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Fitch Assigns Initial Ratings to Caisse Centrale Desjardins and Capital Desjardins.

NEW YORK -- Fitch Ratings has assigned a long-term Issuer Default Rating (IDR) of 'AA-' and a short-term IDR of 'F1+' to Caisse Centrale Desjardins (CCD). The Rating Outlook is Stable. Fitch has also assigned a subordinated debt rating of 'A+' to Capital Desjardins (CD). The ratings assigned to CCD and CD reflect their central position within Desjardins group (DESJ).

CCD and CD are the issuing entities of DESJ, which consists of the Federation des Caisses Desjardins du Quebec (FCDQ), a network of 481 'caisses' or credit unions in Quebec and Ontario, and its subsidiaries. Senior debt obligations of CCD and subordinated debt issued by CD are not guaranteed by DESJ. However, FCDQ is, by law, responsible for establishing standards regarding the liquidity and solvency of CCD. Furthermore, there is an equity maintenance agreement whereby CCD members guarantee that CCD's total capital will be maintained at a minimum of 5.5% of assets and 8.5% of risk-weighted assets. As such, Fitch's ratings are primarily based on DESJ's consolidated figures. The analysis also considers CCD's stand-alone financial statements and its operations, which include treasury management for the group as well as a subset of DESJ's commercial banking activities.

The ratings reflect DESJ's solid and consistent earnings performance supported by a dominant retail and commercial banking franchise in Quebec. Insurance (both life and health, and property and casualty) and wealth management activities are additional sources of earnings generation. While sizeable write-downs on crisis-hit non-bank asset-backed commercial paper (ABCP) significantly reduced profits in 2008, earnings have since rebounded and continue to trend upward.

Profitability is helped by solid asset quality indicators with levels of impaired loans that compare well against local and global peers. The loan book is primarily composed of residential mortgages (62%) and consumer loans (15%), and commercial and industrial loans (23%). Residential and consumer loans continue to perform well. The recent increase in Canadian household debt warrants monitoring as interest rates start to rise from current low levels. DESJ's traditional market is comprised of primarily small towns and rural areas where house price appreciation and household indebtedness levels have risen at a comparatively slower pace relative to metropolitan areas in Canada.

Government or state guarantee on portions of the retail portfolio (mortgages and student loans) and the commercial and loan book, particularly in the agriculture loan portfolio, contribute to the solid loan quality.

However, earning assets are overwhelmingly concentrated in Quebec (rated 'AA-' by Fitch), leading to a significant exposure to the economic performance of the province. Efforts to expand outside of the company's Quebec market are underway but it will take some time before significant geographic diversity is achieved. Ratings also take into consideration a relatively high efficiency ratio. Continued investments in technology and the recent reorganization of the group along business sectors and functional expertise are expected to enhance operating efficiency.

Liquidity and capital are sound. DESJ's leading market share in Quebec provides it with a stable core deposit base. DESJ exhibits strong capital levels with little in the way of non-core components. Solid regulatory and tangible capitalization metrics help mitigate some of the concentration in the business.

CCD acts as the treasurer of DESJ, an important component of the Canadian banking sector, particularly in Quebec. Fitch believes that there is an extremely high probability that provincial and/or federal support would be forthcoming if needed, hence the Support Rating of '1'. Importantly, however, at this time, ratings are based on the intrinsic credit profile (i.e. not support-dependent) and are above their support floors.

Looking forward, factors that could have a negative impact on ratings include a significant decline in profitability due to outsized credit costs, an increase in holdings of comparatively higher risk assets, and/or elevated execution risk associated with expansion. Positive momentum is limited considering current high ratings.

Fitch has assigned the following ratings:

Caisse Centrale Desjardins

--Long-term IDR 'AA-'; Outlook Stable

--Short-term IDR 'F1+';

--Short-term Debt 'F1+';

--Senior unsecured debt 'AA-';

--Support '1';

--Support floor 'A-'.

Capital Desjardins

--Subordinated debt 'A+';

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Global Financial Institutions Criteria' (Aug. 16, 2010);

--'Short-Term Ratings Criteria for Corporate Finance' (Nov. 2, 2010);

--'Rating Criteria for European Banking Structures Backed by Mutual Support Mechanisms' (Dec. 30, 2009)

In addition to the source(s) of information identified in the Master Criteria, this action was additionally informed by information provided by the company.

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685

Short-Term Ratings for Corporate Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726

Rating Criteria for European Banking Structures Backed by Mutual Support Mechanisms

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493322

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
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Date:Dec 23, 2010
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