OREANDA-NEWS. Fitch Ratings has affirmed the ratings for Caisse Centrale Desjardins (CCD) and Capital Desjardins (CD) Inc. The Rating Outlook is Stable. This affirmation reflects CCD's relatively strong capital position, strong asset quality and steady earnings relative to its risk profile and business model.

This rating action follows Fitch's periodic review of the Canadian Banks Peer Group, which includes Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), Caisse Centrale DesJardins (CCD), National Bank of Canada (NBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD).

For further discussion, please refer to the Canadian Banks Peer Review Special Report to be published shortly.

KEY RATING DRIVERS

IDRs, VRs AND SENIOR DEBT

The ratings for CCD and CD reflect their central position within the DesJardins Group (DESJ). CCD and CD are the debt issuing entities for DESJ. Therefore, Fitch's ratings for the entities are primarily based on DESJ's consolidated operating performance and balance sheet.

The Group's ratings reflect solid and consistent earnings performance relative to its cooperative structure. Performance is supported by strong asset quality and a dominant retail franchise in Quebec.

The Group continues to hold a relatively high level of Tier 1 capital. Its Tier 1 capital ratio was 15.9% under Basel III at the end of third quarter 2015 (3Q15) compared to a peer average of 11.1%. Fitch views the company's strong capital position as a significant mitigant to potential risks arising from the Group's geographic concentration in the province of Quebec, its loan portfolio concentration of residential mortgages and a legal structure that may limit its ability to access the equity markets compared to peers. Today's affirmation and stable outlook reflect Fitch's expectation that DESJ will consistently maintain capital ratios at a relatively higher level than peers over the long-term due to its unique organizational structure and business model.

In January 2015 DESJ closed on its purchase of State Farm Canada's (SFC) businesses in property and casualty (P&C) and life insurance, as well as its Canadian mutual fund, loan and living benefits companies. The Group, which is now the third largest P&C insurance provider in Canada, is in the early stages of integrating SFC's operations into its own. Fitch notes that financial results from the transaction thus far have been in line with expectations and the P&C business segment accounted for 15% of adjusted surplus earnings through 3Q15, up from 12% a year prior.

As previously communicated, Fitch views the transaction as neutral to DESJ's rating even as it has increased the Group's geographic diversification of earnings and risk while providing an advantage of scale and strengthens its position among P&C, life and health insurers in Canada. Similar to other areas of the Group, Fitch views the management of the P&C segment as strong and expects performance to remain a net positive contributor to earnings over the rating horizon. This expectation is incorporated into today's rating action.

DESJ's returns continue to be reasonable relative to the company's risk profile and cooperative structure. DESJ's average annual and quarterly return on assets (ROA) typically runs well below many similarly rated banks. However, Fitch recognizes the ultimate strategy of a company with a cooperative structure differs from a typical corporation in that it does not look to maximize shareholder return or return on assets.

Profitability is somewhat constrained by relatively high expense base which is driven by the Group's business model. Given its large caisse network, DESJ has a higher cost structure than other Canadian and global peer banks, which weighs on overall profitability of the group. Like many banks globally, in the current low rate environment, management has taken a more aggressive stance on expenses that could aid profitability over the long-term. DESJ has worked to consolidate its caisses (or branches) as well as centralized many Group functions in order to improve efficiencies. Still, Fitch expects its cost structure to remain relatively high over the near to intermediate term.

DESJ's credit quality remains very strong on both a relative and absolute basis. Fitch views DESJ's pristine asset quality as supportive of its relatively high rating. The Group's ratio of gross impaired loans to total loans stood at 0.36% compared to a peer average of 0.57%. Fitch believes the Group has maintained a relatively conservative risk appetite and maintained focus on its primary borrower - the homeowner in Quebec. This strategy, in the past, has led to significantly fewer credit losses compared to its domestic and foreign competitors. Fitch observes that business and government loans are up 8% year-over-year relative to the peer group average growth rate of 17%. These loans made up 22.2% of total loans at 3Q15, essentially flat over the last year. Meanwhile residential mortgages, which continue to account for nearly two-third of the Group's loan portfolio increased 5% from 3Q14.

Fitch still expects some plateauing or cooling of the Canadian housing market, which should adversely impact all Canadian banks' asset quality, including DESJ's. And while the Group has a relatively low level of insured mortgages to total mortgages at 34%, Fitch's views its aforementioned high capital ratios, and the comparatively good average loan-to-value (LTV) ratio for the conventional mortgage portfolio of 52.8% as of 3Q15 as adequate mitigates. Also offsetting this concern is that Quebec has been a slower growth province, and has not participated as much in the housing price run-up compared to areas such as Vancouver and Toronto.

Liquidity and liquidity risk management are strong. The Group has maintained a Basel III liquidity coverage ratio (LCR) in excess of 120%, well-above peers. The company enjoys dominant market share for retail deposits in Quebec. Moreover, it has also found sustained success in the global capital markets for its debt at good pricing. While DESJ, as well as its Canadian bank peers, continues to rely heavily on wholesale funding relative to similarly sized and rated banks in the United States, DESJ's liquidity risk management practices reasonably mitigate related risks, in Fitch's view.

SUPPORT RATING AND SUPPORT RATING FLOOR

The affirmation of the CCD's Support Rating (SR) of '2' and Support Rating Floor (SRF) of 'BBB-' reflect Fitch's view that the likelihood of support remains relatively high for Canadian Banks due to their systemic importance in the country, significant concentration overall of Canadian banking assets amongst the institutions noted above, which account for over 90% of total banking assets, the large size of the banking sector with banking assets at 2.1x Canada's GDP, and the Canadian banks' position as key providers of financial services to the domestic economy.

In Fitch's view, Canadian banking authorities through the CDIC Act, have wide latitude to resolve a troubled bank including re-capitalizing an institution, creating a bridge bank, or imposing losses on creditors.

Fitch recognizes that the government's willingness to provide support for D-SIFI's in Canada has been reduced demonstrated by Department of Finance consultation paper which outlines the proposed bail-in regime as Canadian banking regulators seek to protect tax payers from the risk of a large financial institution failing. This is evidenced by the issuance of non-viability contingent capital (NVCC) instruments, resolution powers given regulatory authorities under the CDIC Act, and other initiatives that demonstrate the Canadian government's progress to reduce the propensity of state support for banks going forward.

CCD's IDRs and senior debt ratings do not benefit from support because IDR is currently above its SRF.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt issued by the CD is notched down from CCD's IDRs in accordance with Fitch's assessment of the instrument's nonperformance and relative loss severity risk profile. Subordinated debt is typically notched down from the issuing entity's Viability Rating (VR). In the absence of a VR, as is the case with CCD, the issuances are notched from the entity's long-term IDR.

RATING SENSITIVITIES

IDRs and SENIOR DEBT

Given the already high ratings of the group, Fitch notes that there is very limited upside to current ratings.

CCD's Stable Outlook encompasses Fitch's expectation that its earnings will remain consistent over the rating time horizon and able to adequately augment capital such that capital ratios are maintained well-above Canadian bank peers.

CCD's ratings continue to sensitive to the growth of its insurance business lines, namely through its recent acquisition of SFC which is still being integrated into CCD's operations. To the extent that Fitch observes ineffective integration efforts, negative rating pressure could be placed on CCD's current rating or Rating Outlook. This could be measured through metrics such as customer and/or agent retention over the long-term. Moreover, Fitch expects the Canadian P&C market to continue to consolidate. While Fitch expects CCD to be a participant in this consolidation over the long-term, we also expect acquisitions to be reasonable in price and CCD's core competencies. To the extent that CCD partakes in M&A activity that does not fit these attributes and/or results in earnings and capital metrics that are not commensurate with expectations, Fitch could take negative rating action.

Fitch believes CCD is well-positioned to handle a cooling Canadian economy and housing market given the aforementioned characteristics of its mortgage portfolio and its high capital ratios. Fitch does note, however, that should Fitch's expectations of the slowing of the Canadian housing market change, both nationally and with respect to the province of Quebec, there could be pressure on the Group's ratings or Rating Outlook.

SUPPORT RATING AND SUPPORT RATING FLOOR

SR of '2' incorporates Fitch's expectation that there could be some level of support for Canadian Banks going forward although this has been weakened given credible resolution framework. Although Canadian authorities have taken steps to improve resolution powers and tools, they maintain a flexible approach to bank resolution.

Fitch's assessment of continuing support for Canadian D-SIFI's has to some extent relied upon resolution powers granted regulators under the CDIC ACT as well as the potential size, structure, and feasibility of NVCC implementation.

Fitch's view on support could change should the CDIC Act diminish powers of the CDIC to recapitalize a failing institutions leading to a downgrade of the SR and SRF.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The subordinated debt ratings are primarily sensitive to any change in the IDRs of CCD.

Fitch has affirmed the following:

Caisse Centrale Desjardins
--Long-term Issuer Default Rating (IDR) at 'AA-'; Outlook Stable;
--Short-term IDR at 'F1+';
--Senior unsecured debt at 'AA-';
--Support at '2';
--Support Floor at 'BBB-'.

Capital Desjardins, Inc.
--Subordinated debt at 'A+'.