Desjardins-Laurentian Financial Corporation: Confirms at Pfd-3 (low)n

Kent Wideman, CFA, Nigel Heath / 416-593-5577 / e-mail: kwideman@dbrs.com

 

The Pfd-3 (low) rating on the Class A Preferred Shares of Desjardins-Laurentian Financial Corporation (DLFC) is being confirmed, with a continuing Stable trend. In terms of overall credit quality, the sale of DLFC’s 57.5% interest in Laurentian Bank was essentially a trade-off. On the positive side, this disposition dramatically strengthened the financial risk profile of DLFC and provided it with ample flexibility to expand into more core areas in the future (the Bank having been a questionable core holding). On the negative side, the sale reduced DLFC’s diversification (by product and geography, as the Bank had sizeable non Quebec operations), eliminated a dependable stream of earnings, and, removed one of DLFC’s higher rated subsidiaries. On a net basis, we view the sale as neutral to modestly positive event, as DLFC now has both the opportunity and the financial ability to expand into areas that are a better fit. The key uncertainty is how well this strategy can be executed in an environment where acquisitions are a high priority for many peers and prices are relatively high. Until a successful move is made, profitability is expected to remain below average, given the low earnings potential of the present large portfolio of short term securities. In other areas, positive factors in the rating continue to include the relationship with Desjardins Group and the market share strength of the key insurance subsidiaries in Quebec.