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

Kent Wideman, CFA / Nigel Heath

(416) 593-5577

n – Denotes that the security is non-cumulative. This new appendage was introduced by DBRS in October, 1998.

The "Pfd-3 (low) n" rating for the Class A Preferred Shares of Desjardins-Laurentian Financial Corporation ("DLFC") is being confirmed with a continuing Stable trend. In recent years, this credit has effectively offset an improving financial risk profile with heightened business risk. Until the future structure of DLFC becomes more clear and the Company proves that it can maintain its competitive abilities in a changing environment, the strengthening that has been achieved in the financial and credit risk areas is not enough to support a higher credit rating.

On the positive side, significant improvements have been achieved in terms of leverage and credit quality, with both debt and problem assets now at low levels. However, the 1997 sale of Laurentian Bank reduced the profitability and diversification of DLFC and, to date, the Company has not been successful in finding acquisitions that it considers appropriately priced. In its first quarter release, DLFC also stated that, "We are currently reflecting on our strategic positioning outside Quebec, especially about our individual life and health insurance operations. Some of the scenarios being considered include strategic alliances, a partnership or possibly ceasing some less profitable activities. All options remain open." As such, there is some degree of uncertainty regarding the future makeup of DLFC, which appears focused on Imperial Life, an entity that has operated well below expectations for some time now. In addition to these unknowns, we expect that the operating environment for DLFC subsidiaries will continue to grow more competitive as industry consolidation continues and the large Canadian mutual life insurance companies demutualize. Despite some reasonably good geographic niches, DLFC subsidiaries are not industry leaders and will be challenged to maintain their strengths over time. The relationship with Desjardins Group and the market share strength of the key insurance subsidiaries in Quebec remain positive rating considerations.