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Rating Action:

Moody's changes Desjardins outlook to negative

03 Mar 2009

Toronto, March 03, 2009 -- Moody's Investors Service affirmed the ratings of Caisse centrale Desjardins ("CCD") and a rated subsidiary and changed their long-term rating outlooks to negative from stable. Caisse centrale is rated C+ for bank financial strength, Aa1 for long-term deposits, and P-1 for short-term obligations. The negative outlook reflects Moody's concern regarding strategic risk management practices following disclosure of unexpected material losses in Desjardins Group's ("Desjardins") capital guarantee note product, coupled with expected further losses on Desjardins' non-bank asset-backed commercial paper ("ABCP") exposure.

It appears that Desjardins itself took principal risk in the structure supporting the capital guarantee notes it sold to its members, and this risk included exposure to hedge fund valuations. Desjardins also chose to place a substantial portion of the liquid assets supporting the capital guarantee note structure into non-bank ABCP, the aggregate exposure of which Desjardins has now written down by 45%. With regard to the non-bank ABCP exposure outside the capital guarantee note programs, Desjardins had purchased a total of C$1.7 billion in this paper from its money market mutual funds and from the clients of its subsidiary, Desjardins Trust, which operates the group's securities lending business. These aggregate ABCP and capital guarantee note exposures produced C$591 million in after-tax losses in 4Q08 and C$1 billion cumulatively, highlighting the risks associated with new and / or complex financial products.

According to Peter Routledge, Moody's senior credit officer, "The write-downs on two sizable risk concentrations in Desjardins' capital markets and wealth management businesses points to weaknesses in risk oversight of new and / or complex financial products at the group. Moody's will focus on the group's efforts to improve new and complex product evaluation from a risk management perspective. "

Moody's decision to affirm CCD's ratings is based on Desjardins' strong credit fundamentals, including excellent capitalization, good risk-adjusted profitability, sound asset quality, and an exceptional market presence in the province of Québec. Moody's notes the group has a conservative loan portfolio, of which approximately 58% are residential mortgages that are either insured or have low loan-to-value ratios. Desjardins also maintains a very high level of regulatory capital, with its December 31, 2008 Tier 1 ratio currently at 13.39%, well in excess of regulatory minimums. Moody's also views the remaining exposure to the aforementioned items to be manageable within Desjardins' earnings and capital base.

CCD's ratings benefit from Moody's opinion that there exists a very high probability of implicit support from the Desjardins Group, the province of Québec, and the Canadian federal government.

Regarding the future direction of CCD's ratings, a downgrade could follow one or more of the following items: (1) the emergence of additional material losses tied to new and / or complex financial products; (2) Desjardins' ratio of pre-provision, pre-tax earnings to risk-weighted assets falls below 2.3%, and net income to risk-weighted assets falls below 1.5%, for a sustained period; (3) Desjardins' ratio of nonperforming assets to risk weighted assets rises above 20%. A ratings upgrade is not expected over the rating horizon of the next two years, but the most likely causes would be: (1) an improvement in Desjardins' risk adjusted profitability such that pre-provision earnings and net income exceeded 3% and 2%, respectively, of risk-weighted assets; (2) efficiency of the group's personal and commercial banking operations dropped below 55%; (3) Desjardins acquired sizable market presence outside Québec.

The following rating outlooks were changed:

Issuer: Caisse Centrale Desjardins

..Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: Capital Desjardins Inc.

..Outlook Actions:

....Outlook, Changed To Negative From Stable

The last Caisse centrale Desjardins rating action was on April 10, 2007 when Moody's upgraded the junior securities as the result of the refinement of its "joint default analysis" methodology (JDA) and the associated refinement of its rating guidelines for bank capital instruments.

The principal methodologies used in rating Caisse centrale Desjardins were "Cooperative and Mutualist Banking Groups: Proposal for Determining Group Support Levels for Members", "Bank Financial Strength Ratings: Global Methodology", and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating Caisse centrale Desjardins can also be found in the Credit Policy & Methodologies directory.

Caisse centrale Desjardins conducts clearing and central treasury operations for, and is wholly-owned by, the Fédération des caisses Desjardins du Québec (the principal organizing and controlling entity of the Desjardins Group), which supervises the credit union business of its 536 member unions. Both CCD and Desjardins are headquartered in Montréal, Canada, and Desjardins reported total assets of C$152 billion as of December 31, 2008.

New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Toronto
Peter Routledge
VP - Senior Credit Officer
Financial Institutions Group
Moody's Canada Inc.
(416) 214-1635

Moody's changes Desjardins outlook to negative
No Related Data.
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