Results for the second quarter of 2019 – Desjardins Group records surplus earnings of $692 million for the second quarter

At the end of the second quarter ended June 30, 2019, Desjardins Group, Canada’s leading financial cooperative group, recorded surplus earnings before member dividends of $692 million, up $15 million from the same quarter of 2018. Adjusted surplus earnings⁽¹⁾ were up $144 million or 26.3 % for the specific item related to the creation of Aviso Wealth, i.e. the gain from the transaction involving Qtrade Canada Inc. and the interest in Northwest & Ethical Investments L.P. recognized in 2018. These results were due to strong performance in caisse network activities and the operations of the Property and Casualty Insurance segment, which posted higher premium income and a favourable claims experience compared to the same quarter of 2018. The higher surplus earnings were also due to a smaller provision for credit losses as a result of the parameter update for non-credit impaired loans and economic factors. As for the privacy breach, a total of $70 million in expenses and provisions for the implementation of protections for our members (i.e. the credit monitoring plan and the identity theft solution for Desjardins caisse members) were recognized in the second quarter of 2019.

The amount returned to members and the community was $112 million (Q2 2018: $106 million), including an $80 million provision for member dividends (Q2 2018: $71 million), $20 million in sponsorships, donations and scholarships (Q2 2018: $25 million), and $12 million in Desjardins Member Advantages (Q2 2018: $10 million). There was also another $8 million(Q2 2018: $6 million) in commitments related to the $100 million regional development fund.

“Our second quarter results are fully in line with our expectations, in particular due to the growth in caisse network operations,” said President and CEO Guy Cormier. “They demonstrate Desjardins Group’s financial strength and its ability to deal with the unexpected. Members who are worried about the privacy breach can rest assured that their cooperative protects them by providing automatic protection against identity theft to all its members. Our employees are working very hard to address our members’ concerns and needs.

It should be remembered that the identity theft solution for Desjardins caisse members includes the following:

Protection of assets and transactions

The assets and transactions of Desjardins members are protected. If the breach results in unauthorized transactions in members’ accounts, they will be reimbursed.

Individual support during the identity recovery process

In the event of identity theft, Desjardins offers its members individual support throughout the identity recovery process.

Reimbursement of $50,000

Advertisement

In relation to the identity recovery process, Desjardins members will be reimbursed up to $50,000 for certain expenses incurred, such as notary and legal fees and other expenses.

This offer, when combined with the Equifax credit monitoring plan and our Credit Score feature from TransUnion, will help members better protect themselves against identity theft and its consequences.

Giving back to the community

In addition to the sustained commitment of the caisses in the communities they serve, here are some of the other ways that Desjardins is making a positive difference in people’s lives.

• Desjardins joined the Ready When the Time Comes program of the Canadian Red Cross. Through this initiative, Desjardins employees were trained to help the Red Cross with its activities during the recent floods.
• Desjardins has strengthened its partnership with the Citadelle Cooperative, the flagship Quebec organization for maple syrup producers, beekeepers and cranberry producers, providing $1 million to modernize its plants inPlessisville, Château-Richer and Aston-Jonction.
• Desjardins won L’actualité magazine’s social impact award in the Environment category.
• The appointment of a new Desjardins Youth Advisory Board. This committee gives the young people in our cooperative group a voice.
• Donation of $655,000 to support four community development projects in Abitibi-Témiscamingue, with a special focus on young people, mobility in the region and the agrifood sector.

Innovating

Desjardins is constantly innovating to meet the needs of its members and clients. Here are just a few examples of recent initiatives and the recognition received by Desjardins for its expertise.

• Creation of a $45 million strategic fintech investment pool for Desjardins Group that will benefit members and clients and be managed by Desjardins Capital.
• The Desjardins Group Pension Plan acquired a portion of EDF Renewables Canada Inc.’s stake in the Cypress Wind Project in Alberta as a contribution to the energy transition.
• Desjardins Group has modernized its governance with new rules on how members are elected to its Board of Directors and its Board of Ethics and Professional Conduct, including to achieve greater diversity.
• Responsible investment survey carried out on behalf of Desjardins to know Canadians’ perceptions and opinions of this concept in order to better serve our members and clients.
• Launch of UX Lab, a new user experience laboratory.

Q2 financial results

• Surplus earnings of $692 million, up $15 million from 2018.
• Adjusted surplus earnings⁽¹⁾ up $144 million or 26.3% from 2018.
• Increase in operating income⁽¹⁾ of $71 million or 1.7%.
• Provision for member dividends of $80 million, up $9 million or 12.6%.
• Outstanding residential mortgages up $3.3 billion since December 31, 2018.
• Total capital ratio of 17.8% as at June 30, 2019.
• Total assets of $310.9 billion as at June 30, 2019.

Net interest income was $1,299 million, up $124 million from the same period in 2018. This increase was due to growth in the entire average portfolio of loans and acceptances outstanding, and to higher interest rates.

Net premiums were $2,242 million (Q2 2018: $2,200 million), up 1.9%. This increase stemmed primarily from growth in activities and in the average premium in property and casualty insurance, offset by lower premiums from life and health insurance.

Other operating income⁽¹⁾ totalled $686 million, down $95 million from the corresponding period in 2018. Excluding the gain, before income taxes, of $132 million related to the transaction involving Qtrade Canada Inc. and the interest in Northwest & Ethical Investments L.P. recognized in 2018, other operating income would have been up $37 million or 5.7% compared to the same period of 2018. This increase came essentially from higher business volumes in payment and financing activities.

The recovery of the provision for credit losses totalled $11 million for the second quarter of 2019, compared to a provision for credit losses of $80 million for the same period in 2018. This decrease in the credit loss provision was primarily due to a refinement made to the risk measurement methodology for non-credit impaired loans concerning the estimated life of revolving exposures, such as credit cards and lines of credit, and an update of economic factors on the credit portfolios. The gross credit-impaired loans ratio, expressed as a percentage of the total gross loans and acceptances portfolio, was 0.56% as at June 30, 2019, relatively unchanged from what was recorded in 2018. Desjardins Group has continued to present a quality loan portfolio in 2019.

Non-interest expense was $2,053 million (Q2 2018: $1,853 million). This increase was mainly due to $70 million in expenses and provisions for the implementation of protections for our members, i.e. the credit monitoring plan and the identity theft solution for Desjardins caisse members, to higher salaries due to indexing and growth in operations and payment activities, including reward program expenses, as well as growth in financing activities.

Assets of $310.9 billion, an increase of $15.4 billion

Advertisement

As at June 30, 2019, Desjardins Group had $310.9 billion in assets, up $15.4 billion or 5.2% since December 31, 2018. This growth stemmed partly from a $6.2 billion increase in loans and acceptances. In addition, the growth was due to an increase in securities, including securities borrowed or purchased under reverse repurchase agreements, and net segregated fund assets, amounts receivable from clients, brokers and financial institutions included in other assets.

Strong capital base

Desjardins Group maintains very good capitalization levels in compliance with Basel III rules. Its Tier 1A and total capital ratios were 17.7% and 17.8%, respectively, as at June 30, 2019, compared to 17.3% and 17.6%, respectively, as at December 31, 2018.

Results for the first six months of 2019

At the end of the first six months of the year, surplus earnings before member dividends was $1,093 million (2018: $1,178 million), down 7.2%. Adjusted surplus earnings⁽¹⁾ for the specific item during the creation of Aviso Wealth, i.e. the gain related to the transaction involving Qtrade Canada Inc. and the interest in Northwest & Ethical Investments L.P. recognized in 2018, were up $44 million or 4.2%. In addition to the reasons given for the second-quarter results, this increase was offset by lower gains on the disposal of investments than in 2018 in the insurance segments and by the profit related to the restructuring of Interac Corp. recognized in the first quarter of 2018.

Segment results for the second quarter of 2019

Personal and Business Services

For the second quarter of fiscal 2019, the Personal and Business Services segment reported surplus earnings before member dividends of $461 million (Q2 2018: $299 million). This increase was largely due to solid results posted by the caisse network, especially related to the growth in net interest income, a decline in credit loss provisioning, and growth in payment and financing activities.

For the first six months of 2019, surplus earnings were $796 million (2018: $574 million).

Wealth Management and Life and Health Insurance

Advertisement

Net surplus earnings generated by the Wealth Management and Life and Health Insurance segment were $183 million at the end of the quarter (Q2 2018: $331 million). Results for the second quarter of 2018 benefited from the gain related to the transaction involving Qtrade Canada Inc. and the interest in Northwest & Ethical Investments L.P. Adjusted surplus earnings⁽[4]⁾ were down $19 million or 9.4%. This decline was primarily due to less favourable interest margins.

For the first six months of 2019, adjusted surplus earnings⁽¹⁾ were $322 million (2018: $408 million). In addition to the reasons given for the second-quarter results, this decline was primarily due to lower gains on the sale of securities and real estate investments than in 2018.

Property and Casualty Insurance

The Property and Casualty Insurance segment recorded net surplus earnings of $123 million in the second quarter of 2019 (Q2 2018: $52 million). This $71 million increase in surplus earnings was the result of higher net premiums, a smaller impact by catastrophe and major event claims and a lower claims experience for the current year in property and business insurance.

For the first six months of 2019, surplus earnings were $42 million (2018: $78 million). This decrease was primarily due to an unfavourable claims experience and lower gains on investments than in the same period of 2018.

Privacy breach

On June 20, 2019, Desjardins Group announced that some personal information of 2.9 million members had been shared with individuals outside the organization. This situation was caused by an ill-intentioned employee who has since been fired. Desjardins Group was not the victim of a cyberattack and its computer systems were in no way breached. In light of the situation, additional measures were put in place to protect the personal and financial information of all members and clients. Desjardins Group sent a letter to all members affected by the incident. It offers affected members, at its own cost, a credit monitoring plan and identity theft insurance with Equifax for five years.

In addition, on July 15, 2019, Desjardins Group announced to all its members that they are now automatically protected against identity theft. This protection is available not only to personal members, but also to business members, who are currently not served by any similar industry protection. This protection includes the following:

• Protection of assets and transactions: The assets and transactions of Desjardins members are protected. Should unauthorized transactions be made in members’ accounts, they will be reimbursed.
• Individual support in the identity recovery process: In the event of identity theft, Desjardins will offer its members individual support. It will be there for members throughout the identity recovery process.
• Reimbursement of $50,000: Desjardins members may be reimbursed up to $50,000 for certain expenses related to identity theft, such as notary and legal fees and other expenses.

The expenses related to costs incurred and the establishment of a provision with respect to the implementation of these protections for our members, totalling $70 million, have been recognized in profit or loss in the second quarter of 2019. Desjardins Group could periodically reassess this provision based on the circumstances.

Following the announcement on June 20, 2019, the credit ratings assigned by the ratings agencies Standard & Poor’s, DBRS, Moody’s and Fitch to Desjardins Group’s senior securities were affirmed and remained unchanged.

_______________________________ Advertisement

(1) See “Basis of presentation of financial information”.

Key financial data
FINANCIAL POSITION AND INDICATORS
(in millions of dollars and as a percentage)		As at June 30, 2019(1)			As at December 31, 2018
Balance Sheet
	Assets	$	310,906 Advertisement		$	295,465
	Residential mortgage loans	$	123,457		$	120,113
	Consumer, credit card and other personal loans	$	26,577 Advertisement		$	26,210
	Business and government loans(2)	$	47,499		$	45,066
	Total gross loans(2)	$	197,533 Advertisement		$	191,389
	Equity	$	26,530		$	25,649
Indicators
	Assets under administration	$ Advertisement	411,515		$	373,558
	Assets under management(3)	$	63,740		$	57,448
	Tier 1A capital ratio		17.7% Advertisement			17.3%
	Tier 1 capital ratio		17.7%			17.3%
	Total capital ratio		17.8%			17.6%
	Leverage ratio		8.4%			8.3% Advertisement
	Liquidity coverage ratio(4)		122.4%			122.1%
	Gross credit-impaired loans/gross loans and acceptances ratio(5)		0.56%			0.54%

(1)	The information presented as at June 30, 2019 takes into account IFRS 16, “Leases”, adopted on January 1, 2019. The comparative data have not been restated. For more information, see Note 2, “Basis of presentation and significant accounting policies”, to the Interim Combined Financial Statements.
(2)	Includes acceptances. Advertisement
(3)	Assets under management may also be administered by Desjardins Group. When this is the case, they are included in assets under administration.
(4)	The ratio result is presented based on the average of daily data for the quarter.
(5)	See “Basis of presentation of financial information.”

COMBINED INCOME
		For the three-month periods						For the six-month periods
		ended Advertisement						ended
(in millions of dollars and as a percentage)		June 30, 2019(1)		March 31, 2019(1)		June 30, 2018		June 30, 2019(1) Advertisement		June 30, 2018
Operating income(2)		$	4,227	$	4,312	$	4,156	$ Advertisement	8,539	$	8,188
Surplus earnings before member dividends		$	692	$	401	$	677 Advertisement	$	1,093	$	1,178
Adjusted surplus earnings before member dividends(2)		$	692	$	401	$ Advertisement	548	$	1,093	$	1,049
Return on equity(2)			10.6%		6.5%		11.0%		8.6% Advertisement		9.7%
Adjusted return on equity(2)			10.6%		6.6%		8.9%		8.6%		8.6%
Credit loss provisioning rate(2)			(0.02)%		0.23% Advertisement		0.18%		0.10%		0.22%

CONTRIBUTION TO COMBINED SURPLUS EARNINGS BY BUSINESS SEGMENT
		For the three-month periods						For the six-month periods Advertisement
		ended						ended
(in millions of dollars)		June 30, 2019(1)		March 31, 2019(1)		June 30, 2018		June 30, Advertisement 2019(1)		June 30, 2018
Personal and Business Services		$	461	$	335	$	299 Advertisement	$	796	$	574
Wealth Management and Life and Health Insurance			183		139		331		322		537 Advertisement
Property and Casualty Insurance			123		(81)		52		42		78
Other			(75)		8		(5) Advertisement		(67)		(11)
Desjardins Group		$	692	$	401	$	677	$ Advertisement	1,093	$	1,178

CREDIT RATINGS OF SECURITIES ISSUED AND OUTSTANDING
		DBRS	STANDARD &  POOR’S	MOODY’S	FITCH Advertisement
Fédération des caisses Desjardins du Québec
	Short-term	R-1 (high)	A-1	P-1	F1+
	Existing senior medium and long-term(1)	AA	A+	Aa2 Advertisement	AA-
	Senior medium and long-term(2)	AA (low)	A-	A2	AA-
Desjardins Capital Inc.
	Senior medium and long-term	A (high)	A Advertisement	A2	A+

More detailed financial information can be found in Desjardins Group’s interim Management’s Discussion and Analysis (MD&A), which is available on the SEDAR website, under the Desjardins Capital Inc. profile.