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Caisse Centrale (76AV)

Caisse Centrale

2012 Management's Discussion and Analysis
RNS Number : 8419Y
Caisse Cent. Desjardins Du Quebec
27 February 2013
 



DESJARDINS

Caisse centrale

2012 Management's

Discussion and Analysis

 

Caisse centrale Desjardins (CCD) has the mandate to provide "institutional" funding for the Desjardins network and to act as financial agent, in particular by supplying interbank exchange services, including clearing house settlements. CCD's activities on the Canadian and international markets complement those of other Desjardins Group components.

 

This Management's Discussion and Analysis (MD&A), dated February 21, 2013, presents the results of the analysis of the key elements of and changes in CCD's balance sheet for the year ended December 31, 2012, in comparison to previous fiscal years. The MD&A should be read in conjunction with the audited consolidated financial statements (the Consolidated Financial Statements), including the notes thereto, as at December 31, 2012.

 

Additional information on CCD, including CCD's Annual Information Form, is available on the SEDAR Web site 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

 

CCD prepares its Consolidated Financial Statements 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.

 

The International Financial Reporting Standards (IFRS) constitute GAAP for CCD. Therefore, these Consolidated Financial Statements of CCD have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board (IASB). For further information about accounting policies, see the Consolidated Financial Statements.

 

This MD&A was prepared in accordance with the national instruments in force on continuous disclosure obligations issued by the Canadian Securities Administrators. Unless otherwise indicated, all amounts are presented in Canadian dollars and are primarily from CCD's 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 a standardized definition 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 to analyze financial performance, among other things. 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.

 

REGULATORY CONTEXT AND CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

 

REGULATORY CONTEXT

 

CCD's operations are governed in particular by the Act respecting financial services cooperatives and the Act respecting the Mouvement Desjardins. The AMF is the main government agency that has oversight over and monitors deposit-taking institutions (other than banks) that carry on business in Quebec, including CCD.

 

Moreover, CCD complies with the regulatory requirements for minimum capital issued by the AMF, which are adapted to reflect the provisions of the Basel II Accord. CCD manages financial disclosure in compliance with the AMF's Regulation 52-109 respecting certification of disclosure in issuers' annual and interim filings. CCD's financial and corporate governance are discussed in section 5.1 of this MD&A and in the Cooperative Governance section of the Annual Report.

 

It should also be mentioned that Desjardins Bank, N.A., a subsidiary of CCD incorporated under U.S. federal laws, is supervised by the Office of the Comptroller of the Currency of the United States (OCC) and that CCD's operations in the United States are subject, as a bank holding company, to the supervisory and regulatory authority of the Board of Governors of the Federal Reserve System. Caisse centrale Desjardins U.S. Branch, CCD's branch operating in the State of Florida and incorporated under the U.S. federal laws, is also supervised by the OCC.

 

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

 

CCD's public communications often include verbal 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 section 1.0, "Changes in the economy and the industry", section 3.0, "Review of the balance sheet", and section 5.0, "Additional information". 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 section 4.0, "Risk management", in particular, credit, counterparty and issuer, market, foreign exchange, liquidity, operational, strategic and reputation risk. Additional risk factors include environmental risk, legislative or regulatory developments in Quebec, Canada or globally, such as changes in fiscal and monetary policies, liquidity reporting and regulatory guidance, or interpretations thereof, and amendments to and new interpretations of capital guidelines.

 

There are also factors linked to changes in economic and financial conditions in Quebec, Canada or globally, including the unemployment rate; the geographic concentration of economic activity; 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 limitation, technological changes, service disruptions caused by Internet or other technological issues, 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; and management's ability to foresee and manage risks 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 section 4.0, "Risk management." 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 in understanding CCD's balance sheet 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 verbal 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.

 

 

 

 

1.0 CHANGES IN ECONOMIC CONDITIONS AND THE INDUSTRY

 

Changes in the Canadian dollar vs. the U.S. dollar

(Canadian dollars/U.S. dollars)

 

 

 

(REFER TO DOCUMENT « MDA CCD - Changes in the Canadian dollar »)

http://www.rns-pdf.londonstockexchange.com/rns/8419Y_-2013-2-27.pdf 

 

 

 

 

 

Changes in the Prime Rate

(as a percentage)

 

 

 

(REFER TO DOCUMENT « MDA CCD - Changes in the Prime Rate »)

 http://www.rns-pdf.londonstockexchange.com/rns/8419Y_-2013-2-27.pdf

 

 

 

 

 

Changes in the Unemployment Rate

(as a percentage)

 

 

 

(REFER TO DOCUMENT « MDA CCD - Changes in the Unemployment Rate »)

 http://www.rns-pdf.londonstockexchange.com/rns/8419Y_-2013-2-27.pdf

 

 

 

 

 

Change in GDP

(as a percentage)

 

 

 

(REFER TO DOCUMENT « MDA CCD - Changes in GDP »)

http://www.rns-pdf.londonstockexchange.com/rns/8419Y_-2013-2-27.pdf 

 

 

 

 

 

 

2012 economic environment

 

Several obstacles stood in the way of economic recovery in 2012. Growth even slowed down in some parts of the world, and particularly in the euro zone, where the sovereign debt crisis continues. Encouraging progress is nevertheless apparent in this region. Greece obtained a debt reduction that required considerable effort on the part of its private creditors and a promise to continue applying austerity measures. The European Central Bank was also more active, conducting long-term refinancing operations, reducing its key interest rates and creating a sovereign securities purchase program. European countries have also implemented a Financial Stability Mechanism-effectively, a new rescue fund-and continued negotiations aimed at improving the efficiency of the euro zone which led to the planning of a banking union.

 

Many emerging countries suffered from weak demand from industrialized countries. They also had difficulty attracting capital, with investors demonstrating a high aversion to risk. Growth in China stabilized at under 8%, confirming the success of their economic actions. The United States and Japan were among the few countries to see real GDP rise faster in 2012. In the U.S., accelerating growth was supported by the real estate market, which is beginning to get back on its feet. In Japan, results were boosted by the reconstruction effort that followed the March 2011 earthquake.

 

In Canada, growth slowed somewhat from 2011 to 2012. Foreign trade continued to be affected by the strength of the Canadian dollar and the weakness of global demand. Quebec and Ontario were directly impacted by these factors, but provincial economies more dependent on natural resources also suffered as a result of weaker commodity prices. The Canadian economy as a whole was affected by government measures aimed at reducing deficits and by more moderate consumption of goods by households. The real estate market also showed signs of losing momentum after several years of rising prices and sustained activity.

 

industry description and trends

 

Despite the tentative economic environment that prevailed in the past year, there were no major changes in the Canadian financial industry. Canada has over 800 savings and loan cooperatives, of which slightly less than half are part of Desjardins Group, as well as some 70 Canadian and foreign banks.

 

Canadian financial institutions stayed on course despite the many concerns preoccupying financial markets in 2012. They had to deal with an uncertain economic climate that did not encourage business and household confidence as well as profit margins under pressure from low interest rates. Despite conditions that could have tested their mettle, such as a slowdown in residential real estate markets and the state of Canadians' personal finances, Canadian financial institutions remained stable. The World Economic Forum rated the Canadian banking industry as the strongest in the world for a fifth consecutive year. This distinction does not make the industry infallible, but does give it a clear comparative advantage.

 

economic outlook for 2013

 

Economic conditions should remain precarious in many parts of the world in 2013 and, in particular, in the euro zone. Austerity measures should continue to hinder growth for the next few quarters. The European Central Bank may intervene again to support the economy and the financial system by lowering key interest rates one last time and by buying the sovereign bonds of countries in difficulty. However, as a prerequisite to such intervention, these countries will have to formally request assistance from the European Stability Mechanism. Spain may make this move. Greece could still undermine the markets, and more and more participants are recommending a second debt restructuring, one that would be assumed by the public sector this time.

 

Elsewhere in the world, the economies of emerging countries should gradually improve as the situation turns around in Europe and the United States. The outcome of the fiscal cliff negotiations at the end of 2012 should reduce U.S. growth by approximately 1.0% in 2013, and the need to raise the debt ceiling remains a major source of concern. Other factors will offset the government's negative contribution to growth. Consumption will be supported by improving household finances and lower unemployment rate. In addition, the real estate market should continue its new upward trend. The pace of growth in the U.S. economy as a whole should nevertheless slow down somewhat in 2013. This should prompt the U.S. Federal Reserve to maintain its key interest rates at low levels until mid-2015 and extend its quantitative easing program until at least fall 2013.

 

The Canadian economy could benefit from growing global demand and a slight rise in commodity prices. On the other hand, the Canadian dollar should remain above parity with the U.S. dollar, which will continue to harm exports, in particular for manufacturers mainly based in Quebec and Ontario. Most of the cuts in public spending and tax increases appear to be behind us. Consumption should probably continue to track improvements in the labour market and rising income levels, but caution is still called for, given the already high debt levels. The real estate market should continue to gradually stabilize. Overall, economic growth in 2013 should approach 2% in Canada as well as in Ontario, and 1.5% in Quebec. Economic activity will however not be strong enough to bring inflation back above the Bank of Canada's target range, so the Bank should not be inclined to raise key interest rates.

 

 

 

 

 

 

 

2.0 REVIEW OF FINANCIAL RESULTS

 

HIGHLIGHTS

 

CCD's results

 

§ Net income of $111.1 million

§ Non-interest expense decreased $1.9 million

§ Productivity ratio of 35.6% for 2012, a level comparable to 2011

§ Total income from the Business and Institutional Services segment up 9%

§ Provision for credit losses rose $4.6 million

§ Business loan portfolio outstandings increased $525.1 million

§ Outstanding loans to the Desjardins network grew $609.2 million

 

SECTION 2.1

 

ANALYSIS OF 2012 RESULTS

 

NET INCOME AND CONTRIBUTION TO THE NETWORK

 

For 2012, CCD posted net income of $111.1 million, down $6.3 million or 5% compared to 2011. This decrease in net income compared to last year was the result of the current low interest rate environment; however, the decrease was largely offset by growth in the Business and Institutional Services segment's income and the strong performance of our arbitrage activities.

 

CCD's contribution to the Desjardins network consisted of remuneration on capital stock and other payments to the Desjardins network. The contribution totalled $183.8 million for 2012, compared to $195.9 million a year earlier. This decrease resulted from the decline in the net income amount mentioned above.

 

 

TOTAL INCOME

 

Total income, which is made up of net interest income and other income, amounted to $300.0 million, down $8.0 million or 2.6%, compared to 2011. As explained more fully below, this decline in total income was attributable to certain non-recurring factors and did not arise from CCD's core activities.

 

NET INTEREST INCOME

 

Net interest income is the difference between the interest income earned on assets such as loans and securities, and the interest expense related to liabilities such as deposits. It is affected by interest rate fluctuations reinvestment strategies and the nature and characteristics of interest-bearing and non-interest-bearing financial instruments.

 

In order to analyze the change in net interest income, Table 1 presents changes by major asset and liability classes.

 

Net interest income for 2012 totalled $259.5 million, versus $258.3 million for 2011, an increase of $1.2 million or 0.5%. Expressed as a percentage of average total assets, the net margin was 0.83%, down 6 basis points from last year. The prudent strategy of extending institutional refinancing combined with the low interest rates environment on capital markets resulted in greater pressure on net interest income.

 

Interest income on the securities portfolio increased $15.3 million to $187.6 million. As shown in Table 1, the 10-basis-point drop in the interest rate generated by securities was offset by a $985.0 million increase in the average volume of securities held by CCD. This increase in liquid assets gave CCD enough leeway to develop the Desjardins network, and is also part of the strategy aimed at complying with increased regulatory requirements on liquidity maintenance and management resulting from the phasing-in of the new Basel III Accord standards in 2013. Part of this additional liquidity comes from a $300.0 million capital injection completed at the end of 2011 in order to strengthen CCD's capitalization.

 

As shown in Table 2, the $77.2 million increase in interest income generated by CCD's loan portfolio resulted from both the $525.1 million growth in the business loan portfolio and the higher margin on such loans. Interest income generated by all of CCD's loan portfolios increased by 25 basis points to 2.49% this year, versus 2.24% in 2011.

 

Interest expense attributable to deposits was up $91.3 million compared to 2011. The $2.8 billion increase in average deposit volume shown in Table 2 is primarily due to business growth. The increase in average funding cost was also attributable to the prudent strategy implemented by CCD to extend institutional refinancing.

 

Overall, the net interest margin decreased 6 basis points to 0.83%, versus 0.89% for 2011.

 

TABLE 1 - NET INTEREST INCOME ON AVERAGE ASSETS AND LIABILITIES

 

For the years ended December 31

2012

2011

(in thousands of dollars)

Average

balance

Interest

Average rate

Average

balance

Interest

Average rate

Assets












Interest-bearing assets












   Securities, cash and

    deposits with

    financial institutions

$

8,160,256

$

187,608

2.30%

$

7,175,280

$

172,352


2.40%

   Loans


19,275,392


479,601

2.49%


17,997,396


402,360


2.24%

Total interest-bearing assets

$

27,435,648

$

667,209

2.43%

$

25,172,676

$

574,712


2.28%

Other assets


3,937,131


--

--


3,798,856


--


--

Total assets

$

31,372,779

$

667,209

2.13%

$

28,971,532

$

574,712


1.98%

Liabilities and

   members' equity












Interest-bearing

   liabilities












    Deposits

$

23,188,380

$

407,748

1.76%

$

20,356,664

$

316,448


1.55%

Total interest-bearing

   liabilities

$

23,188,380

$

407,748

1.76%

$

20,356,664

$

316,448


1.55%

Other liabilities


6,251,798


--

--


6,967,185


--


--

Members' equity


1,932,601


--

--


1,647,683


--


--

Total liabilities and

   members' equity

$

31,372,779

$

407,748

1.30%

$

28,971,532

$

316,448


1.09%

Net interest income



$

259,461




$

258,264



As a percentage of

   average assets





0.83%






0.89%

 

TABLE 2 - IMPACT OF CHANGES IN BALANCES AND RATES ON NET INTEREST INCOME

 

For the year ended

December 31, 2012


 

(in thousands of dollars and as a percentage)

Change in average volume

Change in average rate

Change in interest

Increase (decrease)

 

Average volume

Average rate

 

Assets











Securities, cash and  deposits with financial institutions

$

984,976


   (0.10)%

$

15,256

$

23,659

$

    (8,403)

 

Loans


1,277,996


    0.25 %


77,241


28,572


    48,669

 

Change in interest income

$

2,262,972


    0.15 %

$

92,497

$

52,231

$

    40,266

 

Liabilities











 

Deposits

$

2,831,716


    0.20%

$

91,300

$

44,020

$

    47,280

 

Change in interest expense

$

2,831,716


    0.20 %

$

91,300

$

44,020

$

    47,280

 

Change in net interest income





$

1,197

$

8,211

$

     (7,014)

 

 

OTHER INCOME

 

Other income includes all income other than interest income.

 

Other income for fiscal 2012 totalled $40.6 million, down $9.2 million compared to last year.

 

As shown in Table 3, this change in other income compared to 2011 was primarily attributable to the $25.7 million decrease in gains realized on sales of securities classified in the "Available-for-sale" category. It should be recalled that last year's results included non-recurring gains realized as part of transactions to reposition the securities portfolio. Excluding this item, other income for 2012 would have increased compared to 2011. The loss presented under "Trading activities" is $13.9 million less than 2011, primarily due to higher income from the trading portfolios, as traders were able to take advantage of favourable market conditions. It should be noted that the loss presented under that item arises from the fact that it also includes the impact on the Consolidated Statements of Income of derivative financial instruments that do not qualify for hedge accounting but are used as an economic hedge for items whose income or expenses are recognized in net interest income.

 

Foreign exchange income rose to $45.2 million in 2012, slightly down by $0.1 million from $45.3 million in 2011. It should be noted that efforts to develop this activity allowed CCD to maintain foreign exchange transactions at a level similar to that of 2011, despite a less favourable economic environment.

 

Table 3 also shows a $1.6 million increase in the "Other" category compared to last year. This growth was attributable to income generated on the disposal of acceptances.

 

TABLE 3 - OTHER INCOME

 

For the years ended December 31

 

(in thousands of dollars)

2012

2011

Change

Deposit and payment service charges

$

               21,563

$

            20,169

 $

              1,394

Foreign exchange income


               45,155


            45,271


               (116)

Trading activities


              (43,729)


           (57,651)


            13,922

Net gains on available-for-sale securities


                 4,075


            29,742


           (25,667)

Credit fees


                 5,591


              5,583


                     8

Management fees


                 5,070


              5,427


                (357)

Other


                 2,835


              1,239


              1,596

Total

$

               40,560

$

            49,780

 $

             (9,220)

 

ANALYSIS OF BUSINESS SEGMENT RESULTS

 

TABLE 4 - COMPONENTS OF NET INTEREST INCOME AND OTHER INCOME BY BUSINESS SEGMENT

 

For the years ended December 31

 

(in thousands of dollars)

2012

2011

Change

Business and Institutional Services







   Net interest income

$

               96,922

$

            82,003

$

            14,919

   Other income


               59,403


            60,842


             (1,439)


$

             156,325

$

          142,845

$

            13,480

Desjardins Group Treasury







   Net interest income

$

             156,345

$

          170,615

$

           (14,270)

   Other income


              (19,820)


           (11,678)


             (8,142)


$

             136,525

$

           158,937

$

           (22,412)

Other







   Net interest income

$

                 6,194

$

               5,646

$

                  548

   Other income


                    977


                  616


                  361


$

                 7,171

$

               6,262

$

                  909

Total - Net interest income

$

             259,461

$

           258,264

$

               1,197

Total - Other income


               40,560


             49,780


             (9,220)

Total

$

             300,021

$

           308,044

$

             (8,023)

 

BUSINESS AND INSTITUTIONAL SERVICES SEGMENT

 

Total income from the Business and Institutional Services segment amounted to $156.3 million in 2012, up $13.5 million or 9% compared to the previous year, when it was $142.8 million.

 

The prudent growth strategy implemented by the Business and Institutional Services segment has produced results, as evidenced by the increase of $820.2 million or 21% in the outstandings of personal and business loan portfolios. This growth in outstanding loans had a beneficial effect on the segment's net interest income, which rose $14.9 million or 18% compared to 2011. It should also be mentioned that this growth in outstanding loans generated a 28% increase in loan fee income compared to 2011.

 

The efforts deployed by this segment also enabled it to make new inroads in Canadian banking syndicates and expand market share outside Quebec: CCD participated in 10 transactions as agent or co-agent, including two in Ontario.

 

In addition, the Business and Institutional Services segment's other income declined $1.4 million compared to last year, primarily due to lower foreign exchange income as a result of the current economic environment, which is less favourable to this activity. Lastly, income from fund transfer activities increased as a result of a higher trading volume.

 

DESJARDINS GROUP TREASURY SEGMENT

 

The Desjardins Group Treasury segment generated total income of $136.5 million in 2012, down $22.4 million from $158.9 million in 2011.

 

Had it not been for certain non-recurring items mentioned below, this segment's income would have been higher than last year.

 

Certain non-recurring items, such as the decrease in gains recorded on the sale of available-for-sale securities and the volatility generated by hedging activities related to foreign exchange deposit issuances, contributed to this decrease.

 

Excluding these items, the segment would have posted a $10.6 million increase in total income compared to 2011. This performance is remarkable, as the low interest rate environment and the economic uncertainty that prevailed throughout the year made it challenging to grow income, in particular the return on our liquid assets. The portfolio managers were therefore able to take full advantage of difficult market conditions to grow income from trading activities as well as income generated by CCD's management of asset/liability matching.

 

OTHER

The Other category includes the operations of the Desjardins FSB Holdings Inc. subsidiary. Total income from this subsidiary increased $0.9 million from last year, to $7.2 million. This growth came essentially from the increase in net interest income generated by the loan portfolio.

 

PROVISION FOR CREDIT LOSSES

 

CCD's loan portfolio continued to be of excellent quality. As at December 31, 2012, gross impaired loans outstanding stood at $20.6 million, down $18.1 million from last year. The gross impaired loans ratio, as a percentage of the total gross loan portfolio, was 0.1% as at December 31, 2012, compared to 0.2% at the end of 2011.

 

CCD recognized a provision for credit losses of $7.4 million for the year ended December 31, 2012. This represents a $4.6 million increase from one year earlier, when a $2.8 million provision was recorded. This increase was primarily due to growth in the outstandings of the Business and Institutional Services loan portfolio, as well as an individual provision arising from the settlement related to a credit file considered impaired. However, it should be mentioned that the increase was partially offset by favourable changes in the collective allowance.

 

NON-INTEREST EXPENSE

 

Non-interest expense includes expenses related to personnel administration, premises, equipment and furniture, and other operating expenses.

 

  

 

Table 5 shows the breakdown of non-interest expense by category. Non-interest expense totalled $106.9 million in 2012 compared to $108.8 million in 2011.

 

TABLE 5 - NON-INTEREST EXPENSE BY CATEGORY

 

For the years ended December 31

 

(in thousands of dollars)

2012

2011

Change

Salaries and fringe benefits







  Salaries

$

26,509

$

23,799

$

         2,710

  Fringe benefits


10,250


8,748


         1,502


$

36,759

$

32,547

$

         4,212

Premises, equipment and furniture, including

  depreciation







  Rent and taxes

$

3,022

$

3,539

$

          (517)

  Depreciation of premises and equipment and amortization

   of intangible assets


2,539


6,571


       (4,032)

  Other


534


1,235


          (701)


$

6,095

$

11,345

$

       (5,250)

Service agreements and outsourcing

$

35,870

$

38,803

$

       (2,933)

Fees


8,179


8,905


          (726)

Other


19,958


17,165


         2,793

Total

$

106,861

$

108,765

$

        (1,904)

 

 

For the year ended December 31, 2012, salaries and related fringe benefits amounted to $36.8 million compared to $32.5 million in 2011. This growth was largely due to the impact of the annual indexing of salaries and the transfer of employees from Desjardins entities in order to complete the centralization of Desjardins Group's medium-sized business lending activities initiated last year. It is worth noting that this centralization project will allow CCD to generate additional recurring income. Lastly, the increase in this item was also due to a $0.3 million increase in the expense related to the various pension plans offered to CCD employees.

 

Furthermore, expenses for premises, equipment and furniture declined compared to the previous year due to the end of the amortization period for management applications as well as the decrease in rental expenses. Service agreement and outsourcing expenses declined $2.9 million compared to last year, since the employee transfer mentioned above reduced CCD's share in the cost of various activities shared by several Desjardins Group components. Lastly, fees decreased, as fees for 2011 included one-time fees for process optimization and business development.

 

For 2012, the productivity index stood at 35.6%, relatively unchanged from one year earlier, when it was 35.3%.

 

OTHER PAYMENTS TO THE DESJARDINS NETWORK

 

In cooperation with the Desjardins network, CCD offers a broad spectrum of banking and financing services and treasury products to Canadian public and private organizations. The total amount paid to the Desjardins network for these services was $39.3 million, down $2.7 million or 7% from last year due to a decline in foreign exchange operations carried out with the Desjardins network.

 

INCOME TAXES AND OTHER TAXES

 

Since CCD is a financial services cooperative, it is subject to the tax regulations applicable to private companies. For fiscal 2012, CCD's income tax expense was $35.4 million, versus $37.1 million for 2011. The decrease in income taxes recognized in the Consolidated Statements of Income is primarily the result of lower operating income. CCD's effective tax rate was 24%, stable compared to last year.

 

REMUNERATION ON CAPITAL STOCK

 

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. Up to the end of the second quarter of 2012, CCD had declared remuneration on capital stock in an amount corresponding to its non-consolidated net income, including recovery of related income taxes. On July 1, 2012, the Board of Directors amended this method and now declares remuneration on capital stock in an amount corresponding to the lesser of its non-consolidated net income and the balance of its consolidated retained earnings, including recovery of related income taxes.

 

For fiscal 2012, $144.5 million was declared as interest on subscribed and paid-up capital shares, compared to $153.9 million last year. This decrease was primarily the result of lower net income. These amounts were also recorded under "Other liabilities - Other" in the Consolidated Balance Sheets as at December 31, 2012 and 2011, respectively.

 

Overall, amounts paid to the Desjardins network, including other payments to members, totalled $183.8 million, versus $195.9 million in 2011.

 

SECTION 2.2

 

ANALYSIS OF FOURTH QUARTER RESULTS

 

TABLE 6 - QUARTERLY RESULTS FOR THE PREVIOUS EIGHT QUARTERS

 


2012

2011

(in thousands of dollars)

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

(For the quarter)

















Statement of

   Income

Net interest

   income

$

62,244

$

63,998

$

   68,288 

$

  64,931 

$

  66,435 

$

  62,866 

$

  64,588 

$

  64,375 

Other income


15,246


11,343


     2,076 


  11,895 


  21,220 


  18,030 


    7,734 


    2,796 

Provision for

 credit losses

 (recovery)


(12,171)


3,768


   (928)


  16,715 


    6,530 


    5,070 


  (2,049)


  (6,789)

Non-interest

 expense


27,760


26,157


   26,879 


  26,065 


  29,948 


  24,691 


  27,535 


  26,591 

Operating

  income

  before other

  payments to

  the

  Desjardins 

  network

 $

61,901

$

45,416

$

   44,413 

$

  34,046 

$

  51,177 

$

  51,135 

$

  46,836 

$

  47,369 

Other

  payments to

  Desjardins

  network


9,065


10,355


   10,212 


    9,621 


    9,733 


  11,036 


  10,634 


  10,598 

Operating

  income


52,836


35,061


   34,201 


  24,425 


  41,444 


  40,099 


  36,202 


  36,771 

Income taxes


12,716


9,249


     8,244 


    5,178 


  10,481 


    9,559 


    8,350 


    8,695 

Net income

$

40,120

$

25,812

$

   25,957 

$

  19,247 

$

  30,963 

$

  30,540 

$

  27,852 

$

  28,076 

Total assets

$

29,278,854

$

33,264,224

$

30,011,632

$

30,659,887

$

29,986,797

$

28,259,310

$

28,446,668

$

27,221,576

Tier 1 capital

  ratio


        16.5%


           17.1%


           17.9%


          18.3%


              

          18.9%


           16.7%


           16.9%


        17.0%

Total capital

  ratio


      17.2 


          17.8


         18.8


         19.2


         19.6


         17.5


         17.6


      17.7

 

FOURTH QUARTER RESULTS

 

CCD recorded net income of $40.1 million for the fourth quarter of 2012, versus $31.0 million for the same period of 2011. Total income for the quarter ended December 31, 2012 was $77.5 million, compared to $87.7 million recorded for the same quarter of 2011.

 

Total income from the Desjardins Group Treasury segment for the last quarter of the year was $35.5 million, down $14.6 million compared to the same period of 2011. This decline was essentially attributable to the decrease in non-recurring gains realized on the disposal of available-for-sale securities and the increase in unrealized losses arising from hedging activities related to foreign currency deposit issuances.

 

The Business and Institutional Services segment posted total income of $40.1 million for the quarter ended December 31, 2012, up $3.5 million or 10%. This excellent performance was largely attributable to the growth in the outstandings of the personal and business loan portfolio. This portfolio growth also accounted for the increase in loan fee income compared to the same period last year.

 

In the fourth quarter of 2012, CCD recognized a $12.2 million recovery of the provision for credit losses due to the settlement related to a credit file that had been considered impaired as well as a decline in loan commitments. For the same period of 2011, increases in loan commitments and the average term of the business loan portfolio led to the recognition of a $6.5 million provision. Overall, the quality of the loan portfolio remained excellent, with gross impaired loans representing only 0.1% of total loans.

 

Non-interest expense amounted to $27.8 million in the fourth quarter, down $2.2 million compared to the same quarter in 2011. As mentioned above, the end of the amortization period for management applications, as well as the decrease in one-time fees related to process optimization and business development, accounted for the decrease in non-interest expense compared to the same period last year.

 

Other payments to the Desjardins network totalled $9.1 million in the fourth quarter, down $0.6 million compared to 2011. This decrease was due to the lower volume of foreign exchange activities carried out with Desjardins entities.

 

QUARTERLY TRENDS

 

Quarterly net income, income and non-interest expense fluctuate in response to certain trends such as seasonal changes, general economic conditions, market conditions and foreign exchange rate volatility.

 

A summary of the results for the last eight quarters is presented in Table 6 of this MD&A. Results for the last eight quarters have been affected by the following positive and negative factors:

 

Low interest rates on markets in recent quarters generated downward pressure on net interest income, which was partially offset by the higher volume of securities and loans outstanding.

The repayment of some significant loans to entities included in the group perimeter of Desjardins Group as well as the sale of hedge funds in the fourth quarter of 2011 reduced income in all four quarters of 2012.

The assessment of the accounting effectiveness of some hedging relationships involving foreign currency deposit issuances, which is based on changes in interest rate spreads, led to volatility in the results for the last eight quarters.

Recoveries of the provision for credit losses were recognized in the first two quarters of 2011 as a result of the decrease in loan portfolio outstandings and commitments in the Business and Institutional Services segment, as well as in the fourth quarter of 2012 following the settlement related to a credit file that had been considered as an impaired loan.

The recovery of the provision for credit losses in the second quarter of 2012 stemmed from the favourable impact of changes in the risk parameters used in the collective allowance valuation model.

In the fourth quarter of 2011, CCD received a $300.0 million capital injection, which increased the volume of liquid assets and, consequently, income generated by liquid assets in the four quarters of 2012.

 

2013 FINANCIAL OUTLOOK

 

In 2013, CCD should face an uncertain economic environment in which interest rates will remain low. As a result of these low interest rates, combined with the strong competition in the industry, net interest income will again come under pressure in 2013. CCD will also continue to strictly manage non-interest expense.

 

CCD will begin 2013 on a solid footing, including a capitalization level that is higher than the Canadian banking industry average. CCD continues to be a strong and well-capitalized financial institution, with a Tier 1 capital ratio of 16.5%, and benefits from excellent asset quality, with a gross impaired loans to gross loans ratio of less than 0.1%. CCD will make ongoing efforts to improve productivity and maintain sound and prudent capital management.

 

3.0 REVIEW OF THE BALANCE SHEET

 

HIGHLIGHTS

 

§ Tier 1 capital ratio of 16.5% as at December 31, 2012, evidencing CCD's financial strength

§ Liquidity maintained at 25% of total assets

§ Total assets down 2% to $29.3 billion as at December 31, 2012

§ Personal and business loan portfolios increased by $820.2 million

§ Quality loan portfolio, with a gross impaired loans ratio of 0.1%

§ Issuance of covered bonds on the U.S. market for an additional amount of US$1.5 billion, and issuance of $800 million medium-term notes on the Canadian market

§ Participation in the Canada Mortgage Bonds Program in an amount of $1.5 billion

 

SECTION 3.1

 

BALANCE SHEET MANAGEMENT

 

TABLE 7 - CONSOLIDATED BALANCE SHEETS

 

As at December 31

(in millions of dollars) 

2012

2011

2010

2009

2008


IFRS

GAAP

Assets
















Cash and securities

$

 7,335

25%

$

7,429

   25%

$

7,620

28%

$

 5,297

23%

$

 4,950

   20%

Securities purchased

   under reverse

   repurchase

   agreements


        345

     1 


        735

     2


        230

   1


          64

--


  46

       --

Loans


   18,245

   62 


17,789

   59 


   15,987

 58


13,016

  58


   14,735

    58 

Other


     3,354

   12 


4,034

   14 


     3,420

13


  4,220

 19


   5,604

    22 

Total assets

$

 29,279

 100%

$

 29,987

 100%

$

 27,257

100%

$

 22,597

 100%

$

 25,335

100%

Liabilities and

  members' equity
















Deposits

$

   22,570

   77%

$

 21,640

72%

$

19,082

   70%

$

 14,836

   66%

$

 16,310

   64%

Other liabilities


     4,786

16


   6,406

  21 


     6,544

24


  6,433

 28


     7,763

   31 

Members' equity


     1,923

 7


   1,941

    7 


     1,631

6


  1,328

  6


     1,262

    5 

Total liabilities and

  members' equity

$

 29,279

100%

$

 29,987

100%

$

 27,257

 100%

$

 22,597

 100%

$

 25,335

 100%

 

TABLE 8 - CASH AND SECURITIES

 

As at December 31

(in millions of dollars) 

2012

2011

2010

2009

2008

 


IFRS

GAAP

 

Cash and deposits with financial

  institutions

$

554

$

 344

$

585

$

196

$

378

Securities











Canada


2,558


 3,754


 4,003


1,026


2,268

Provinces and municipal  corporations

 in Canada


2,639


 2,275


 2,142


1,468


592

Other issuers


1,584


1,056


 890


2,607


1,712

Total

$

7,335

$

7,429

$

7,620

$

5,297

$

4,950

 

TOTAL ASSETS

 

As at December 31, 2012, CCD's total assets stood at $29.3 billion, down $707.9 million from December 31, 2011.

 

Liquidities, comprising cash, investments with financial institutions and securities, totalled $7.3 billion as at December 31, 2012, down $93.9 million from December 31, 2011. The liquidity ratio, presented in Table 7, stood at 25% at the end of 2012, unchanged from one year earlier. This level meets regulatory requirements and enables CCD to support the growth of the Desjardins network.

 

A very high percentage of the securities 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. As discussed in more detail in section 4.1, "Risk Management", most of the securities in the securities portfolio have credit ratings of A- or better.

 

Other assets stood at $3.4 billion as at December 31, 2012, down $0.7 billion from one year earlier. This decline was due to the derivative financial instruments recognized as assets, whose market value declined by $0.8 billion in 2012 to stand at $2.0 billion. This change was attributable to an increase in medium- and long-term interest rates in 2012. This same factor also accounted for the $1.1 billion decline in the value of derivative financial instruments recognized as liabilities.

 

 

LOANS

 

The loan portfolio stood at $18.3 billion as at December 31, 2012, up $450.3 million or 3% from last year. Including acceptances, the increase was $614.8 million. In its role as Desjardins Group treasurer, CCD continued to ensure refinancing to the Fédération des caisses Desjardins du Québec (the Federation) and other Desjardins entities. Consequently, outstanding loans to these entities grew by $609.2 million since the beginning of the year, to $12.4 billion as at December 31, 2012. Note that these loans account for over 40% of CCD's total assets.

 

In addition, the personal and business loan portfolios increased by $820.2 million or 21% during the year to $4.7 billion as at December 31, 2012 as a result of continued, prudent business development efforts. Note that this growth was achieved while maintaining the quality of these portfolios. The public and parapublic sector loan portfolio, including clients' liability under acceptances, declined by $674.9 million since the end of 2011, to $1.9 billion as at December 31, 2012.

 

CREDIT QUALITY

 

The quality of CCD's loan portfolio is still excellent. Gross impaired loans amounted to $20.6 million as at December 31, 2012, down from $38.7 million at the end of 2011. The decrease was attributable to the write-off and repayment of some impaired loans during the year. The gross impaired loans ratio, expressed as a percentage of the total gross loan portfolio, stood at 0.1% as at December 31, 2012, an improvement from the ratio of 0.2% at the same date one year earlier.

 

Other information on the quality of CCD's credit portfolio is presented in Section 4.1, "Risk Management," of this MD&A.

 

DEPOSITS

 

TABLE 9 - DEPOSITS

 

As at December 31

2012

2011(1)

(in millions of dollars and as a percent)

Payable on demand

Payable on a fixed date

Total

Total


Total

Total

Individuals

 $          115

 $            22

 $          137

1

%

 $       112

1

%

Business and government

         1,162

      17,405

       18,567

82


     17,321

80


Deposit-taking institutions

         533

      3,333

      3,866

17


       4,207

19


Total deposits

 $       1,810

 $     20,760

 $     22,570

100

%

$ 21,640

100

%

(1) Data restated to conform to the presentation adopted in 2012.

 

Geographic distribution

 

As at December 31 

2012

 2011

 2010

2009

2008


IFRS

 GAAP

Canada

 $ 14,872

  66

%

 $ 14,364

66

%

 $ 12,825

67

%

 $   8,285

56

%

 $   9,600

59

%

International

      7,698

  34


      7,276

34


      6,257

33


      6,551

44


      6,710

41


Total

 $ 22,570

100 

%

 $ 21,640

100

%

 $ 19,082

100

%

 $ 14,836

100

%

 $ 16,310

100

%

 

As at December 31, 2012, outstanding deposits stood at $22.6 billion, compared to $21.6 billion at the end of 2011. This $1.0 billion increase was mainly attributable to various issuances on Canadian and U.S. markets completed during the year.

 

Additional information about CCD's deposit issuances is presented in the "Liquidity risk" section of this MD&A. 

 

OTHER LIABILITIES

 

Other liabilities decreased $1.6 billion compared to December 31, 2011. Part of this change was attributable to the decline in the fair value of derivative financial instruments mentioned above. In addition, this decrease in derivative financial instruments also explained the decline in amounts payable to brokers and dealers presented under "Other liabilities - Other."

 

 

 

 

SECTION 3.2

 

CAPITAL MANAGEMENT

 

Capital management is crucial to CCD's financial management, and takes into account its regulatory obligations, the economic and financial environment, its risk profile, and its cooperative difference and objectives.

 

CCD advocates prudent management of its capital. Its purpose is to maintain higher regulatory capital ratios than those of the Canadian banking industry, the regulatory requirements and its internal targets. As at December 31, 2012, CCD's Tier 1 capital and total capital ratios stood at 16.5% and 17.2%, respectively, compared to ratios of 18.9% and 19.6%, respectively, one year earlier. CCD's prudent management is further reflected in the attractive credit ratings granted by the various rating agencies.

 

The 2008-2009 global financial crisis prompted the industry to place more emphasis on capitalization. Now more than ever, rating agencies and the market favour the best-capitalized institutions. These factors argue in favour of a general increase in the level and quality of capital issued by financial institutions. This is also reflected in the stricter capital adequacy requirements that will apply following the implementation of Basel III, in the first quarter of 2013.

 

POLICIES

CCD's capital management is the responsibility of its Board of Directors. To support it with this task, the Board gave Desjardins Group's Finance and Risk Management Committee and its Asset/Liability Committee the mandate to ensure that CCD has a sufficient and reliable capital base. CCD therefore prepares, on an annual basis, a capitalization plan that sets and updates its capital objectives and targets.

 

BASEL II

 

CCD's capital ratios are calculated based on the guideline on adequacy of capital base standards issued by the AMF and applicable to financial services cooperatives. Since fiscal 2009, this regulatory framework has been largely based on the revised framework for international convergence of capital measurement and capital standards (Basel II), issued by the Bank for International Settlements (BIS).

 

The minimum total capital ratio recommended to institutions for compliance with BIS regulatory requirements and to be considered sufficiently capitalized is 8%. CCD has maintained its financial objective for the Tier 1 capital ratio at a minimum of 10%, thus taking into account the prevailing global economic environment and the framework of the AMF's guideline on adequacy of capital base standards.

 

Until the new Basel III requirements are implemented in 2013, regulators have revised certain regulations, in particular concerning market risk and the weighting of some securitization categories (Basel 2.5). These regulations have been in force since the first quarter of 2012.

 

BASEL III

 

0n December 16, 2010 and January 13, 2011, the BIS issued new requirements (Basel III) for the global regulation of capital standards. In fact, since 2009, various consultative proposals have been submitted to the banking industry as a whole to build a more secure financial system that is resilient to periods of stress. The new rules, which will be phased in over the next few years, increase not only capital requirements (the minimum levels to be met) but also risk management requirements. The new framework, combined with global liquidity standards, forms an essential element of the global financial reform program. These new Basel III on capital standards have been integrated into the AMF's guideline adequacy of capital base standards applicable to financial services cooperatives, which was updated in December 2012.

 

The key points of the new regulatory capital standards set out in Basel III are:

 

1)   Improvement in the quality of financial institutions' capital:

·  a new definition of the components of capital categories;

·  a greater focus on the best Tier 1 capital component to absorb losses (Tier 1a capital or Common Equity Tier 1);

 

2)   Increase in minimum capital requirements:

·    Tier 1a capital ratio of 7.0%, including a 2.5% capital conservation buffer;

·    Tier 1 capital ratio of 8.5%, including a 2.5% capital conservation buffer;

·    Total capital ratio of 10.5%, including a 2.5% capital conservation buffer;

·    The Basel Committee also provides for the addition of a minimum leverage ratio to prevent the build-up of excessive leverage (a requirement already imposed to Desjardins Group by its regulatory authority);

 

3)   Reduction of systemic risk:

·  strong incentive from the Basel Committee to have a countercyclical capital buffer, ranging from 0% to 2.5%, in order to prevent risk from spreading throughout the entire financial system;

 

4)  Addition of supplementary criteria for capitalization instruments to ensure their capacity to absorb losses in the event of insolvency.

 

The increased minimum capital levels will be phased in between 2013 and 2019. The above-mentioned minimum capital requirements represent the minimum regulatory requirements for 2019. The AMF nevertheless expects CCD to attain the minimum capital requirements for 2019 in the first quarter of 2013. 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 December 31, 2012, and these targets should be exceeded by a wide margin.

 

As at December 31, 2012, the pro forma Tier 1a and Tier 1 capital ratios under Basel III were approximately 16.2%, and the capital/asset ratio was 6.5%. Tier 1 capital would decrease by approximately $20 million. Risk-weighted assets would increase by approximately $25 million, primarily due to the 250% weighting for deferred tax assets.

 

ANALYSIS OF CAPITAL RATIOS

 

CCD is one of the best capitalized financial institutions in Canada: its Tier 1 and total capital ratios, measured under the Basel II regulatory framework, stood at 16.5% and 17.2%, respectively, as at December 31, 2012 (18.9% and 19.6%, respectively, as at December 31, 2011). The capital/asset ratio was 6.60% as at December 31, 2012 (6.58% as at December 31, 2011). 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 at January 1, 2011, the date of conversion to IFRS, CCD elected to use the transitional provision permitted by the AMF. This election is irrevocable and allows CCD to mitigate the impact of the new accounting standards through a quarterly adjustment of its eligible retained earnings over a two-year period that ended December 31, 2012. Accordingly, for purposes of calculating the Tier I capital ratio, since January 1, 2011, CCD has amortized the eligible portion of the IFRS impact of $20.1 million on a straight-line basis, for an amortization of $2.5 million per quarter until December 31, 2012. As at December 31, 2012, this impact had been completely amortized, and all impacts related to the first-time adoption of IFRS have been fully taken into account in the capital ratio calculations.

 

TABLE 10 - REGULATORY CAPITAL

 

As at December 31

2012

2011

 

(in thousands of dollars)

 

Tier 1 capital






Capital stock

$    1,887,206



 $    1,887,206


General reserve

              1,467



              2,702 


Retained earnings

                       --



                     -- 


Deferral attributable to IFRS adoption

                       --



            10,047 


Total Tier 1 capital

$    1,888,673



 $    1,899,955


Tier 2 capital






Eligible collective allowances

$         77,065



 $         75,765


Total Tier 2 capital

$         77,065



 $         75,765


Total regulatory capital

$    1,965,738



 $    1,975,720


Capital ratios






Tier 1 capital

16.5

%


18.9

%

Total capital

17.2

%


19.6

%

 

MINIMUM RATIOS AND COMPLIANCE WITH REQUIREMENTS

 

The capital adequacy of CCD is regulated by standards developed by the Federation and approved by the AMF. The minimum total capital ratio recommended to institutions for compliance with BIS regulatory requirements, to be considered sufficiently capitalized, is 8%. In addition, the Tier 1 capital ratio must represent at least half of the total capital ratio.

 

The AMF requires that CCD maintain a capital/asset ratio of more than 5%. This measure determines overall capital adequacy against the entity's total assets, including certain off-balance sheet items.

 

Furthermore, member federations formally undertook to maintain CCD's total capital at a minimum level of (i) 5.5% of its total assets, or if higher, (ii) 8.5% of its risk-weighted assets, as determined in accordance with the established standards.

 

As part of the work on the Desjardins Group capitalization plan, CCD set target ratios to ensure sound capital management in accordance with the Federation's directives. Target ratios of 6% and 10% were set for the capital/asset ratio and the total capital ratio, respectively. CCD's capital quality enables it to be well positioned on the markets.

 

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 the Consolidated Financial Statements.

 

CCD was well within its minimum regulatory capitalization requirements as at December 31, 2012 and 2011.

 

TABLE 11 - RISK-WEIGHTED ASSETS

 

As at December 31

2012

2011

(in thousands of dollars)

Exposures(1)

Risk-weighted assets

Average risk-weighting rate (%)

Risk-weighted assets

Credit risk






Sovereign borrowers

 $   6,217,661

 $                 --

--

%

 $                --

Financial institutions

18,503,177

3,700,635

20


3,789,909

Business

6,193,749

6,100,971

99


4,536,056

Mortgages

186,490

37,908

20


37,939

Other retail client exposure

21,052

15,789

75


33,434

Securitization

--

--

--


4,431

Equities

5,907

5,907

100


13,427

Trading portfolio

455,213

96,296

21


114,638

Other assets

3,422,217

463,825

14


400,297

Total credit risk

 $ 35,005,466

 $ 10,421,331

30

%

 $   8,930,131

Market risk


$      503,200



 $      610,100

Operational risk(2)


         532,459



         541,208

Total risk-weighted assets


$ 11,456,990



$ 10,081,439

(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.

 

SECTION 3.3

 

ANALYSIS OF CASH FLOWS

 

This section presents an analysis of the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.

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.

 

In 2012, cash and cash equivalents increased by $247.5 million compared to a decrease of $273.5 million in 2011, and amounted to $454.7 million as at December 31, 2012 compared to $207.2 as at December 31, 2011.

 

Operating activities generated liquidities of $165.2 million in 2012. The liquidity needs resulting from the growth in CCD's various loan portfolios and the decrease in amounts payable to brokers and dealers were met through issuances of notes. In 2011, these activities had generated liquidities of $192.7 million, as liquidities from issuances of deposit notes had more than offset the increase in loans and securities purchased under reverse repurchase agreements.

 

Financing activities required liquidities of $153.9 million in 2012, as CCD paid the remuneration on capital stock for the previous year. In 2011, an issuance of capital shares and the payment of remuneration on capital stock had generated net liquidities of $113.9 million.

 

Lastly, cash flows from investing activities totalled $236.2 million in 2012, as a result of the decrease in available-for-sale securities. In 2011, these activities required liquidities of $580.2 million, as available-for-sale securities increased during the year, in particular following the $300.0 million capital injection completed in 2011.

 

SECTION 3.4

 

OFF-BALANCE SHEET ARRANGEMENTS

 

In the normal course of operations, CCD enters into various off-balance sheet arrangements, including credit instruments, contractual commitments, financial assets held as collateral and special purpose entities, including securitization and assets under management.

 

CREDIT INSTRUMENTS

 

In order to meet its members' and clients' financing needs, CCD makes credit instruments available to them. Credit instruments include guarantees and standby letters of credit and credit commitments representing authorized amounts that have not been used by members and clients. The risks associated with these credit instruments are managed according to the same strict rules as those applied to Consolidated Balance Sheet items. In management's opinion, no unusual risk result from these off-balance sheet items.

 

These instruments expose CCD to credit and liquidity risks. Management of these risks is described in section 4.0 of this MD&A. Table 12 shows the contractual amounts of credit instruments by remaining maturities. Since several of these credit instruments will mature or will be terminated without any cash outflow, the contractual amounts of these commitments do not represent future liquidity needs.

 

Note 20, "Commitments, guarantees and contingent liabilities", to CCD's Consolidated Financial Statements provides further information on these credit instruments.

 

TABLE 12 - CREDIT INSTRUMENTS BY MATURITIES

 

As at December 31

2012

Total

(in millions of dollars)

 One year

or less


1 to 5 years


 Over 5 years


 Total

2012

2011

Guarantees and standby letters of credit

 $              233


 $       141


 $      1


 $        375

$     481

Credit commitments

10,697


6,172


51


      16,920

  16,770

Total credit instruments

 $         10,930


 $    6,313


 $    52


 $   17,295

$17,251

 

CONTRACTUAL COMMITMENTS

 

In the normal course of operations, CCD, like other major Canadian financial institutions, pledges part of its liquid assets in order to participate in the clearing and payments systems. In addition, CCD has contractual commitments under which it must make future payments on leases. Note 21, "Off-balance Sheet Arrangements", to CCD's Consolidated Financial Statements provides information on these contractual commitments.

 

FINANCIAL ASSETS HELD AS COLLATERAL

CCD receives financial assets as collateral as a result of transactions involving securities purchased under reverse repurchase agreements and transactions on derivatives. Such transactions are carried out under normal conditions for these types of transactions. Note 20, "Commitments, guarantees and contingent liabilities", to CCD's Consolidated Financial Statements provides additional information on financial assets received as collateral.

 

SPECIAL PURPOSE ENTITIES

 

In the normal course of operations, CCD enters into various financial transactions with special purpose entities (SPEs) to diversify its sources of financing and manage its capital. These SPEs are usually created for a unique and distinct purpose, and they often have a limited life. They are used to legally isolate the financial assets they hold from the transferring organization. SPEs are not operating entities and generally have no employees. Under IFRS, they may be included on the Consolidated Balance Sheets if, in substance, the relationship between this entity and CCD indicates that control exists. Detailed information concerning significant exposure to SPEs is provided below.

 

SECURITIZATION

 

CCD participates in the Mortgage-Backed Securities Program under the National Housing Act to manage its liquidities and capital. Transactions carried out under this program require using an SPE, the Canada Housing Trust, set up by Canada Mortgage and Housing Corporation (CMHC) under the Canada Mortgage Bonds (CMB) Program. Note 8, "Securitization and other transferred financial assets", to the Consolidated Financial Statements provides more information on the financial assets transferred by CCD through securitization transactions.

 

To carry out securitization transactions, CCD groups CMHC-guaranteed residential mortgages (previously acquired from member caisses of Desjardins Group) under mortgage-backed securities (NHA MBSs) and transfers them to the SPE in exchange for monetary consideration. The SPE then finances these purchases by issuing CMBs to investors. Furthermore, under this program, CCD acquires interests in securitized mortgage loans from Desjardins Group member caisses. The loans and interests acquired through these transactions do not meet the recognition criteria since member caisses retain substantially all the risks and rewards related to these securitized loans and interests. In addition, CCD treats these transfers as collateralized financing arrangements and recognizes a liability. This liability represents the consideration received from CMHC with respect to the loans and interests in mortgage loan securitization that do not meet the derecognition criteria.

 

As at December 31, 2012, outstanding NHS MBSs issued by CCD and sold to the Canada Housing Trust totalled $5.0 billion. However, some securitization transactions entered into before January 1, 2010 resulted in derecognition, as CCD elected to apply the derecognition requirements. At the time of transfer, these transactions were therefore recognized as sales, and CCD retains certain interests in excess interest margins, which are retained interests, and assumes responsibility for servicing the transferred mortgage loans. As at December 31, 2012, the aggregate of the original assets transferred and derecognized was $0.6 billion, compared to $1.8 billion at the end of 2011. On the same date, assets representing retained interests that CCD continues to recognize with respect to these transactions amounted to $7.5 million ($28.3 million as at December 31, 2011).

ASSETS UNDER MANAGEMENT

 

CCD performs liquidity management on behalf of third parties. These assets under management are not the property of CCD and therefore are not reflected on the Consolidated Balance Sheets. Management fees are received in exchange for the liquidity management services.

 

4.0 RISK MANAGEMENT

 

SECTION 4.1

 

RISK MANAGEMENT

 

The shaded boxes of this section present information on credit, market and liquidity risk in accordance with IFRS 7, "Financial Instruments: Disclosures". In addition, this section contains an analysis of how CCD assesses its risks and a description of its risk management objectives, policies and methods. IFRS 7 provides that risk disclosures may be included in the MD&A. Consequently, the shaded boxes are an integral part of the Consolidated Financial Statements, as explained in Note 22, "Financial instrument risk management", to the Consolidated Financial Statements.

 

CCD is exposed to various types of risks in the normal course of operations, including credit risk, counterparty and issuer risk, market risk, liquidity risk, operational risk, strategic risk and reputation risk. Strict and effective management of these risks is a priority for CCD, its purpose being to support its major orientations, including those regarding its financial stability as well as its sustained and profitable growth, while complying with Basel requirements.

 

INTEGRATED RISK MANAGEMENT FRAMEWORK

 

CCD's objective in risk management is to optimize the risk-return trade-off, within tolerance limits set, by 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 management framework that complies with accepted accountability and independence principles.

 

As integral parts of this management framework, risk appetite and tolerance determine the risk type and level that CCD is prepared to assume to achieve its business and strategic objectives. They provide a basis for integrated risk management by promoting a better understanding of risks and its impact on the risk profile. This framework provides for a system of risk indicators that are monitored on a regular basis to ensure that CCD's risk profile matches the degree of risk appetite and tolerance desired by senior management and the Board of Directors in view of the mission, vision and values of Desjardins Group and CCD. The Board of Directors is responsible for approving the risk appetite and tolerance framework, which must reflect Desjardins Group's financial and strategic objectives.

 

The Integrated Risk Management Framework also includes the overall operational infrastructure and the risk management governance structure, which are supported by all the explicit and implicit rules, values, and ways of thinking and acting prevailing at Desjardins Group and CCD. This framework promotes exchanges between Desjardins Group's risk management function, business segments and regulated entities.

 

To promote sound risk management and enhance risk management capabilities, risk management training sessions are held on a regular basis. The organization intends, through a continuing professional development plan, to continue updating the knowledge of the members of the participating bodies.

 

RISK MANAGEMENT GUIDELINES

 

The Integrated Risk Management Framework is based on risk management guidelines that provide for the following, among other things:

·      The accountability of CCD with regard to the risks inherent to its operations;

·      Application at every level of the organization in order to obtain a comprehensive vision of risk exposure;

·      The existence of a process to determine the appropriate capital level based on the risks assumed;

·      Taking risk management into account when formulating strategic plans and business strategies and in the resulting decisions;

·      Thorough risk assessment when launching a new product or introducing projects with a strong financial impact.

 

RISK MANAGEMENT GOVERNANCE

 

The Integrated Risk Management Framework is based on a solid risk governance structure that reflects CCD's organizational reality.

 

CCD's Board of Directors is responsible for guiding, planning, coordinating and monitoring all CCD's operations, and in such capacity, it participates actively in the oversight of the major risks to which CCD is exposed. The Board of Directors is in particular responsible for adopting the overall orientations and strategies proposed by senior management as well as risk management policies aimed at ensuring sound and prudent management of operations. To discharge its specific risk management responsibilities, the Board is supported by the Risk Management Commission, the Audit and Inspection Commission and the Board of Ethics and Professional Conduct. Additional information about these bodies is found in the Cooperative Governance section of the Annual Report.

 

CCD's Management Committee must, inter alia, make recommendations to the Board of Directors concerning risk management policies and strategies and ensure that they are implemented efficiently and effectively.

 

Independent units complete CCD's risk management governance infrastructure. The Risk Management Executive Division is a strategic function whose primary role is to act as a partner in Desjardins Group's development in identifying, measuring and managing risks while ensuring the longevity of Desjardins Group regulated entities, including CCD. It is up to the risk management function to recommend and establish risk management policies and to set up the appropriate infrastructure, processes and practices to target all major risks. Monitoring and control of the various risks is a shared responsibility that is assumed, among others, by the business sectors and teams responsible for regulatory compliance and financial governance. They complement the work of those responsible for risk management to ensure that service offer is adapted to the growing regulatory requirements.

 

The Desjardins Group Monitoring Office (DGMO) is an independent and objective organization assurance and advisory function that assists Desjardins Group's and CCD's management personnel in carrying out their governance responsibilities. In addition, it oversees and advises management with respect to its responsibility to manage in a sound and prudent manner. In so doing, it contributes to improving Desjardins Group's and CCD's overall performance and maintaining members', the public's and regulatory bodies' confidence in Desjardins Group and CCD. The DGMO includes the internal audit activities of Desjardins Group's subsidiaries and components, including CCD, as well as activities related to the audit and inspection of the caisse network.

 

RISK MEASUREMENT AND DISCLOSURE

 

RISK MEASUREMENT

 

CCD uses quantitative as well as qualitative techniques to determine its risk exposure. It ensures that an appropriate selection of measurement tools and mitigation techniques are designed and maintained in order to support business development.

 

Risk quantification is performed both in the current economic context as well as in hypothetical situations, simulating crises integrated across the entire organization. Sensitivity tests and crisis scenarios are used as additional risk analysis tools to measure the potential impact of exceptional but plausible events on profitability and capital levels. Institution-wide crisis scenarios are developed on the basis of the anticipated economic outlook under distress conditions. The results of these analyses help detect potential vulnerabilities to risk factors of the various operations.

 

RISK DISCLOSURE

 

Risk reports on all significant risks are prepared for the Management Committee, the Risk Management Commission and CCD's Board of Directors. These reports provide risk indicators and information about capital, particularly capital adequacy in relation to CCD's risk profile. Constantly being updated, these reports present the latest risk management developments to ensure that decision-making bodies receive timely information on major risks that is both practical and forward-looking.

 

BASEL II CAPITAL ACCORD

 

Basel II is an international capital adequacy tool designed to align regulatory capital requirements more closely with risk exposure and to further the continuous development of the risk assessment capabilities of financial institutions.

 

The Basel II framework essentially rests on three pillars: the first pillar sets out the requirements for risk-weighted regulatory capital; the second pillar deals with the supervisory review process; and the third pillar stipulates financial disclosure requirements.

 

In accordance with the guideline on adequacy of capital base standards adapted to reflect the Basel II provisions, CCD is currently using the Standardized Approach for exposure to credit risk and market risk and the Basic Indicator Approach for operational risk. This provision is also used to calculate capital ratios.

 

Again this year, numerous efforts were made to enhance the implementation of sound risk management practices and to align regulatory capital requirements more closely with risk exposures. Desjardins Group and CCD are continuing to invest in improving their tools and systems and aligning them with industry best practices for the main types of risks. In recent years, the Bank for International Settlements has issued new requirements (Basel III) for the global regulation of capital standards. These new rules, which regulators will integrate into their guidelines effective January 1, 2013, will increase not only capital requirements but also risk management requirements. In addition to the changes made to the level and definition of eligible capital and the measurement of risk-weighted assets, Basel III has, under Pillar 2, implemented new liquidity requirements and raised expectations concerning many management practices. The disclosure standards, which are associated with Pillar 3, have also been enhanced. CCD continues its development by integrating these new regulatory requirements into its risk management 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 balance sheet.

 

CCD is exposed to credit risk through its direct loans to businesses and government (excluding the Desjardins network entities, these loans accounted for close to 20% of assets on the Consolidated Balance Sheets as at December 31, 2012 and 2011), but also through various other commitments including letters of credit, foreign exchange lines and transactions involving derivative financial instruments and securities.

 

 

CREDIT RISK MANAGEMENT

 

CCD is accountable for its performance and it therefore has some latitude regarding the framework it uses and the approval given, and is also equipped with the corresponding management and monitoring tools and structures. To assist CCD in this area, Desjardins Group has set up centralized structures and procedures to ensure that this risk management framework allows effective management that is also sound and prudent.

 

Desjardins Group set up a Risk Management Executive Division with two divisions that manage credit risk for Desjardins Group as a whole and for CCD. These divisions share responsibilities based on the major activities: credit approval, quantification, monitoring and reporting.

 

CREDIT RISK FRAMEWORK

The credit risk framework is comprised of policies and standards that govern the credit risk management elements for CCD, such as the responsibilities and powers of the parties involved, the limits imposed by our risk tolerance, the rules governing credit granting and file administration and, lastly, the rules for disclosing CCD's exposure to credit risks.

 

Together, these monitoring activities, policies and practices determine conduct with respect to risk management and control.

 

CREDIT GRANTING

 

This responsibility is assumed by the various units grouped together according to their respective client base. The qualifications of professionals, their approval responsibilities and the depth of the analysis required depend on the product's features as well as the complexity and extent of the risk associated with the transactions.

 

BUSINESS LOANS

 

Credit is granted to businesses based on an analysis of the various parameters of each file, where each borrower is assigned a risk rating. These ratings are assigned individually following a detailed examination of the financial, market, operational and management characteristics of the business.

 

The characteristics of each borrower are analyzed using models based on internal and external historical data, taking into account the specific features of the borrower's economic sector and the performance of comparable businesses. These analyses are performed using systems that can make quantitative comparisons and are supplemented by the professional judgment of the personnel handling the file.

 

The scoring system has 19 ratings, broken down into 12 levels, each of which represents a default probability level.

 

The following table provides a comparison of internal ratings and ratings assigned by external agencies.

 

TABLE 13 - RATING ACCORDING TO RISK LEVEL

 

Ratings

Moody's

S&P

Description

1 to 2

Aaa to Aa3

AAA to AA-

High quality

2.5

A1 to A3

A+ to A-

3 à 4

Baa1 to Baa3

BBB+ to BBB-

4.5 to 5.5

Ba1 to Ba3

BB+ to BB-

Lower quality

6 to 7.5

B1 to Caa1

B+ to CCC+

8 and 9

Caa2 to C

CCC to C-

10 to 12

D

D

Impaired loans or loans in default

 

The use of internal ratings and estimates has been expanded into other risk management and governance activities such as establishing analysis requirements and file authorization levels, the different types of follow-up and the disclosure of portfolio risk quality.

 

 

 

TABLE 14 - LOAN PORTFOLIO'S EXPOSURE TO CREDIT RISK

 

As at December 31

2012

(in thousands of dollars)

Highest quality

Poor quality

Impaired loans or defaults

Total






Public and parapublic sectors

 $   1,065,328

 $               --

 $           --

 $  1,065,328

Members





Federation

10,802,676

--

--

10,802,676

Other

184,978

--

--

184,978

Other entities included in the group perimeter

  of Desjardins Group

1,417,168

--

--

1,417,168

Loans purchased from Desjardins Group

88,863

--

--

88,863

Personal

1,287,199

103,013

5,751

1,395,963

Business

1,588,335

1,739,776

14,868

3,342,979


 $ 16,434,547

 $ 1,842,789

 $  20,619

 $18,297,955







2011


Highest quality

Poor quality

Impaired loans

or defaults

Total






Day, call and short-term loans to investment

 dealers and brokers

$           91,000

 $               --

 $           --

 $       91,000

Public and parapublic sectors

1,904,756

--

--

1,904,756

Members





Federation

9,678,649

--

--

9,678,649

Other

230,195

--

--

230,195

Other entities included in the group perimeter

  of Desjardins Group

1,886,748

--

--

1,886,748

Loans purchased from Desjardins Group

137,636

--

--

137,636

Personal

997,291

95,806

7,728

1,100,825

Business

1,275,826

1,511,135

30,926

2,817,887


 $ 16,202,101

 $ 1,606,941

 $  38,654

 $17,847,696

 

CHART 1

 

(REFER TO DOCUMENT « MDA CCD - CHART 1 -T4-2012 »)

http://www.rns-pdf.londonstockexchange.com/rns/8419Y_-2013-2-27.pdf 

 

Counterparty and issuer risk

 

Counterparty and issuer risk is a credit risk to which CCD is exposed relative to different types of 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.

 

To properly managing its risk, CCD assigns a credit rating to each counterparty and issuer, based on four external credit assessment institutions (DBRS, Moody's, S&P and Fitch). This rating is used to establish exposure limits and to calculate capital requirements using the Standardized Approach. These four credit assessment institutions meet the eligibility criteria of the Basel Accord and are authorized by the AMF and the Office of the Superintendent of Financial Institutions.

 

A large proportion of CCD's exposure is to different levels of government in Canada, Quebec public or parapublic entities and major Canadian banks. Their credit ratings are usually A- or higher. Furthermore, CCD is not directly exposed to the sovereign debt of the European countries most affected by the recent financial upheaval, more specifically Greece, Portugal, Italy, Ireland and Spain. Its exposure to U.S. and European financial institutions is marginal.

 

In its derivative financial instrument and securities lending transactions, which include repurchase and reverse repurchase agreements as well as securities borrowing and lending, CCD is exposed to counterparty credit risk.

 

CCD uses derivative financial instruments primarily for asset-liability management purposes. Derivative financial instruments are contracts whose value is mainly based on an underlying asset, such as interest rates or exchange rates. The vast majority of derivative financial instruments are traded over-the-counter between CCD and its counterparties, and include forward exchange contracts, currency swaps, interest rate swaps, credit default swaps, total return swaps, forward rate agreements, and currency, interest rate and stock index options. The other transactions are carried out as part of regulated trades and mainly consist of futures.

 

The credit risk associated with derivative financial instruments refers to the risk that a counterparty will fail to honour its contractual obligations toward CCD at a time when the fair value of the instrument is positive for CCD. The credit risk associated with a derivative financial instrument normally corresponds to a small fraction of the notional amount. The replacement cost and the credit risk equivalent are two measures used to quantify this risk. The replacement cost refers to the current replacement cost of all contracts with a positive fair value. The credit risk equivalent is equal to the sum of this replacement cost and the future credit exposure.

 

CCD limits the credit risk associated with derivative financial instruments by doing business with counterparties that have high credit ratings. Note 13, "Derivative financial instruments and hedging activities", to the Consolidated Financial Statements presents derivative financial instruments by credit risk rating and type of counterparty. Based on replacement cost, this note shows that substantially all the counterparties have credit ratings ranging from AAA to A. Furthermore, by purchasing hedges through credit derivatives, such as credit default swaps and total return swaps, CCD can transfer credit risk to a counterparty or hedge itself against various types of risk.

 

CCD also limits credit risk with certain counterparties by entering into International Swaps and Derivatives Association (ISDA) master agreements that define the terms and conditions for the transactions. These agreements are legal contracts binding the counterparties. The majority of agreements entered into by CCD provide for the use of netting to determine the net amount of exposure in the event of default. In addition, a Credit Support Annex can be added to the master agreement in order to request that the counterparties pay or obtain guarantees on the current market value of the positions when this value exceeds a certain threshold. Taking into account master netting agreements, the risk-weighted balance for all CCD's derivative financial instruments as at December 31, 2012 was $378.0 million ($356.3 million as at December 31, 2011). As at December 31, 2012, the amount of collateral that CCD would have to provide in the event of a downgrade was marginal because the replacement cost was positive for the majority of the contracts.

 

Securities lending transactions are governed by Investment Industry Regulatory Organization of Canada participation agreements. To mitigate credit risk, CCD also uses netting agreements with its counterparties and requires a percentage of collateralization (a pledge) on these transactions.

 

CCD accepts from its counterparties, and also gives them, financial collateral that complies with the eligibility criteria set out as part of its policies. These criteria promote a quick realization, if necessary, of collateral in the event of default. The types of collateral received and given by CCD are mainly cash and government securities.

 

Additional information about credit risk is presented in Note 20, "Commitments, guarantees and contingent liabilities", to the Consolidated Financial Statements.

 

  

 

 

TABLE 15 - LOANS, LETTERS OF GUARANTEE AND CREDIT COMMITMENTS BY ECONOMIC SECTOR

 

As at December 31

2012

2011

(in thousands of dollars)

Residential mortgages

$           199,083

 $         300,012

Consumer, credit card and other personal loans

1,298,864

           959,531

Public administrations

2,414,647

         2,426,763

Agriculture and related enterprises

59,826

              13,536

Retail trade

1,211,181

         1,065,334

Wholesale trade

360,165

            477,277

Education

3,167,274

         3,452,610

Accommodation and food services

31,706

              40,214

Non-residential real estate

416,315

         1,114,382

Construction industries

 426,959

            391,171

Manufacturing industries

1,245,011

         1,088,347

Financial intermediaries

19,595,691

       19,523,732

Fishing, logging and mining

1,044,813

            806,096

Health and social services

403,776

460,438

Service corporations

954,975

           832,652

Telecommunications and utilities

1,891,464

        1,316,523

Transportation and warehousing

662,708

           586,868

Other sectors

208,175

           243,327


 $      35,592,633

 $    35,098,813

 

ADDITIONAL CREDIT RISK DATA

 

The tables below provide additional credit risk data. Used and unused exposures are comprised of the main credit risks, while off-balance sheet exposures include credit equivalent amounts for comparable transactions, over-the-counter derivatives, other off-balance sheet exposures and the overall trading portfolio.

 

TABLE 16 - RISK EXPOSURE BY ASSET CLASS(1)  

 

As at December 31

2012


 Exposure category


 Used

 exposures  

Unused

exposures

Off-balance

sheet exposure(2)

 

 Total

 Net

exposure(3)

(in thousands of dollars)

Standardized Approach






Sovereign borrowers

 $   5,582,143

 $    586,257

 $        49,261

 $   6,217,661

 $   6,217,661

Financial institutions

14,351,705

2,220,827

4,276,846

20,849,378

18,503,177

Business

 3,464,271

2,679,722

 178,416

6,322,409

6,193,749

Mortgages

 186,490

--

--

 186,490

186,490

Other retail client exposures

1,298,712

--

--

1,298,712

 21,052

Equities

5,907

--

--

5,907

5,907

Trading portfolio

 --

--

601,625

601,625

455,213

Total

 $ 24,889,228

 $ 5,486,806

 $   5,106,148

 $ 35,482,182

 $ 31,583,249

(1) The definition of exposure categories related to regulatory capital differs from the accounting classification.

(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.

 

  

 

TABLE 17 - GROSS EXPOSURE BY ASSET CLASS(1) AND BY RISK TRANCHE (STANDARDIZED APPROACH)(2)

 

As at

December 31

2012


Risk tranches

(in thousands of dollars)

0%

20%

35%

50%

75%

100%

Other

Total

Sovereign borrowers

 $6,217,661

$               --

 $            --

 $      --

 $            --

 $            --

 $         --

 $  6,217,661

Financial institutions

--

20,849,378

--

--

--

--

--

20,849,378

Business

--

101,844

--

3,548

--

6,188,940

32,942

6,327,274

Mortgages

--

--

180,739

--

--

5,751

--

186,490

Other retail client
   exposures

--

--

--

--

1,298,712

--

--

1,298,712

Equities

--

--

--

--

--

5,907

--

5,907

Trading portfolio

23,471

565,049

--

1,522

--

11,133

450

601,625

Total

$6,241,132

 $21,516,271

 $  180,739

 $5,070

 $1,298,712

$6,211,731

 $33,392

 $35,487,047

(1) The definition of exposure categories related to regulatory capital differs from the accounting classification.

(2) Exposures before individual allowances for losses and before CRM.

 

MAXIMUM CREDIT RISK EXPOSURE

Table 18 presents the maximum credit risk for financial instruments, without any collateral held or other credit enhancements. The maximum credit risk exposure for other financial instruments recognized in the Consolidated Balance Sheets is equal to their carrying amount.

 

TABLE 18 - MAXIMUM CREDIT RISK EXPOSURE

 

As at December 31

2012

2011

(in thousands of dollars)

Recognized in the Consolidated Balance Sheets





Deposits with financial institutions

$

 414,728

$

 178,099

Securities





Available-for-sale securities


5,017,104


5,308,822

Debt securities designated as at fair value through profit or loss


1,763,551


1,776,279

Loans


18,293,091


17,836,349

Total

$

25,488,474

$

25,099,549

Off-balance sheet





Guarantees and standby letters of credit

$

 374,608

$

 481,194

Credit commitments


16,920,070


16,769,923

Total off-balance sheet

$

17,294,678

$

17,251,117

 

 

CREDIT RISK MITIGATION

 

In its lending operations, CCD obtains collateral if deemed necessary for a client's loan facility based on an assessment of the client's creditworthiness. Collateral normally takes the form of assets such as property, plant and equipment, trade receivables, inventory, cash, government securities, or shares. For some portfolios, programs offered by organizations such as Canada Mortgage and Housing Corporation are used in addition to the customary collateral.

 

Policies and procedures adapted to each product describe the requirements for valuation of collateral, its legal validation and follow-up.

 

Where required, CCD uses mechanisms to share risk with other financial institutions, such as loan syndication.

 

 

 

 

TABLE 19 - LOANS BY BORROWER CATEGORY

 

As at December 31

2012

2011

2010

2009

2008

(in millions of dollars)


 IFRS

GAAP

Composition






Day, call and short-term loans to investment
dealers and brokers

$           --

$     91

$    103

$      59

$     82

Public and parapublic sectors

1,065

1,905

1,609

1,974

2,201

Members






Federation

10,803

9,679

8,724

5,776

6,399

Other

185

230

190

20

24

Other entities included in the group perimeter

Of Desjardins Group

1,417

1,887

1,659

1,680

2,113

Loans purchased from Desjardins Group

89

138

185

230

141

Personal

1,396

1,100

813

597

509

Business

3,343

2,817

2,770

2,809

3,393

Allowance for credit losses

$     (53)

$     (58)

$     (66)

$   (129)

$   (127)

Total

$ 18,245

$ 17,789

$ 15,987

$ 13,016

$ 14,735

 

quality of the loan portfolio

 

CHART 2

 

(REFER TO DOCUMENT «MDA CCD - CHART 2 -T4-2012  »)

http://www.rns-pdf.londonstockexchange.com/rns/8419Y_-2013-2-27.pdf

 

ALLOWANCE FOR CREDIT LOSSES

 

The impairment of a loan or a group of loans is determined by discounting future expected cash flows at the interest rate inherent to the financial asset. The allowance is equal to the difference between this amount and the carrying amount. This allowance is presented in deduction of assets under "Allowance for credit losses". To determine the estimated recoverable amount of a loan, CCD discounts the estimated future cash flows at the effective interest rate inherent to the loan. When the amounts and timing of future cash flows cannot be estimated with reasonable reliability, the estimated recoverable amount is determined using either the fair value of any security underlying the loan, net of expected costs of realization, or the observable market price for the loan. The security may vary depending on the type of loan.

 

INDIVIDUAL ALLOWANCES

 

CCD first reviews its loan portfolios on a loan-by-loan basis to assess credit risk and determine if there is any objective evidence of impairment for which a loss should be recognized in the Consolidated Statements of Income. Loan portfolios for which an individual allowance has not been established are then included in groups of assets having similar credit risk characteristics and are subject to a collective allowance. Individual allowances totalled $4.9 million as at December 31, 2012, compared to $11.3 million as at the same date one year earlier. As shown in Table 21, this amount represented 23.6% of the gross impaired loan portfolio, versus a ratio of 29.4% as at December 31, 2011.

  

 

TABLE 20 - IMPAIRED LOANS BY BORROWER CATEGORY

 

As at December 31

2012

2011

(in millions of dollars and as a percentage)

 Gross loans

 Gross impaired loans

 Individual allowances

 Net impaired loans

Net impaired loans

Public and parapublic sectors

$

1,065 

$


 --

%

$

 --

$

--

$

--

Members













Federation


10,803


 --

--



 --


--


--

Other


185 


  --

--



 --


--


--

Other entities included in the group perimeter
  of Desjardins Group


 1,417 


  --

--



 --


--


--

Loans purchased from Desjardins Group


   89 


  --

 --



 --


--


--

Personal


1,396 


 6

0.43



 --


6


 8

Business


3,343 


15

0.45



 5


10


 20

Total

$

18,298

$

21



$

 5

$

16

$

 28

As a percentage of gross loans





0.11

%




0.09 %


0.15%

 

TABLE 21 - SPECIFIC COVERAGE RATIO

 


2012

2011

(as a percentage)

Impaired loan portfolio coverage ratio(1)

23.6

%

29.4

%

(1) The specific coverage ratio is equal to total individual allowances divided by total gross impaired loans.

 

COLLECTIVE ALLOWANCE

 

The method used by CCD to determine the collective allowance takes into account the risk parameters of the various loan portfolios, in particular through the integration of sophisticated credit risk models. These collective allowance impairment models take into account certain factors such as probabilities of default (loss frequency), loss given default (extent of losses) and gross exposures at default. These parameters are based on historical losses and are determined according to the category and the risk rating of each loan. The measurement of the collective allowance also depends on management's assessment of current credit quality trends with respect to business sectors, the impact of changes in its credit policies, and economic conditions.

 

The collective allowance stood at $47.9 million as at December 31, 2012, versus $47.1 million as at December 31, 2011. An allowance related to off-balance sheet exposures of $29.1 million as at December 31, 2012, compared to $28.7 million as at the end of 2011 was recognized under "Other liabilities - Other" in the Consolidated Balance Sheets. The collective allowance reflects management's best estimate of allowances for credit losses regarding loans not yet individually identified as impaired.

 

IMPAIRED LOANS

 

There is objective evidence of impairment when one of the following conditions is met: there is reason to believe that a portion of the principal or interest cannot be collected; or the interest or principal repayment is contractually 90 days or more past due, unless the loan is fully secured or in the process of collection; or the interest or principal is more than 180 days in arrears.

 

The volume of impaired loans decreased $18.0 million, from $38.6 million as at December 31, 2011 to $20.6 million at year-end 2012, due to the repayment and write-off of some of these loans. Net impaired loans-i.e. the gross amount less individual allowances for these loans-was $15.8 million as at December 31, 2012. Net impaired loans outstanding accounted for less than 0.1% of the gross loan portfolio as at December 31, 2012.

 

PROVISION FOR CREDIT LOSSES

 

CCD recognized a $7.4 million provision for credit losses for the year ended December 31, 2012, an increase of $4.6 million from the $2.8 million provision recognized in 2011. This increase was primarily due to growth in outstandings for the Business and Institutional Services loan portfolio as well as an individual provision arising from the settlement related to a credit file considered impaired. It should nevertheless be mentioned that the increase was partially offset by a favourable change in the collective allowance.

 

 

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.

 

CCD is exposed to market risk primarily through positions taken in the course of its traditional financing and trading activities. CCD has adopted policies that set out the principles, limits, and procedures to use in managing market risk.

 

INTEREST RATE RISK MANAGEMENT

 

CCD is exposed to interest rate fluctuations, which may potentially impact net interest income and the economic value of equity. Interest rate risk is the main component of market risk for CCD's traditional banking activities other than trading, such as accepting deposits and granting loans, as well as for the securities portfolio used for long-term investment purposes and as liquidity reserves.

 

Sound and prudent management is applied to optimize net interest income while minimizing the negative impact of interest rate movements. The policies established 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 (the Asset/Liability Committee) is responsible for analyzing and approving the overall matching strategy on a monthly basis while respecting the parameters defined in interest rate risk management policies.

 

The following table presents the potential impact before income taxes on the non-trading portfolio of a sudden and sustained 100-basis-point increase or decrease in interest rates on net interest income and the economic value of equity.

 

TABLE 22 - INTEREST RATE SENSITIVITY (BEFORE INCOME TAXES)

 

As at December 31

2012

2011

(in thousands of dollars)

Net interest income(1)

Economic value of equity(2)

Net interest income(1)

Economic

value of equity(2)

Impact of a 100-basis-point increase in interest rates

 $     2,085

 $      (3,140)

 $        815

 $     (4,322)

Impact of a 100-basis-point decrease in interest rates

 $   (5,988)

  $        3,770

 $   (2,966)

 $       4,517  

(1) Represents the sensitivity of net interest income for the next 12 months.

(2) Represents the sensitivity of the present value of assets, liabilities and off-balance sheet instruments.

 

Interest rate sensitivity is based on the earlier of the repricing or maturity date of the assets, liabilities and derivative financial instruments used to manage interest rate risk. The situation presented reflects the position on that date only and can change significantly in subsequent years depending on the preferences of members and clients and the application of policies on interest rate risk management.

 

Some Consolidated Balance Sheets items are considered non interest rate-sensitive instruments, such as non-performing loans, non-interest-bearing deposits, non-maturity deposits with an interest rate not referenced to a specific rate (such as the prime rate), and equity. CCD's management practices are based, as required by its policies, on prudent assumptions regarding the maturity profile used in its models in order to determine their interest rate sensitivity.

 

FOREIGN EXCHANGE RISK

 

Foreign exchange risk may be defined as the risk that the actual or expected value of assets denominated in a foreign currency will be higher or lower than that of liabilities denominated in the same currency.

 

Overall, CCD's exposure to this risk is low because the majority of its transactions are conducted in Canadian dollars. However, in certain specific situations, CCD may become exposed to foreign exchange risk, particularly with respect to the U.S. dollar and the euro. This exposure mainly arises from its intermediation activities with members and clients, and it financing and investing activities. To ensure that such exposure is well controlled and limited, CCD uses, among other things, derivative financial instruments such as forward exchange contracts and currency swaps.

 

 

MANAGEMENT OF MARKET RISK RELATED TO TRADING ACTIVITIES - VALUE-AT-RISK

 

The market risk of trading portfolios is managed daily under a specific policy for that purpose. 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 the trading portfolios for a holding horizon of one day. It is therefore reasonable to expect a loss exceeding the VaR figure once every 100 days. The calculation of VaR is based on historical data over a one-year interval.

 

The following table presents the aggregate VaR of CCD'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 different risk categories. Interest rate and foreign exchange risks are two risk categories to which CCD is exposed. The definition of a trading portfolio meets the various criteria defined in the Basel Capital Accord.

 

TABLE 23 - VaR BY RISK CATEGORY (TRADING PORTFOLIO)

 


2012

2011


As at December 31

For the year ended December 31

As at December 31

For the year ended December 31

(in thousands of dollars)


Average

High

Low


Average

High

Low

Foreign exchange

 $      40

 $    42

 $ 114

 $     1

 $     39

 $    95

 $    526

 $      2

Interest rate

357

467

777

269

275

339

989

117

Diversification effect(1)

(26)

(44)

N/A(2)

N/A(2)

(53)

(86)

N/A(2)

N/A(2)

Aggregate VaR

 $    371

 $   465

 $ 745

 $ 264

 $   261

 $   348

 $ 1,040

 $  133

(1) Risk reduction related to diversification, namely the difference between the sum of the VaR for the various market risk categories and the aggregate VaR.

(2) Not applicable: the highs and lows of the various market risk categories can refer to different dates.

 

As at December 31, 2012, the aggregate VaR was $370,879, with the interest rate VaR being the largest component. This aggregate VaR was lower than its annual average of $465,460. The risk mitigation related to diversification was $26,411 as at December 31, 2012.

 

BACK TESTING

 

Back testing is conducted to validate the VaR model used by comparing the VaR daily with the profits or losses (hereinafter called "P&L") on CCD's portfolios.

 

CCD performs back testing daily, applying a hypothetical P&L to its trading portfolios. The hypothetical P&L is calculated by determining the difference in value resulting from changes in market conditions between two consecutive days. The portfolio mix between these two days remains static.

 

The chart below presents changes in VaR for trading activities as well as the profits and losses related to these activities. During the fourth quarter of 2012, the actual P&L did not exceeded VaR.

 

CHART 3

 

(REFER TO DOCUMENT «MDA CCD - CHART 3 -T4-2012 »)

http://www.rns-pdf.londonstockexchange.com/rns/8419Y_-2013-2-27.pdf 

 

 

  

 

STRESS TESTING

 

From time to time, certain events that are considered highly unlikely may occur and have a significant impact on trading portfolios. These events at the tail-end of the distribution are the result of extreme situations.

 

The approach used to measure the risk related to events that are highly unlikely, but plausible, is applied through the regular use of a stress testing program (sensitivity tests, historical scenarios and hypothetical scenarios). Stress testing results are analyzed together with the VaR calculations in order to detect vulnerability to such events. The stress testing program is reviewed periodically to ensure that it is kept current.

 

LIQUIDITY RISK

 

Liquidity risk refers to CCD's capacity to raise the necessary funds (by increasing liabilities or converting assets) to meet a financial obligation, whether or not it appears on the Consolidated Balance Sheets.

 

Through Desjardins Group, CCD is exposed to liquidity risk during potential crisis situations that would result in exceptional cash outflows and make it difficult for the Desjardins Group Treasury to find sufficient funding to meet this sudden demand. For instance, such extreme situations could occur following massive withdrawals in the caisse network, which might occur if members lose confidence in the strength of the institution. Liquidity risk management is a key component of the overall risk management strategy. CCD and Desjardins Group have established policies describing the principles, limits, risk appetite and tolerance levels and mechanisms applicable to liquidity risk management.

 

 

LIQUIDITY RISK MANAGEMENT

 

Liquidity risk is managed in order to ensure that CCD and Desjardins Group have access, on a timely basis and in a profitable manner, to the funds needed to meet their financial obligations as they become due in both routine and crisis situations. Managing this risk involves maintaining a sufficient level of liquid securities, ensuring stable and diversified sources of funding, monitoring indicators and adopting a contingency plan to implement in the event of a liquidity crisis.

 

Policies and standards are reviewed on a regular basis to ensure that they are appropriate for the operating environment and prevailing market conditions. They are also updated based on regulatory requirements and sound liquidity risk management practices.

 

LIQUIDITY RESERVES

 

The minimum liquidity reserves that must be maintained by the caisse network, the Federation and CCD are prescribed in policies and standards specific to each one. Daily management of securities and the reserve level to be maintained is centralized at Desjardins Group Treasury and is subject to risk management monitoring by the Risk Management Division under the supervision of Desjardins Group's Finance and Risk Management Committee. Eligible securities must meet high security and negotiability standards. The securities held in these funds are largely Canadian government securities.

 

The aggregate liquidity reserves held in these funds provide Desjardins Group and CCD with some room to manoeuvre and are monitored daily. In addition to complying with specific policies and standards, the levels maintained must provide assurance of their adequacy in the event of a possible severe liquidity crisis directly affecting Desjardins Group and CCD, as it would be the case, for instance, if its credit rating were downgraded by rating agencies. A Desjardins Group-wide crisis scenario program has been implemented for this purpose. This program incorporates the concepts put forward by BIS under the document entitled "Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring." The scenarios make it possible to measure the extent of potential cash outflows in a crisis situation, to implement liquidity ratios and levels to be maintained throughout Desjardins Group, and to assess the potential marginal cost of such events, depending on the type, severity and level of the crisis.

 

The arrival of Basel III will also strengthen international minimum liquidity requirements. This accord introduced a liquidity coverage ratio (LCR) to allow financial institutions to face potential liquidity crisis situations, and a net stable funding ratio (NSFR) to address mismatches between assets and funding sources. Even though the Basel Committee is still studying these two ratios and there is currently an observation period, the AMF expects Desjardins Group and CCD to calculate these ratios in order to benefit from an observation period before the planned effective dates of January 1, 2015 for the LCR and January 1, 2018 for the NSFR. Desjardins Group already monitors these two ratios on a regular basis for management information purposes and intends to comply with the new standards when they become effective.

 

SOURCES OF FUNDING

 

CCD ensures stable and diversified sources of institutional funding by type, source and maturity. It uses a wide range of financial products and borrowing programs on various markets to meet its financing needs.

 

It should be noted that systems are in place for the securitization of CMHC-insured loans. Furthermore, CCD is eligible for the Bank of Canada's various intervention programs and the loan facilities for Emergency Lending Assistance advances.

 

LIQUIDITY RISK INDICATORS

 

The purpose of monitoring liquidity indicators daily is to quickly identify a lack of liquidity, whether potential or real, within CCD and Desjardins Group and on capital markets. For each liquidity indicator defined, warning levels are established and subject to an escalation process. If one or more indicators trigger a warning level, the Finance and Risk Management Committee is immediately alerted. This committee would also act as a crisis committee should the contingency plan need to be applied.

 

The indicators are divided into two categories: indicators specific to CCD and Desjardins Group, and capital market indicators. The first category includes indicators that monitor the level of CCD's and Desjardins Group's flexibility, members' behaviour, the credit spreads facing CCD, and the effectiveness of institutional funding sources. Market indicators apply primarily to the credit spreads observed for financial institutions and provinces compared to federal bonds.

 

CONTINGENCY PLAN

 

CCD and Desjardins Group developed a liquidity contingency plan providing for, in particular, an internal crisis committee vested with special decision-making powers to deal with crisis situations. This plan lists the sources of liquidity available in exceptional situations. It also prescribes a decision-making and information process based on the severity level of a possible crisis.

 

The objective of the plan is to make it possible to quickly and effectively minimize disruptions caused by sudden changes in members' and clients' behaviour and potential disruptions in capital markets or economic conditions.

 

SOURCES OF FINANCING

 

As Desjardins Group's treasurer, CCD meets the needs of its members and clients. Its first priority is to implement appropriate strategies to identify, measure and manage risks. These activities are regulated by a liquidity sufficiency and administration policy and a refinancing management policy.

 

In order to maintain stable and diversified refinancing, CCD ensures the diversification of its sources of financing from institutional capital markets. It therefore regularly resorts to the capital market when conditions are favourable, and occasionally makes public and private issues of term notes on Canadian, U.S. and European markets.

 

In 2012, CCD managed to maintain sufficient liquidity to meet Desjardins Group's needs through its rigorous treasury policy, solid institutional refinancings and the contribution of the caisse network. CCD's strict treasury strategy allowed it to be well positioned to confidently weather the period of global financial stabilization that is currently beginning.

 

In keeping with the strategy of increasing the duration of institutional refinancing and its mission as Desjardins Group treasurer, CCD issued debt securities on various markets in 2012The presence of Desjardins on these different markets also helped expand its pool of institutional investors.

 

CCD continued to be present on the federally-guaranteed mortgage loan securitization market under the Canada Mortgage Bonds Program (CMB). CCD has in fact been active in this area, with participation in new issues of approximately $1.5 billion in 2012, namely four five-year fixed rate CMB issues, and one five-year floating rate CMB issue. The main objective of the program is to obtain a source of long-term financing at the lowest price on the market.

 

Overall, these transactions made it possible to adequately meet the liquidity needs of Desjardins Group, to better diversity sources of financing and to further extend their average term.

 

Following is a summary of CCD's various borrowing programs:

 

On the Canadian market:

-   a medium-term note program of up to $5 billion;

 

On the international market:

-   a European short-term note program of €1 billion;

-   a U.S. short-term note program of US$5 billion;

-   a global multi-currency medium-term note program of €7 billion.

 

It should be noted that the medium-term multi-currency note program is currently in the process of being renewed.

 

Charts 4 and 5 present the breakdown of deposits as at December 31, 2012 by category and by currency.

 

CHART 4

 

 

 

(REFER TO DOCUMENT « MDA CCD - CHART 4 - T4-2012 »)

http://www.rns-pdf.londonstockexchange.com/rns/8419Y_-2013-2-27.pdf 

 

 

 

 

 

 

CHART 5

 

 

 

(REFER TO DOCUMENT « MDA CCD - CHART 5 - T4-2012 »)

http://www.rns-pdf.londonstockexchange.com/rns/8419Y_-2013-2-27.pdf 

 

 

 

 

 

RATING AGENCIES

 

The credit ratings assigned to CCD by ratings agencies are instrumental to its access to sources of wholesale financing and the cost of such financing, as well as Desjardins Group's credibility and recognition among institutional investors. Rating agencies assign investment-grade ratings to securities issued by CCD and recognize the financial strength of Desjardins Group, its capitalization, the stability of its operating surplus earnings, its leading role in local markets and the quality of its assets.

 

On December 13, 2012, Standard & Poor's downgraded the credit ratings of CCD and five other Canadian financial institutions. This agency said it was concerned about the debt levels of Canadians and the consequences they could have on financial institutions, particularly on their mortgage loan portfolios and the volume of credit losses. It expects a slowdown in credit demand and greater pressure on the margins of the country's financial institutions, in a low interest rate environment.

 

In addition, on January 28, 2013, Moody's downgraded the credit ratings of CCD and five other Canadian financial institutions. This agency stated that this decision was essentially due to the economic situation in Canada, that shows signs of concern, including high consumer debt levels and elevated housing prices. Moody's also clarified that financial institutions are more vulnerable than in the past to downside risks the Canadian economy faces.

 

Management is of the opinion that these decisions have more to do with the agencies' concern about Canada's economic situation than with the quality of CCD's loan portfolio or balance sheet.

 

Even after the downgrade, CCD's credit ratings remain among the best in Canada and compare favourably with those of many large international and Canadian financial institutions.

 

The credit ratings and outlooks assigned by Fitch and DBRS to CCD's various securities were unchanged in fiscal 2012.

 

TABLE 24 - CREDIT RATINGS OF ISSUED SECURITIES

 


DBRS

Standard & Poor's

Moody's

Fitch

Short-term

R-1 (high)

A-1

P-1

F1+

Medium- and long-term, senior

AA

A+

Aa2

AA-

 

CONTRACTUAL OBLIGATIONS

 

Contractual obligations lead to commitments through contracts under which minimum future payments impact CCD's liquidity needs. Such contractual obligations are recognized in the Consolidated Balance Sheets or are off-balance sheet.

 

Table 25 presents financial liabilities as well as other obligations by remaining contractual maturities. Amounts presented include principal and interest, if any.

 

TABLE 25 - CONTRACTUAL OBLIGATIONS BY TERM TO MATURITY

 

As at December 31

2012

(in thousands of dollars)

Payable on demand

1 year or less

Over 1 to 5 years

Over 5 years

Total

Liabilities






Deposits

 $  1,809,633

 $10,279,011

 $11,210,269

 $   231,388

$  23,530,301

Acceptances

 --

841,000

 --

 --

841,000

Commitments related to securities sold short

 --

929

 44,279

 17,846

63,054

Commitments related to securities sold under
repurchase agreements

 --

 574,880

 --

 --

 574,880

Other financial liabilities

 --

1,202,447

 52,716

 --

1,255,163

Guarantees and standby letters of credit

 --

232,757

141,000

851

374,608

Credit commitments

 --

10,696,732

6,172,299

51,039

16,920,070

Derivative financial instruments with net

 settlement

 --

624,758

1,259,673

 45,271

1,929,702

Derivative financial instruments with gross

 settlement(1)






Cash flows to be paid on liabilities

 --

4,288,995

1,421,907

 --

5,710,902

Cash flows to be paid on assets

 $                --

 $  4,867,689

 $  2,719,621

 $              --

 $   7,587,310




2011


Payable on demand

1 year or less

Over 1 to 5 years

Over 5 years

Total

Liabilities






Deposits

 $  3,520,389

 $  9,967,626

 $  8,410,334

 $    648,337

 $   22,546,686

Acceptances

--

 676,500

 --

 --

 676,500

Commitments related to securities sold short

--

 17,016

 54,360

 1,946

 73,322

Commitments related to securities sold under
repurchase agreements

 --

 242,533

 --

--

 242,533

Other financial liabilities

 --

2,198,090

 70,811

--

2,268,901

Guarantees and standby letters of credit

 --

 237,188

 244,006

--

 481,194

Credit commitments

 --

11,322,008

4,179,148

1,268,767

16,769,923

Derivative financial instruments with net settlement

 --

885,097

 1,754,901

 205,927

2,845,925

Derivative financial instruments with gross settlement(1)






Cash flows to be paid on liabilities

 --

 7,532,332

1,544,726

--

9,077,058

Cash flows to be paid on assets

 $               --

 $  1,566,336

 $  1,690,266

 $        7,211

 $     3,263,813

 

(1) The "Derivative financial instruments with gross settlement" category presents cash flows to be paid on both derivative financial instruments recorded as liabilities and derivative financial instruments recorded as assets. Contractual cash outflows for derivative financial instruments with gross settlement are accompanied by related cash inflows that are not included in the above table.

 

OPERATIONAL RISK

 

Operational risk is defined as the risk of inadequacy or failure attributable to processes, people, internal systems or external events resulting in losses, failure to achieve objectives or a negative impact on reputation.

 

OPERATIONAL RISK MANAGEMENT

 

Operational risk is inherent to all business activities as well as internal and outsourced activities. Losses can mainly arise from fraud, damage to tangible assets, illegal acts, lawsuits, systems failures, or problems in process management.

 

OPERATIONAL RISK MANAGEMENT FRAMEWORK

 

The primary objective of the operational risk management framework is to maintain operational risk at an acceptable level while ensuring quality and organizational agility. The development of policies, guidelines and rules to identify, measure, track, monitor and disclose operational risk ensures its sound and prudent managed.

 

Practices currently in place to foster efficient and proactive management of operational risk events include risk assessment, management of outsourcing risks, protection of information and insurance coverage, as well as business continuity and crisis management.

 

The operational risk management framework is periodically reviewed based on regulatory authorities' expectations and industry practices.

 

OUTSOURCING RISK MANAGEMENT

 

A program has been set up for managing CCD's outsourcing. Major outsourcing agreements have been identified and are monitored to ensure that they are being properly managed.

 

BUSINESS CONTINUITY AND CRISIS MANAGEMENT

 

The business continuity program has been enhanced to ensure that service delivery to members and clients will be maintained in essential operations in the event of business interruptions, system disruptions or crises.

 

INFORMATION RISK MANAGEMENT

 

Given the importance of protecting information, CCD implemented an information risk management program as well as a training and awareness program to protect privacy and ensure the security of its members' and clients' property.

 

TECHNOLOGY RISK MANAGEMENT

 

Technology risk management progressed through the implementation of a specific framework for all technology services delivered to CCD by Desjardins Technology Group. The framework defines the concept of technology risks, the scope of application of the technology risk management approach, the governance structure and management activities.

 

STRATEGIC RISK

 

Strategic risk refers to a possible loss attributable to an inability to adapt to a changing environment because of a failure to act, an inappropriate strategic choice or the inability to effectively implement strategies.

 

It is first up to senior management and the Board of Directors to address and define CCD's strategic orientations according to the consultation processes specific to it, and to monitor changes. Events that could compromise the achievement of CCD's strategic objectives and initiatives are systematically and regularly monitored by its officers and senior management.

 

REPUTATION RISK

 

Reputation risk is the risk of being perceived negatively by stakeholders, whether or not justifiably, because of Desjardins Group's or CCD's practices, actions or lack of action, which could have an unfavourable impact on its income and equity, and the trust that it inspires.

 

Reputation is of critical importance and cannot be managed separately from other risks. Consequently, managing reputation risk in all its spheres of activity is a constant concern for CCD.

 

The organization has defined guidelines, a management framework, and roles and responsibilities with regard to reputation risk. This framework is in addition to various processes already in place, such as the regulatory compliance function and ethical requirements to encourage sound management of reputation risk. Management personnel and employees are required to perform their duties in accordance with these principles as well as the values of Desjardins Group and CCD.

 

OVERVIEW OF OTHER RISKS

 

ENVIRONMENTAL RISK

 

Environmental risk is the risk of financial, operational or reputational loss for CCD as a result of environmental impact or issues, whether they occur through CCD's credit or investment activities or its operations.

 

LEGAL AND REGULATORY ENVIRONMENT RISK

 

Legal and regulatory environment risk represents the consequences of not complying with the laws, regulations, standards and practices governing our operations.

 

The financial services industry is one of the most strictly regulated sectors. In fact, in recent years the regulations governing the finance sector have evolved significantly in response to numerous socio-economic phenomena such as the development of new, increasingly complex financial products, the continuing volatility in the securities industry, market crisis, financial fraud, the fight against money laundering and terrorist financing, to mention but a few. In addition to federal (Canadian and U.S.) and provincial government requirements, the regulatory environment also includes organizations such as the Autorité des marchés financiers du Québec (AMF), the Canadian securities administrators, the Office of the Superintendent of Financial Institutions (OSFI), the Mutual Fund Dealers Association of Canada (MFDAC) and, in the U.S., the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Complying with major legislative and regulatory changes such as the Foreign Account Tax Compliance Act (FATCA), the Volcker Rule or the Basel Accord requires Desjardins Group to make significant investments of financial and human resources. It should be noted that CCD is not directly subject to all these regulations, but they are nevertheless part of Desjardins Group's regulatory environment.

 

Legal and regulatory environment risk entails, inter alia, effectively preventing and handling possible disputes and claims, which may lead to decisions by a court of law or regulatory agency that could result in financial penalties. They may also end in unfavourable decisions or settlements that could negatively affect the conduct of CCD's current operations and lead to further costs associated with legal proceedings that could have an adverse impact on CCD's financial position and corporate image.

 

CCD manages the risk related to the legal and regulatory environment by promoting a strong culture of compliance and by setting up a compliance management framework. This framework is used to identify risks of non-compliance, to assess the potential consequences of such risks and to implement practices to manage them effectively. In addition, a chief compliance officer with Desjardins Group supervises all Desjardins Group's teams engaged in compliance activities. This overall management of compliance provides reasonable assurance that CCD's operations comply with the applicable regulations.

 

The compliance function is responsible for developing, updating and maintaining the compliance management framework. It is based on a number of principles, including the identification and monitoring of regulatory obligations and the functional units subject to them. To do so, regulatory developments and their impact on operations are monitored on an ongoing basis. The compliance function provides support in an advisory capacity to managers in charge of the business segments so that they can effectively manage their risks. It also conducts periodic inspections of operations and provides further support through training programs. Lastly, a formal reporting process is in place for CCD's senior management and governing bodies.

 

SECTION 4.2

 

OTHER RISK FACTORS

 

Besides the risk factors described in section 4.1, Risk Management, certain other risk factors may impact CCD's future results.

 

GENERAL ECONOMIC AND BUSINESS CONDITIONS IN THE REGIONS IN WHICH CCD OPERATES

 

General economic and business conditions in the regions in which CCD operates may significantly affect its revenues. These conditions include short and long-term interest rates, inflation, debt securities market fluctuations, foreign exchange rates, the volatility of capital markets, including tighter liquidity conditions in certain markets, the strength of the economy and the volume of business conducted by CCD in a given region.

 

FOREIGN EXCHANGE RATES

 

Exchange rate fluctuations in the Canadian dollar, the U.S. dollar and other foreign currencies may affect CCD's financial condition and its future earnings. Fluctuations in the Canadian dollar may also adversely impact the earnings of CCD's business clients in Canada.

 

MONETARY POLICY

 

The monetary policies of the Bank of Canada and the Federal Reserve Board in the United States, as well as other interventions in capital markets, have an impact on CCD's income. The general level of interest rates may affect CCD's profitability. Fluctuations in interest rates affect the spread between interest paid on deposits and interest earned on loans, which could change CCD's net interest income. CCD has no control over changes in monetary policies or capital market conditions, and it therefore cannot forecast or anticipate them systematically.

 

COMPETITION

 

The level of competition in markets in which CCD operates affects its performance. Client retention depends on many factors, such as product and service pricing, changes to the products and services offered, and customer service delivery.

 

CHANGES IN STANDARDS, LAWS AND REGULATIONS

 

Changes made to standards, laws and regulations, including changes affecting their interpretation or implementation, could have an impact on CCD by restricting its product or service offering or by enhancing the ability of competitors to compete with its products or services. In addition, CCD's failure to comply with applicable laws, regulations and other guiding principles, even though it takes care to avoid such a possibility, could result in penalties and fines that may have an unfavourable impact on its reputation and financial results.

 

ACCURACY AND COMPLETENESS OF INFORMATION CONCERNING CLIENTS AND COUNTERPARTIES

 

CCD relies on the accuracy and completeness of the information concerning its clients and counterparties. When deciding to authorize credit or other transactions with clients or counterparties, CCD may use information provided by them, including financial statements and other financial information. It may also rely on representations made by clients and counterparties regarding the completeness and accuracy of such information, and on auditors' reports regarding the financial statements. The financial condition and income of CCD could be adversely affected if it relied on financial statements that do not comply with accounting standards, are misleading or do not present fairly, in all material respects, the financial condition and the results of operations of clients and counterparties.

 

ACCOUNTING POLICIES AND METHODS USED BY CAISSE CENTRALE

 

The accounting policies and methods that CCD uses determine how it reports its financial position and results of operations, and they may require management to make estimates or rely on assumptions about matters that are inherently uncertain. Any change to these estimates and assumptions may have a significant impact on CCD's results of operations and financial position.

 

NEW PRODUCTS AND SERVICES TO RETAIN OR INCREASE MARKET SHARE

 

The ability of CCD to retain or increase its market share depends partly on its skill in adapting its products and services to changing standards in the financial services industry. Financial services companies are subject to increasing pressure regarding the pricing of their products and services. This factor may reduce net interest income or revenues from fee-based products and services. Moreover, the adoption of new technologies could require CCD to modify or adapt its products and services, resulting in major expenses.

 

ABILITY TO RECRUIT AND RETAIN KEY MANAGEMENT PERSONNEL, INCLUDING EXECUTIVES

 

CCD's future performance depends partly on its ability to recruit and retain key management personnel including at the executive level. In addition, intense rivalry to attract the best people pervades the financial services industry. CCD cannot, however, be sure that it will be able to continue to recruit and retain key management personnel and executives, even though this is one of the objectives of its resources management policies and practices.

 

BUSINESS INFRASTRUCTURE

 

Third parties provide some of the essential components of CCD's business infrastructure, such as Internet connections and network access. Interruptions in network access services or other communication services provided by such third parties could adversely affect the ability of CCD to offer products and services to customers and to otherwise conduct its business.

 

GEOGRAPHIC CONCENTRATION

 

As at December 31, 2012, CCD's lending in Quebec accounted for 90% of its total loans, and CCD's operations are heavily concentrated in Quebec. As a result of this geographic concentration, CCD's results depend largely on economic conditions in Quebec. Deterioration in economic conditions in this market could:

 

(i)             increase past due loans;

(ii)            increase problem assets and foreclosed property;

(iii)           increase claims and lawsuits;

(iv)           decrease the demand for CCD's products and services; and

(v)            decrease the value of collateral for loans, especially mortgages, in turn reducing customers' borrowing capacity, the value of assets associated with impaired loans and collateral coverage.

 

CREDIT RATINGS

 

The credit ratings assigned to CCD by ratings agencies are instrumental to its access to sources of wholesale financing and the cost of such financing. There is no guarantee that credit ratings and outlooks assigned by the agencies to CCD's various securities will be maintained. Furthermore, it should be noted that a downgrade to CCD's various ratings could raise its cost of funding and reduce its access to capital markets.

 

OTHER FACTORS

 

Other factors that may have an impact on CCD's future results include changes in tax laws, unexpected changes in consumer spending and savings habits, technological changes, the ability to implement its disaster recovery plan within a reasonable time, the possible impact on CCD's business of international conflicts or natural disasters, and CCD's ability to anticipate and properly manage the risks associated with these factors within a disciplined risk environment.

 

CCD cautions the reader that factors other than the foregoing could affect future results. When investors and other stakeholders rely on forward-looking statements to make decisions with respect to CCD, they should carefully consider these factors as well as other uncertainties, potential events, and industry factors or items specific to CCD that could adversely impact its future results.

  

 

 

SECTION 4.3

 

ADDITIONAL INFORMATION RELATED TO CERTAIN RISK EXPOSURES

 

The tables below provide more details about more complex financial instruments that have a higher risk.

 

TABLE 26 - DERIVATIVE FINANCIAL INSTRUMENTS

 

As at December 31

2012

2011

(in millions of dollars)

Notional amount

Positive

 value

Negative value

Notional amount

Positive

value

Negative

value

Credit default swaps(1)

 $    249

 $    --

 $    6

 $     253

 $      --

 $    30

Total return swaps(2)

1,131

             --

    26

 1,140

     --

   160

(1) CCD's commitment and the nature of underlying assets are provided in the "Credit default swaps" section of Note 20, "Commitments, guarantees and contingent liabilities", to the Consolidated Financial Statements. Credit default swaps are presented in the Consolidated Balance Sheets as derivative financial instruments.

(2) These amounts do not include any amounts realized as part of securitization activities. Total return swaps are presented in the Consolidated Balance Sheets as derivative financial instruments.

 

TABLE 27 - LEVERAGED FINANCE LOANS AND SUBPRIME LOANS

 

As at December 31

2012

2011

(in millions of dollars)

Leveraged finance loans(1)

 $  165

 $  90

Alt-A mortgage loans(2)

36

 43

Subprime residential mortgage loans(3)

  2

   1

(1) Leveraged finance loans are 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.

(2) Alt-A mortgage loans are defined as loans to borrowers with non-standard income documentation. These loans are presented in the Consolidated Balance Sheets under "Loans" and are measured at amortized cost.

(3) These loans are defined as loans to borrowers with a high credit risk profile. Only one of these loans is currently in default. Subprime residential mortgage loans are presented in the Consolidated Balance Sheets under "Loans" and are measured at amortized cost.

 

5.0 ADDITIONAL INFORMATION

 

SECTION 5.1

 

CONTROLS AND PROCEDURES

 

CCD must comply with certain requirements of the regulations of the Canadian Securities Administrators (CSA) respecting continuous disclosure obligations, oversight of external auditors, certification of financial disclosures and audit committees, which led the management of CCD to provide a certification on the design and effectiveness of its disclosure controls and procedures and internal control over financial reporting as at December 31, 2012.

 

DISCLOSURE CONTROLS AND PROCEDURES

 

In accordance with the CSA guidelines in regulation 52-109, the Chair of the Board of Directors and Chief Executive Officer as well as the Chief Financial Officer of CCD,designed, or caused to be designed, financial disclosure controls and procedures which are supported in particular by the process for periodic certification of financial disclosures in annual and interim filings. All information collected as part of the financial governance process is reviewed on a quarterly and annual basis by the members of the Disclosure Committee and of the Audit Commission of CCD. The members of these governing bodies play a lead role in the oversight and assessment of the adequacy of financial disclosure controls and procedures.

 

As at December 31, 2012, in accordance with the recognized control framework of the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, CCD's management assessed the design and effectiveness of the financial disclosure controls and procedures.

 

An assessment of the design and effectiveness of disclosure controls and procedures was therefore carried out by the management of CCD, under the supervision of the Chair of the Board of Directors and Chief Executive Officer as well as the Chief Financial Officer of CCD. Based on the results of this assessment, the Chair of the Board of Directors and Chief Executive Officer as well as the Chief Financial Officer of CCD concluded that the disclosure controls and procedures are adequately designed and are effective, and do not contain any material weakness, therefore ensuring that information required to be disclosed in reports filed or submitted under Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and providing investors with complete and reliable information.

 

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The management of CCD caused an adequate internal control over financial reporting process to be designed and maintained. Such internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

 

As in the case of the assessment of disclosure controls and procedures, the design and effectiveness of internal control over financial reporting were assessed on the basis of the COSO control framework.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements, whether due to error or fraud. Moreover, management's assessment of the controls provides only reasonable, and not absolute, assurance that all the problems related to control which could give rise to material misstatement have been detected.

 

The management of CCD therefore carried out an assessment of the design and effectiveness of internal control over financial reporting under the supervision of the Chair of the Board of Directors and Chief Executive Officer as well as the Chief Financial Officer of CCD. Based on the results of this assessment, the Chair of the Board of Directors and Chief Executive Officer as well as the Chief Financial Officer of CCD have concluded that, as at December 31, 2012, internal control over financing reporting is adequately designed and effective, and does not contain any material weakness.

 

CHANGE IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

During the year ended December 31, 2012, CCD made no changes to its internal control over financial reporting that have materially affected, or that may materially affect, its activities.

 

SECTION 5.2

 

RELATED PARTY DISCLOSURES

 

In the normal course of business, CCD offers financial services to its members and other entities included in the group perimeter of Desjardins Group. Pursuant to the Act respecting the Mouvement Desjardins, the Federation and its member caisses are members of CCD. CCD offers to these related parties other operating services under market conditions that are the same as those offered to unrelated parties.

 

Transactions with members and other entities included in the group perimeter of Desjardins Group and CCD's key management personnel compensation are presented in more detail in Note 26, "Related party disclosures", to the Consolidated Financial Statements.

 

CCD has implemented a process to obtain assurance that transactions with its management personnel and the persons who are related to them have been carried out under conditions that are the same as those offered to other members and clients.

 

SECTION 5.3

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

A description of the accounting policies used by CCD is essential to understanding the Consolidated Financial Statements as at December 31, 2012. Significant accounting policies are described in Note 2, "Significant accounting policies", to the Consolidated Financial Statements. Some of these policies are of particular importance in presenting CCD's financial position and results of operations since they require management to make assumptions and estimates that may involve uncertainties and, as well, any change to these assumptions and estimates could have a significant impact on CCD's Consolidated Financial Statements. The text that follows discusses these accounting methods.

 

SPECIAL PURPOSE ENTITIES

 

CCD includes in its Consolidated Financial Statements the operations of the distinct legal structures specifically created to manage a transaction or a group of similar transactions (special purpose entities), even if it has no equity interest in these entities, provided that it exercises, in substance, control based on the following criteria:

·      The activities of the entity are being conducted exclusively on behalf of CCD, so that CCD obtains benefits for the entity's operations;

·      CCD has the decision-making and management powers needed to obtain the majority of the benefits of the ongoing activities of the entity. These powers are characterized, in particular, by the ability to dissolve the entity, to modify its statutes or to formally veto any modification thereto;

·      CCD has the ability to obtain the majority of the benefits of the entity and therefore may be exposed to risks incident to the activities of the entity. These benefits may take the form of rights to receive some or all of the profit or loss of the entity, measured on an annual basis, a share of its net assets, as well as to sell one or more assets or receive the majority of the residual assets in the event of liquidation;

·      CCD retains the majority of the risks taken by the entity in order to obtain benefits from its activities; this would be the case if CCD remains exposed to the initial losses on the asset portfolio held by the entity.

 

FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS

 

The fair value of financial instruments, especially securities, obtained from quoted prices on active markets includes little subjectivity in the determination of fair value.

 

If there are no quoted prices on active markets, the fair value is determined using models based on observable market data or models that are not based on observable market data. When no quoted prices are available, the fair value is estimated using present value or other valuation methods, which are influenced by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates, which reflect varying degrees of risk, including liquidity risk, credit risk, and risks related to interest rates, exchange rates, and price and rate volatility. Due to the need to use estimates and judgment when applying many valuation techniques, the fair value estimates of identical or similar assets may differ between entities. Estimated fair value reflects market conditions on a given date and for this reason cannot be representative of future fair values. It also cannot be considered as being realizable in the event of immediate settlement of these instruments.

 

LOANS

 

Changes in interest rates and in the creditworthiness of borrowers are the main causes of changes in the fair value of loans held by CCD, which result in a favourable or unfavourable difference compared to their carrying amount. The fair value of loans is estimated by discounting expected cash flows using market interest rates charged for similar new loans at the reporting date. The fair value of impaired loans is assumed to be equal to their carrying amount.

 

DEPOSITS

 

The fair value of deposits with floating rate features or with no stated maturity is assumed to be equal to their carrying amount. The fair value of fixed rate deposits is determined by discounting expected cash flows using the market interest rates currently being offered for deposits with relatively the same term.

 

DERIVATIVE FINANCIAL INSTRUMENTS

 

The fair value of derivative financial instruments is determined using pricing models that incorporate the current market prices and the contractual prices of the underlying instruments, the time value of money, yield curves and volatility factors. The fair value of derivative financial instruments is presented without taking into account the impact of legally binding master netting agreements.

 

FINANCIAL INSTRUMENTS WHOSE FAIR VALUE EQUALS THEIR CARRYING AMOUNT

 

The carrying amount of financial instruments that mature within the next 12 months is a reasonable approximation of their fair value. These financial instruments include the following items: "Cash and deposits with financial institutions", "Securities purchased under reverse repurchase agreements", "Clients' liability under acceptances", "Other assets - Other", "Acceptances", "Commitments related to securities sold under repurchase agreements", and "Other liabilities - Other."

The fair value of financial instruments is presented in Note 5, "Fair value of financial instruments", to the Consolidated Financial Statements.

 

DERECOGNITION OF FINANCIAL ASSETS AND LIABILITIES

 

A financial asset is derecognized when the contractual rights to the cash flows from the asset expire or when the contractual rights to the cash flows from the financial asset and substantially all risks and rewards of ownership of the asset are transferred to a third party.

 

When the cash flows from a financial asset have been transferred but CCD has retained substantially all the risks and rewards of ownership of the financial asset, it recognizes a separate asset or a separate liability in the Consolidated Balance Sheets which represents the rights and obligations created or retained in the asset transfer. If control of the financial asset is retained, CCD continues to recognize the asset in the Consolidated Balance Sheets to the extent of its continuing involvement in this asset.

 

When a financial asset is derecognized in full, a gain or a loss is recognized in the Consolidated Statements of Income for an amount equal to the difference between the carrying amount of the asset and the value of the consideration received.

A financial liability is derecognized when the related obligation is discharged, cancelled or expires.

 

IMPAIRMENT OF FINANCIAL ASSETS

 

ALLOWANCE FOR CREDIT LOSSES

 

Measuring the allowance for credit losses is very important for CCD, given the size of its loan portfolio. Certain factors may influence management's judgment, and any significant change to estimates or parameters could result in a change in the currently recognized amount for the allowance for credit losses. The allowance for credit losses reflects management's best estimate of potential credit losses.

 

The impairment of a loan or a group of loans is determined by estimating the recoverable amount of these financial assets. The allowance is equal to the difference between this amount and the carrying amount. To determine the estimated recoverable amount of a loan, CCD discounts the estimated future cash flows at the effective interest rate inherent to the loan. When the amounts and timing of future cash flows cannot be estimated with reasonable reliability, the estimated recoverable amount is determined using either the fair value of any security underlying the loan, net of expected costs of realization, or the observable market price for the loan. The security may vary depending on the type of loans.

 

The allowance resulting from this impairment is established using two components: individual allowances and collective allowance.

 

For individual allowances, CCD first reviews its loan portfolios on a loan-by-loan basis to assess credit risk and determine if there is any objective evidence of impairment for which a loss should be recognized in the Consolidated Statements of Income. Loan portfolios for which an individual allowance has not been established are then included in groups of assets having similar credit risk characteristics and are subject to a collective allowance.

 

For the collective provision, the measurement method used by CCD takes into account the risk parameters of the various loan portfolios, in particular through the integration of sophisticated credit risk models. These collective allowance impairment models take into account certain factors such as probabilities of default (loss frequency), loss given default (extent of losses) and gross exposures at default. These parameters, which are based on historical losses, are determined according to the category and the risk rating of each loan. The measurement of the collective allowance also depends on management's assessment of current credit quality trends with respect to business segments, the impact of changes to its credit policies and economic conditions.

 

Additional information about accounting for loans and the allowance for credit losses is presented in Note 7, "Loans and allowance for credit losses", to the Consolidated Financial Statements.

 

AVAILABLE-FOR-SALE SECURITIES

 

Securities classified in the "Available-for-sale" category are monitored on a regular basis to determine whether there is any objective evidence that they are impaired. In evaluating the decline in value, CCD takes into account many facts specific to each investment and all the factors that could indicate that there has been an impairment. Factors considered include, but are not limited to, a significant or prolonged decline in fair value, significant financial difficulties of the issuer, a breach of contract, the increasing probability that the issuer will enter bankruptcy or a restructuring and the disappearance of an active market for that financial asset. Management also uses judgment to determine when to recognize an impairment loss.

 

Debt securities classified in the "Available-for-sale" category are individually assessed by CCD to determine whether there is any objective evidence of impairment. For equity securities classified in the "Available-for-sale" category, the objective evidence would also include a "significant" or "prolonged" decline in the fair value below cost.

 

Additional information about accounting for available-for-sale securities and fair value measurement is presented in Note 4, "Carrying amount of financial instruments", Note 5, "Fair value of financial instruments", and Note 6, "Securities", to the Consolidated Financial Statements.

 

IMPAIRMENT OF NON-FINANCIAL ASSETS

 

CCD assesses at the reporting date whether there is an indication that an asset may be impaired. An impairment loss is recognized when the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of its fair value less costs to sell and its value in use, which corresponds to the present value of the recoverable future cash flows. Any impairment loss recognized in the Consolidated Statements of Income represents the excess of the carrying amount of the asset over the recoverable amount. Impairment losses on that asset may be subsequently reversed and are recognized in the Consolidated Statements of Income in the year in which they occur.

 

Estimating the recoverable amount of a non-financial asset to determine if it is impaired also requires that management make estimates and assumptions, and any change in these estimates and assumptions could impact the determination of the recoverable amount of non-financial assets and, therefore, the outcome of the impairment test.

 

PROVISIONS

Provisions are liabilities of uncertain timing or amount. A provision is recognized when CCD has an obligation (legal or constructive) as a result of a past event, the settlement of should result in an outflow of resources embodying economic benefits, and a reliable estimate can be made of the amount of the obligation. The amount of the obligation is discounted where the effect of the time value of money is material.

 

Provisions are based on management's best estimates of the amounts required to settle the obligation at the end of the reporting period, taking into account relevant risks and uncertainties. As these estimates are forward-looking in nature, management must use judgment to forecast the timing and amount of future cash flows. Actual results may differ materially from these forecasts.

 

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

 

Derivative financial instruments are financial contracts whose value depends on assets, interest rates, foreign exchange rates, and other financial indexes. The vast majority of derivative financial instruments are negotiated by mutual agreement between CCD and the counterparty and include forward exchange contracts, interest rate swaps, currency swaps, credit default swaps, total return swaps, forward rate agreements, and currency, interest rate and stock index options. Other transactions are carried out as part of regulated trades and mainly consist of futures.

 

Derivative financial instruments, including embedded derivatives which are required to be recognized separately, are recorded on the Consolidated Balance Sheets at fair value.

 

CCD uses derivative financial instruments for trading purposes or for asset-liability management purposes. Derivative financial instruments held for trading purposes are mainly used in intermediation activities conducted to meet the needs of the Desjardins network or its clients. Derivative financial instruments held for asset-liability management purposes are used to manage current and expected risks related to market risk. These instruments enable CCD to transfer, manage or reduce the interest rate and foreign currency exposures of assets and liabilities recorded on the Consolidated Balance Sheets, as well as firm commitments and forecasted transactions.

 

When derivative financial instruments are used to manage assets and liabilities, CCD must determine, for each derivative, whether or not hedge accounting is appropriate. To qualify for hedge accounting, a hedge relationship must be designated and documented at its inception. Such documentation must address, among other things, the specific strategy to manage risk, the asset, liability or cash flows that are being hedged as well as and the measure of hedge effectiveness. Consequently, the effectiveness of each hedging relationship must be assessed, regularly and on an individual basis, to determine with reasonable assurance whether the relationship is effective and will continue to be effective. The derivative financial instrument must prove highly effective to offset changes in the fair value or the cash flows of the hedged item attributable to the risk being hedged.

Additional information about derivative financial instruments is presented in Note 13, "Derivative financial instruments and hedging activities", to the Consolidated Financial Statements.

 

INCOME TAXES

 

The income tax expense comprises the current income tax expense and the deferred tax expense. Income taxes are recognized in the Consolidated Statements of Income unless they relate to items that were recognized outside profit or loss directly in the Consolidated Statements of Comprehensive Income or to Consolidated Statements of Members' Equity. In such case, income taxes are also recognized outside profit or loss.

 

The calculation of income taxes is based on the expected tax treatment of the transactions. To determine the current and deferred portions of income taxes, assumptions must be made concerning the dates on which deferred income tax assets and liabilities will be reversed. If CCD's interpretation differs from that of taxation authorities or if the reversal dates do not correspond with the forecasted dates, the provision for income taxes may increase or decrease in subsequent years.

 

Note 18, "Income taxes", to the Consolidated Financial Statements provides further information on income taxes.

 

EMPLOYEE BENEFITS

 

CCD offers to a majority of its employees a pension plan and a supplemental pension plan, which provides pension benefits in excess of statutory limits, through the group plans in which all employers of Desjardins Group may participate. These group plans represent defined benefit pension plans of which the risks are shared by the Desjardins Group participating entities. The main CCD pension plan is funded by contributions from both employees and employers, which are determined based on the financial position and the funding policy of the plan. The contributions needed to fund benefits are collected based on the pensionable salaries of CCD as a percentage of total pensionable salaries for Desjardins Group as a whole. The supplemental pension plan is unfunded.

 

CCD also offers to certain active and retired executives another defined benefit supplemental pension plan. This supplemental pension plan provides pension benefits in excess of statutory limits and is unfunded.

 

Defined benefit pension plans are plans in which CCD participates and for which it has formally committed to a level of benefits and therefore assumes actuarial and, when the plans are funded, investment risks. Benefits are calculated on the basis of the number of years of membership in the pension plans and take into consideration the average salary of the employee's five most highly-paid years. Since the terms of the plans are such that future changes in salary levels will have an impact on the amount of future benefits, the cost of the benefits and the fair value of the defined benefit plan obligation are generally actuarially determined using the projected unit credit method. These calculations are made based on management's best estimate assumptions concerning the expected rate of return of the plans' investments and the plan obligation discount rate, and also, but to a lesser extent, salary increases, the retirement age of employees, the mortality rate and the rate of increase in pension benefits. A complete actuarial valuation is performed each year by a qualified actuary.

 

Actuarial gains (losses) result from the difference between the actual return on plan assets and the expected return for funded plans, the changes made to the actuarial assumptions used to determine the defined benefit plan obligation and the experience gains or losses on this obligation. Any actuarial gain or loss exceeding 10% of the greater of the value of the defined benefit plan obligation and the fair value of plan assets at the end of the previous year is amortized over the expected average remaining working lives of plan members.

 

The defined benefit asset or liability corresponds to the present value of the defined benefit obligation less the unrecognized past service cost, the fair value of pension plan assets and unamortized actuarial losses, plus unamortized actuarial gains. The value of any asset is limited to the total of actuarial losses, unrecognized past service cost and the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the pension plans.

 

CCD's share in the cost recognized and the liability for the defined benefit group pension plans of Desjardins Group is determined based on the pensionable salaries of CCD as a percentage of total pensionable salaries for Desjardins Group as a whole.

 

Note 19, "Defined benefit plans", to the Consolidated Financial Statements provides further information on accounting for defined benefit plans as well as about the sensitivity of the key assumptions.

 

 

SECTION 5.4

 

FUTURE ACCOUNTING CHANGES

 

Accounting standards that have been issued but not are yet effective are listed below. Regulatory authorities have also stated that early adoption of these standards will not be permitted.

 

DATE OF APPLICATION: january 1, 2013

 

IFRS 10, "CONSOLIDATED FINANCIAL STATEMENTS"

 

In May 2011, the IASB issued IFRS 10, "Consolidated Financial Statements", which defines the principle of control and establishes that control serves as the basis to determine which entities are included in the perimeter of consolidation. This new standard replaces the requirements on consolidated financial statements included in IAS 27, "Consolidated and Separate Financial Statements", and SIC-12, "Consolidation - Special Purpose Entities".

 

CCD is currently assessing the impact of the adoption of this new standard, which must be applied retrospectively.

 

IFRS 11, "JOINT ARRANGEMENTS"

 

In May 2011, the IASB issued IFRS 11, "Joint Arrangements", which supersedes IAS 31, "Interests in Joint Ventures" and SIC-13, "Jointly Controlled Entities - Non-Monetary Contributions by Venturers". This standard establishes the principles for accounting for two types of joint arrangements, namely joint operations and joint ventures, and eliminates the possibility of recognizing joint ventures using the proportionate consolidation method.

 

The adoption of this new standard will have no impact on CCD since interests in joint ventures are already recognized using the equity method. This new standard must be applied retrospectively.

 

IFRS 12, "DISCLOSURE OF INTERESTS IN OTHER ENTITIES"

 

In May 2011, the IASB issued IFRS 12, "Disclosure of Interests in Other Entities", which expands disclosure requirements for interests held by an entity in subsidiaries, joint arrangements, associates and unconsolidated structured entities. Some of the disclosures were already required by the current standards, while others are new, such as disclosures about significant judgments and assumptions the entity has made in determining the nature of its interests in another entity as well as the nature of, and risks associated with, its interests in other entities.

 

IFRS 12 is a new presentation standard that will have no impact on CCD's results and financial position. It must be applied retrospectively.

 

IFRS 13, FAIR VALUE MEASUREMENT

 

In May 2011, the IASB issued IFRS 13, "Fair Value Measurement", which defines fair value and sets out a single framework for measuring the fair value of all transactions and balances for which IFRS require or permit fair value measurement. This standard aims at improving the consistency between the various fair value concepts defined in various existing standards. In addition, it carries forward disclosure requirements concerning the fair value of financial instruments and expands the scope to all items measured at fair value.

 

With respect to fair value measurements, CCD does not expect that the adoption of this new standard, which must be applied prospectively, will have a material impact.

 

IAS 1, "PRESENTATION OF FINANCIAL STATEMENTS"

 

In June 2011, the IASB issued amendments to IAS 1, "Presentation of Financial Statements", which improve the presentation of items of other comprehensive income. The amendments require the presentation by nature of items of other comprehensive income by distinguishing those that will not be reclassified to the statement of income in a subsequent period from those that will.

 

IAS 1 is a presentation standard whose objective is to provide information to enable users to better understand financial statements. The amendments to this standard will have no impact on CCD's results and financial position. They must be applied retrospectively.

 

IAS 19, "EMPLOYEE BENEFITS"

 

In June 2011, the IASB issued an amended version of IAS 19, "Employee Benefits" (IAS 19(R)), which requires that the funding status of a defined benefit plan be entirely reflected in the Consolidated Balance Sheets. This change therefore eliminates the option to defer the recognition of actuarial gains and losses, known as the "corridor approach". All actuarial gains and losses will now be recognized immediately in other comprehensive income. The calculation of the interest cost recognized in the Consolidated Statements of Income is also amended. This interest cost will now be calculated by multiplying the net defined benefit plan asset or liability by the rate used to discount the obligation, and the difference between the actual return on plan assets and the amount recognized as interest cost will be recognized in other comprehensive income. In addition, all past service cost will now be directly recognized in profit or loss when they occur. Furthermore, the risk-sharing features between employers and employees for defined benefit plans will now be taken into account when determining the liability to be recognized in the Consolidated Balance Sheets and the expense to be recognized in the Consolidated Statements of Income. The presentation and recognition of changes in the defined benefit plan obligation and plan assets will therefore be modified, and disclosures about the characteristics of defined benefit plans and the risks to which an entity is exposed through its participation in such plans will be enhanced. CCD will have to apply this new standard retrospectively.

 

Accordingly, the main impact of adopting IAS 19(R) on CCD will be the recognition of unamortized actuarial losses and unrecognized past service cost under "Defined benefit plan liabilities" in the Consolidated Balance Sheets. This will result in a decrease in "Retained earnings" (for more information, please refer to Note 19, "Defined benefits plans", to the Consolidated Financial Statements). In addition, taking into account the risk-sharing features between employers and employees for the main group pension plan will result in a decrease in "Defined benefit plan liabilities" and a corresponding increase in "Retained earnings". CCD is currently assessing the impact of the changes related to risk sharing. The initial impact of these amendments on capital ratios could be deferred and amortized on a straight-line basis over the period from January 1, 2013 to December 31, 2014, as CCD may elect to use the relevant transitional provision stipulated by the regulatory authorities.

 

IFRS 7, "FINANCIAL INSTRUMENTS: DISCLOSURES" - OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES

 

In December 2011, the IASB issued amendments to IFRS 7, "Financial Instruments: Disclosures". These amendments improve the disclosure requirements with respect to offsetting of financial assets and liabilities. The objective of these amendments is to help users of financial statements better evaluate the impact of netting agreements on the financial position of an entity and understand how an entity manages the credit risk associated with such agreements.

 

IFRS 7 is a presentation standard whose objective is to provide disclosures to enable the users to better understand and evaluate the significance of financial instruments for the entity's financial position and performance. Since the amendments to this standard specifically concern disclosures, they have no impact on CCD's results and financial position. They must be applied retrospectively.

 

ANNUAL IMPROVEMENTS

 

In May 2012, the IASB issued amendments to several standards as part of its annual improvement process. Except for the amendment to IAS 32, "Financial Instruments: Presentation", these amendments are minor and will have no impact on CCD's results and financial position.

 

The amendment to IAS 32 specifies that the income tax consequences of dividends and remuneration on capital stock should now be recognized in accordance with IAS 12, "Income Taxes". Therefore, when certain conditions will be met, the income tax consequences of dividends and remuneration on capital stock will have to be presented in profit or loss rather than in members' equity. This amendment will be applied retrospectively.

 

Accordingly, there will be no impact on CCD's financial position as at January 1, 2012 and December 31, 2012. However, certain comparative figures will have to be reclassified from the Consolidated Statement of Members' Equity to the Consolidated Statement of Income for the year ended December 31, 2012. "Income tax recovery on remuneration on capital stock", in the Consolidated Statement of Members' Equity, will decrease by $32.8 million, and "Income taxes", in the Consolidated Statement of Income, will decrease by a similar amount.

 

DATE OF APPLICATION: january 1, 2014

 

IAS 32, "FINANCIAL INSTRUMENTS: PRESENTATION"

 

In December 2011, the IASB issued amendments to IAS 32, "Financial Instruments: Presentation", to clarify the criteria for offsetting a financial asset and a financial liability.

 

CCD is currently assessing the impact of the amendments to this standard, which must be applied retrospectively.

 

DATE OF APPLICATION: january 1, 2015

 

IFRS 9, "FINANCIAL INSTRUMENTS"

 

The IASB issued in November 2009 and amended in October 2010 the first phase of a project that will replace IAS 39, "Financial Instruments: Recognition and Measurement". This standard defines a new way of classifying and measuring financial assets and liabilities. Financial assets will be classified in two categories (amortized cost or fair value through profit or loss) based on the entity's business model for managing its financial assets and the contractual cash flow characteristics of the financial assets. However, a new exposure draft issued in November 2012 proposes the introduction of a third financial instrument category for debt securities: fair value through other comprehensive income.

 

Financial liabilities will be classified in the same categories as those defined in IAS 39, but measurement of financial liabilities under the fair value option has been modified.

The impairment of financial asset methodology and hedging activities will be covered in future phases.

 

CCD is currently assessing the impact of the adoption of IFRS 9. The application of all phases of this standard is expected to be prospective.

 

 

 

 

 

SECTION 5.5

 

FIVE-YEAR STATISTICAL REVIEW

 

TABLE 28 -CONSOLIDATED BALANCE SHEETS

 

As at December 31

2012

2011(1)

2010(1)

2009(1)

2008(1)

(in thousands of dollars)


 IFRS

GAAP

Assets






Cash and deposits with financial institutions

 $      554,110

 $     343,544

$     585,275

$   196,321

$     378,019

Securities

6,780,655

7,085,101

7,035,231

5,100,146

4,572,320

Securities purchased under reverse

   repurchase agreements

 345,342

735,367

230,002

64,143

46,172

Loans






Day, call and short-term loans to

   investment dealers and brokers

 --

 91,000

 103,000

59,000

82,000

Public and parapublic sectors

1,065,328

 1,904,756

1,609,151

1,974,169

2,201,175

Members






Federation

10,802,676

9,678,649

8,724,221

5,775,888

 6,398,948

Other

 184,978

 230,195

189,814

19,824

24,088

Other entities included in the group

   perimeter of Desjardins Group

1,417,168

1,886,748

 1,659,415

1,679,716

 2,112,724

Loans purchased from Desjardins Group

 88,863

 137,636

 185,050

229,943

141,369

Personal

1,395,963

1,100,825

812,569

 596,725

508,871

Business

3,342,979

2,817,887

2,769,334

 2,808,926

3,392,729

Allowance for credit losses

(52,800)

(58,451)

(66,049)

 (128,587)

 (126,888)


 $ 18,245,155

 $ 17,789,245

$ 15,986,505

$ 13,015,604

$ 14,735,016

Clients' liability under acceptances

 $      841,000

 $      676,500

$      672,200

$      750,500

$      428,200

Derivative financial instruments

2,048,542

2,888,139

 2,085,255

2,819,219

4,611,577

Deferred tax assets

 24,745

25,644

 23,591

27,745

 33,081

Other

 439,305

 443,257

638,607

623,023

530,787

Total assets

 $ 29,278,854

 $ 29,986,797

$ 27,256,666

$ 22,596,701

$ 25,335,172

Liabilities and members' equity






Deposits






Individuals

 $      136,785

 $      111,934

$        97,122

$        93,511

$        86,833

Business and government

    18,566,938

   17,321,365

  12,852,432

   9,177,411

    9,553,279

Deposit-taking institutions

      3,866,338

     4,206,609

   6,132,899

   5,565,260

   6,669,611


 $ 22,570,061

 $ 21,639,908

$ 19,082,453

$ 14,836,182

$ 16,309,723

Acceptances

 $      841,000

 $     676,500

$      672,200

$      750,500

$      428,200

Commitments related to securities sold short

 57,115

 73,322

156,641

 167,060

--

Commitments related to securities sold

   under repurchase agreements

 574,817

242,422

 1,408,676

986,595

942,599

Derivative financial instruments

2,032,621

3,118,583

 2,675,700

 2,724,607

4,085,376

Defined benefit plan liabilities

 24,823

 26,038

 31,482

 5,070

4,789

Other

1,255,163

 2,268,901

 1,598,061

 1,798,414

2,302,170

Members' equity






Capital stock

1,887,206

 1,887,206

 1,587,206

 1,287,206

1,287,206

Retained earnings

 -

--

 (21,777)

(21)

(31,993)

General reserve

 1,467

2,702

20,845

 20,845

 20,845

Accumulated other comprehensive income

 34,581

 51,215

 45,179

 20,243

 (13,743)


 $   1,923,254

 $   1,941,123

$   1,631,453

$   1,328,273

$   1,262,315

Total liabilities and members' equity

 $ 29,278,854

$ 29,986,797

$ 27,256,666

$ 22,596,701

$ 25,335,172

 (1) Data restated to reflect the presentation adopted in 2012.

 

 

 

 

 

 

 

 

 

TABLE 29 -CONSOLIDATED STATEMENTS OF INCOME

 

For the years ended December 31

2012

2011

2010

2009

2008

(in thousands of dollars)


 IFRS

GAAP

Interest income






Loans

$ 479,601

$ 402,360

$ 268,770

$ 245,298

$ 592,901

Securities

 187,608

 172,352

192,619

188,664

 214,867


 $ 667,209

$ 574,712

$ 461,389

$ 433,962

$ 807,768

Interest expense

 407,748

316,448

217,283

183,075

 628,961

Net interest income

 $ 259,461

$ 258,264

$ 244,106

$ 250,887

$ 178,807

Other income

 40,560

49,780

25,674

63,476

(89,675)

Total income

 $ 300,021

$ 308,044

$ 269,780

$ 314,363

$   89,132

Provision for credit losses (recovery)

 7,384

2,762

(29,581)

12,610

 20,689


 $ 292,637

$ 305,282

$ 299,361

$ 301,753

$   68,443

Non-interest expense






Salaries and fringe benefits

 $   36,759

$   32,547

$   37,800

$   41,845

$   30,597

Premises, equipment and furniture, including

   depreciation

 6,095

11,345

15,878

16,082

 15,096

Service agreements and outsourcing

 35,870

38,803

 10,837

9,785

 9,225

Fees

 8,179

8,905

8,179

10,504

 11,058

Other 

 19,958

 17,165

12,638

23,096

 11,289


 $ 106,861

$ 108,765

$85,332

$ 101,312

$   77,265

Operating income before other payments

   to the Desjardins network

 $ 185,776

$ 196,517

$ 214,029

$ 200,441

$   (8,822)

Other payments to the Desjardins network

 39,253

42,001

39,363

35,975

 36,129

Operating income 

 $ 146,523

$ 154,516

$ 174,666

$ 164,466

(44,951)

Income taxes

 35,387

37,085

41,824

37,080

(8,346)

Net income (loss)

 $ 111,136

$ 117,431

$ 132,842

$ 127,386

$ (36,605)

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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