30, 2013, and these targets were exceeded by a wide margin. CCD s prudent capital management is further reflected in the attractive credit ratings assigned by the various rating agencies. The minimum Tier 1 capital ratio that institutions must maintain in order to meet the settlement requirements of the Bank for International Settlements and be considered adequately capitalized is now 8.5%. In addition, the Tier 1a capital ratio must be above 7% as a minimum, including a 2.5% capital conservation buffer. Lastly, the total capital ratio must be above 10.5%, which also includes the 2.5% capital conservation buffer. In June 2013, the AMF determined that Desjardins Group met the criteria to be designated a domestic systemically important financial institution (D-SIFI). As a D-SIFI, beginning on January 1, 2016 Desjardins Group will be subject to an additional Tier 1a capital requirement corresponding to 1% of risk-weighted
assets. Therefore, from January 1, 2016 Desjardins Group s Tier 1a capital target will be 8%. Even though CCD has not itself been designated a D-SIFI, a thorough analysis of this change will be performed to determine its potential impacts on CCD s capital targets. In addition, the Office of the Superintendent of Financial Institutions has determined that Canada s six largest financial institutions meet the criteria for designation as domestic systemically important financial institutions. They will therefore be subject to the same capital targets as Desjardins Group from January 1, 2016. Application of amendments to accounting standard IAS 19 on employee benefits, including defined benefit pension plans, has had negative impacts on capital ratios. These amendments specify in particular that the use of the "corridor approach" is no longer allowed and that all actuarial gains and losses must now be recognized when they occur. Moreover, it is no longer permitted to amortize past service costs, which will accelerate their recognition. At the same time, the revised IAS 19 allows risk-sharing features to be taken into account. The total impact of these modifications is deferred and amortized using the straight-line method over the period from January 1, 2013 to December 31, 2014, given CCD s election to use the transitional provision stipulated by the AMF. CCD s liquidity is assessed on an ongoing basis, given the regulatory restrictions imposed by local administrations, as well as operational, tax, economic and other constraints. Details concerning the AMF guideline and the regulatory framework governing the capitalization of CCD are presented in Note 24, Capital management, to CCD's Annual Consolidated Financial Statements, on pages 111 and 112 of the 2012 Annual Report. REGULATORY CAPITAL (in thousands of dollars and as a percentage) Tier 1 capital (3) As at June 30, 2013 (1) As at December 31, 2012 (2) All-in basis Eligible capital shares $ 2,142,821 $ 1,887,206 General reserve 1,467 1,467 Retained earnings 4,344 N/A Eligible accumulated other comprehensive income 17,789 N/A Deferral attributable to the amendment of IAS 19 4,735 N/A Other deductions (21,070) N/A Total Tier 1 capital (3) $ 2,150,086 $ 1,888,673 Tier 2 capital Eligible collective allowance $ 81,752 $ 77,065 Eligible qualifying shares 3 N/A Total Tier 2 capital $ 81,755 $ 77,065 Total regulatory capital $ 2,231,841 $ 1,965,738 Capital ratios Tier 1 capital (3) 16.7% 16.5% Total capital 17.3% 17.2% (1) According to the AMF guideline on adequacy of capital base standards applicable to financial services cooperatives under Basel III. (2) According to the AMF guideline on adequacy of capital base standards applicable to financial services cooperatives under Basel II. (3) The capital included in Tier 1 is all Tier 1a capital. CCD has no Tier 1b capital. Capital ratios as at June 30, 2013 The capital adequacy of CCD is regulated by standards established by the Federation, which are based on the AMF guideline on adequacy of capital base standards applicable to financial services cooperatives. This guideline was updated effective January 1, 2013 to take into account the revised framework for international convergence of capital measurement and capital standards (Basel III) issued by the Bank for International Settlements, whose objective is to make the financial system safer and more resilient in periods of stress. In that respect, credit risk and market risk are assessed according to the Standardized Approach, while operational risk is calculated based on the Basic Indicator Approach. CCD is one of the best capitalized financial institutions in Canada. As at June 30, 2013, CCD's Tier 1 and total capital ratios under Basel III, irrespective of the relief provided during the transitional period, were 16.7% and 17.3%, respectively. For comparison purposes, the pro forma Tier 1 capital ratios as at December 31, 2012 were 16.2%. As at December 31, 2012, the Tier 1 and total capital ratios, under Basel II, were 16.5% and 17.2%, respectively. The capital/asset ratio was 6.9% as at June 30, 2013, under Basel III, compared to 6.6% as at December 31, 2012, under Basel II.
CCD therefore still has excellent capitalization. The high level of Tier 1 capital accordingly demonstrates CCD s financial strength, even in a challenging economic environment. As part of work on the Desjardins Group capitalization plan and in accordance with the Federation s directives, CCD set target ratios to ensure sound capital management. Target ratios were set for the capital/asset ratio as well as the total capital ratio. As at June 30, 2013, CCD amply complied with both the minimum requirements and capitalization targets established by the Federation's standards. Furthermore, member federations formally undertook to maintain CCD's total capital at an amount that would allow the capital/asset ratio and the total asset ratio to be maintained at minimum levels, as determined in accordance with established standards. RISK-WEIGHTED ASSETS (in thousands of dollars and as a percent) As at June 30, 2013 (in thousands of dollars) Exposure (1) assets Risk-weighted Credit risk Average riskweighted rate (%) As at December 31, 2012 Risk-weighted assets Sovereign borrowers $ 6,323,890 $ -- -- % $ -- Financial institutions 20,060,507 4,012,101 20 3,700,635 Business 6,916,554 6,818,628 99 6,100,971 Mortgages 178,414 40,346 23 37,908 Other retail client exposure 21,259 15,944 75 15,789 Equities 8,301 8,301 100 5,907 Trading portfolio 572,184 130,561 23 96,296 Other assets 3,537,209 468,049 13 463,825 Total credit risk $ 37,618,318 $ 11,493,930 31 % $ 10,421,331 Market risk $ 872,650 $ 503,200 Operational risk (2) 536,801 532,459 Total risk-weighted assets $ 12,903,381 $ 11,456,990 (1) Net exposure, after credit risk mitigation (net of specific allowances under the Standardized Approach but not under the Internal Ratings-Based Approach, in accordance with the AMF guideline). (2) The Basic Indicator Approach was used to assess operational risk. ANALYSIS OF CASH FLOWS Because of the nature of CCD s operations, most of the items that generate income and expenses are liquidities. As a result, normal operations trigger significant fluctuations in liquidity affecting numerous items, such as loans, deposits and securities. During the six-month period ended June 30, 2013, cash and cash equivalents decreased by $360.8 million, compared to a decrease of $227.8 million for the corresponding period in 2012. Cash flows used in operating activities totalled $121.6 million since the beginning of the year, compared to $711.0 million for the corresponding period in 2012. Liquidity needs for the current year are mainly the result of the growth in the business loan portfolio and the increase in securities purchased under reverse repurchase agreements. In order to support this growth in activities, CCD participated in the Canada Mortgage Bonds (CMB) Program and issued medium-term notes on the Canadian market. This explains most of the $3.6 billion increase in deposits since the beginning of the year. The $711.0 million increase in liquidity needs on the same period of 2012 was due to the same reasons. Cash flows from financing activities were $155.5 million, due to the issuance of $300 million in shares of capital stock and payment for remuneration of capital stock in an amount of $144.5 million. Lastly, cash flows required by investing activities totalled $394.6 million in the first six months of the year, while they generated $483.3 million in cash flows in the same period of 2012. These changes were due to the net change in the portfolio of available-for-sale securities.
OFF-BALANCE SHEET ARRANGEMENTS STRUCTURED ENTITIES In the normal course of operations, CCD enters into various financial transactions with structured entities to diversify its sources of financing and manage its capital. Structured entities are usually created for a unique and distinct purpose and they often have limited activities. They are sometimes used to legally isolate the financial assets they hold from the transferring organization. In accordance with IFRS, structured entities can be included on CCD's Consolidated Balance Sheets provided that CCD exercises control over them. Detailed information concerning significant exposure to structured entities is provided below. SECURITIZATION CCD participates in Canada's National Housing Act Mortgage-Backed Securities Program to manage its liquidities. Transactions carried out under this program require the use of a structured entity, the Canada Housing Trust (CHT), set up by Canada Mortgage and Housing Corporation (CMHC) under the Canada Mortgage Bonds (CMB) Program. As at June 30, 2013, mortgage-backed securities outstanding issued by CCD and sold to the CHT totalled $5.1 billion, compared to $5.0 billion as at December 31, 2012. Note 8 Securitization and other transferred financial assets to the Annual Consolidated Financial Statements provides more information on the financial assets transferred by CCD through securitization transactions. RISK MANAGEMENT RISK MANAGEMENT CCD is exposed to various risks in the normal course of operations, including credit risk, market risk and liquidity risk. Strict and effective management of these risks is a priority for CCD, its purpose being to support its major orientations, among other things, regarding its financial stability as well as its sustained and profitable growth in compliance with Basel requirements. For the first six months of fiscal 2013, there were no changes in CCD s risk management policies and practices from those described on pages 30 to 49 of the 2012 annual report. CCD s objective in risk management is to optimize the risk-return trade-off by staying within the tolerance limits set and applying integrated risk management and control strategies, policies and procedures throughout the organization s activities. It also aims to provide, through the Integrated Risk Management Framework, a prudent and appropriate framework that complies with accepted accountability and independence principles. Based on recommendations issued by the Enhanced Disclosure Task Force of the Financial Stability Board and contained in the document Enhancing the Risk disclosures of Banks, Desjardins Group continues to develop its external disclosures and is currently working to integrate these recommendations into its risk management disclosure framework. Credit risk Credit risk is the risk of losses resulting from a borrower s or a counterparty s failure to honour its contractual obligations, whether or not these obligations appear on the Consolidated Balance Sheets. CCD is exposed to credit risk through its direct loans to businesses and government as well as through various other commitments including letters of credit, foreign exchange lines and transactions involving derivative financial instruments and securities.
Additional credit risk data EXPOSURE BY ASSET CLASS (EXPOSURE AT DEFAULT (EAD)) As at June 30, 2013 (in thousands of dollars) Exposure classes (1) (in thousands of dollars) Used exposure Unused exposure Off-balance sheet exposure (2) Total Net exposure (3) Standardized approach Sovereign borrowers $ 5,664,350 $ 633,145 $ 26,395 $ 6,323,890 $ 6,323,890 Financial institutions 15,638,455 2,278,093 4,765,196 22,681,744 20,060,507 Business 4,174,098 2,695,617 163,090 7,032,805 6,916,554 Mortgages 178,414 -- -- 178,414 178,414 Other retail client exposures 1,467,954 -- -- 1,467,954 21,259 Equities 8,301 -- -- 8,301 8,301 Trading portfolio -- -- 701,133 701,133 572,184 Total $ 27,131,572 $ 5,606,855 $ 5,655,814 $ 38,394,241 $ 34,081,109 (1) Definitions of exposure classes under the regulatory capital requirements are different from the accounting classifications. (2) Including repo-style transactions, over-the-counter derivatives and other off-balance sheet exposures. (3) After credit risk mitigation (CRM) techniques, including the use of collateral, guarantees and credit derivatives. GROSS EXPOSURE BY ASSET CLASS (1) AND BY RISK TRANCHE (2) As at June 30, 2013 (in thousands of dollars) Exposure classes Risk tranches (in thousands of dollars) 0% 20% 35% 50% 75% 100% Other Total Sovereign borrowers $ 6,323,890 $ -- $ -- $ -- $ -- $ -- $ -- $ 6,323,890 Financial institutions -- 22,681,744 -- -- -- -- -- 22,681,744 Business -- 101,381 -- 4,621 -- 6,900,146 31,481 7,037,629 Mortgages -- -- 172,730 -- -- 5,684 -- 178,414 Other retail client exposures -- -- -- -- 1,467,954 -- -- 1,467,954 Equities -- -- -- -- -- 8,301 -- 8,301 Trading portfolio 13,233 664,642 -- 8 -- 22,913 337 701,133 Total $ 6,337,123 $ 23,447,767 $ 172,730 $ 4,629 $ 1,467,954 $ 6,937,044 $ 31,818 $ 38,399,065 (1) Definitions of exposure classes under the regulatory capital requirements are different from the accounting classifications. (2) Exposure before specific allowances for losses and before credit risk mitigation (CRM) techniques. Counterparty and issuer risk Counterparty and issuer risk is a credit risk to which CCD is exposed relatively to various types of transactions on securities, derivative financial instruments and securities lending transactions. 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 different components based on their needs. A large proportion of CCD s exposure is to different levels of government in Canada, to Quebec public or parapublic entities and to major Canadian banks. For most of them, credit ratings are A- or higher. Furthermore, CCD is not directly exposed to the sovereign debt of European countries such as Greece, Portugal, Italy, Ireland and Spain. Its exposure to U.S. and European financial institutions is marginal. 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, credit spreads and their volatility.