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THE LARGEST COOPERATIVE FINANCIALGROUP IN CANADA
Representing Desjardins on the capital markets.
2004 Annual Report
THE LARGEST COOPERATIVE FINANCIAL GROUP IN CANADA
WE ARE ITS REPRESENTATIVE ON CAPITAL MARKETS
• Nearly $15 billion in assets
• About $92 billion in derivatives
• Funding programs of more than $10 billion in Canada and
other parts of the globe
• Borrowings on the Canadian money market (no upper limit)
• Authorized credits of $9 billion to businesses and
government institutions
• Business offices in Québec and Ontario
• One U.S. retail banking subsidiary
• One U.S. corporate lending subsidiary
• A network of banking correspondents on every continent
• First-class credit ratings
• $106.2 billion in assets
• Over 5.5 million members and customers and
125,000 business members
• More than 1,600 points of service throughout Québec, Ontario,
Manitoba and New Brunswick
• Some 20 subsidiaries, a number of which operate Canada-wide,
in United States and elsewhere in the world
• A cutting-edge virtual network
PR
OF
ILE
CA
IS
SE
C
EN
TR
AL
E1
PR
OF
ILE
Ca
isse
ce
ntr
ale
De
sja
rdin
s (
“Ca
isse
ce
ntr
ale
”) i
s a
ke
y p
laye
r w
ith
in t
he
De
sja
rdin
s e
xte
nd
ed
fam
ily,
th
e l
arg
est
coo
pe
rati
ve f
ina
ncia
l g
rou
p i
n C
an
ad
a,
for
wh
ich
it
acts
as
its
re
pre
se
nta
tive
on
ca
pit
al
ma
rke
ts.
As a
co
op
era
tive
be
lon
gin
g t
o D
esja
rdin
s G
rou
p c
ais
se
s a
nd
au
xili
ary
fe
de
rati
on
s,
Ca
isse
ce
ntr
ale
is a
cti
ve l
oca
lly
as w
ell
as o
n t
he
Ca
na
dia
n a
nd
in
tern
ati
on
al
sce
ne
s t
hro
ug
h i
ts m
ult
iple
fun
cti
on
s,
inclu
din
g t
ho
se
of:
•fi
na
ncia
l a
ge
nt
in C
an
ad
a a
nd
ab
roa
d,
•fu
nd
s p
rovid
er
an
d t
rea
su
rer
of
the
Gro
up
, a
nd
•fi
na
ncia
l p
art
ne
r o
f b
us
ine
ss
es
an
d i
ns
titu
tio
ns
.
It a
lso
ha
s t
he
re
sp
on
sib
ilit
y to
su
pp
ort
De
sja
rdin
s G
rou
p i
n i
ts b
usin
ess
de
velo
pm
en
t a
nd
the
reb
y e
nsu
re i
ts s
usta
ina
bil
ity.
Du
e t
o t
he
fin
an
cia
l so
lid
ity
of
De
sja
rdin
s G
rou
p,
Ca
iss
e c
en
tra
le e
njo
ys
alm
os
t e
xe
mp
lary
cre
dit
rati
ng
s f
rom
th
e m
ain
cre
dit
ra
tin
g a
ge
ncie
s.
Its r
ati
ng
s r
an
k a
mo
ng
th
e b
est
in
th
e e
nti
re f
ina
nci
al
ind
ustr
y, n
ot
on
ly i
n t
he
Ca
na
dia
n b
an
kin
g s
ecto
r, b
ut
als
o i
n t
he
glo
ba
l fi
na
ncia
l co
op
era
tive
se
cto
r.
CA
IS
SE
C
EN
TR
AL
ET
AB
LE
OF
CO
NT
EN
TS
2C
AI
SS
E
CE
NT
RA
LE
3D
ES
JA
RD
INS
OR
GA
NIZ
AT
ION
CH
AR
T
4A
RE
AS
OF
AC
TIV
ITY
52
00
4 P
ER
FO
RM
AN
CE
6M
AN
AG
EM
EN
T’S
ME
SS
AG
E
10
RE
VIE
W O
F O
PE
RA
TIO
NS
10
Fin
an
cia
l m
ark
ets
:
A t
rea
su
ry f
un
cti
on
fo
r th
e e
nti
re D
esja
rdin
s G
rou
p
14
Co
rpo
rate
an
d i
nsti
tuti
on
al
ma
rke
t:
A c
usto
miz
ed
se
rvic
e o
ffe
rin
g
20
Ca
na
dia
n m
ark
et:
Bre
ak
thro
ug
hs a
cro
ss C
an
ad
a
24
Bo
rde
rle
ss m
ark
ets
:
Ca
isse
ce
ntr
ale
, a
cro
ss-b
ord
er
em
issia
ry
28
Re
tail
ma
rke
t:
Su
pp
ort
ing
De
sja
rdin
s’ w
ea
lth
ma
na
ge
me
nt
bu
sin
ess
32
Th
e c
oo
pe
rati
ve d
iffe
ren
ce:
Ca
isse
ce
ntr
ale
se
rvin
g i
ts m
em
be
rs a
nd
th
e c
om
mu
nit
y
37
FIN
AN
CIA
L R
EV
IEW
10
3C
OR
PO
RA
TE
GO
VE
RN
AN
CE
CA
IS
SE
C
EN
TR
AL
EO
RG
AN
IZA
TIO
N C
HA
RT
3
AN
IN
TE
GR
AT
ED
CO
OP
ER
AT
IVE
F
INA
NC
IAL
GR
OU
P
OP
TII
NS
UR
AN
CE
OP
TIF
UN
DS
INV
ES
TM
EN
TS
5,36
4,49
7 M
EM
BE
RS
IN Q
UÉ
BE
C A
ND
ON
TA
RIO
572
CA
ISS
ES
PO
PU
LA
IRE
S A
ND
CA
ISS
ES
D’É
CO
NO
MIE
IN Q
UÉ
BE
C A
ND
ON
TA
RIO
GE
ST
ION
VA
LE
UR
S
MO
BIL
IÈR
ES
DE
SJA
RD
INS
SO
CIÉ
TÉ
IMM
OB
ILIÈ
RE
PL
AC
E D
ES
JA
RD
INS
31
,05
3 D
CU
ME
MB
ER
S
IN O
NT
AR
IO2
19
,02
6 M
EM
BE
RS
IN N
EW
BR
UN
SW
ICK
AN
D M
AN
ITO
BA
40
CA
ISS
ES
IN
NE
W B
RU
NS
WIC
K
AN
D M
AN
ITO
BA
DE
SJA
RD
INS
SE
CU
RIT
IES
INT
ER
NA
TIO
NA
L
LP
AN
D D
ES
JAR
DIN
S
RE
GIO
NA
L
DE
VE
LO
PM
EN
T
FU
ND
S
TH
E P
ER
SO
NA
L
INS
UR
AN
CE
CO
MP
AN
Y (
*)
CE
RTA
S D
IRE
CT
INS
UR
AN
CE
CO
MP
AN
Y (
*)
TH
E P
ER
SO
NA
L
GE
NE
RA
L
INS
UR
AN
CE
(*)
SF
L
MA
NA
GE
ME
NT
SIG
MA
AS
SIT
EL
DE
SJA
RD
INS
GL
OB
AL
AS
SE
T
MA
NA
GE
ME
NT
FIE
RA
CA
PIT
AL
(*)
PL
AC
E
DE
SJA
RD
INS
DÉ
VE
LO
PP
EM
EN
T
INT
ER
NA
TIO
NA
L
DE
SJA
RD
INS
DE
SJA
RD
INS
GE
NE
RA
L
INS
UR
AN
CE
(*)
CA
PIT
AL
RÉ
GIO
NA
L
ET
CO
OP
ÉR
AT
IF
DE
SJA
RD
INS
(1
)
DE
SJA
RD
INS
GE
NE
RA
L
INS
UR
AN
CE
GR
OU
P
DE
SJA
RD
INS
FIN
AN
CIA
L S
EC
UR
ITY
DE
SJA
RD
INS
AS
SE
T M
AN
AG
EM
EN
T
ON
TA
RIO
FE
DE
RA
TIO
N
NE
W B
RU
NS
WIC
K A
ND
MA
NIT
OB
A F
ED
ER
AT
ION
S
DE
SJA
RD
INS
SE
CU
RIT
IES
DIS
NA
T
DE
SJA
RD
INS
VE
NT
UR
E
CA
PIT
AL
FO
ND
AT
ION
DE
SJA
RD
INS
SO
CIÉ
TÉ
H
IST
OR
IQU
E
AL
PH
ON
SE
- D
ES
JA
RD
INS
DE
SJA
RD
INS
BA
NK
DE
SJA
RD
INS
C
OM
ME
RC
IAL
L
EN
DIN
G U
.S.A
.,
CO
RP
CA
ISS
E C
EN
TR
AL
E
DE
SJA
RD
INS
DE
SJA
RD
INS
TR
US
T
FO
ND
S D
E S
ÉC
UR
ITÉ
DE
SJA
RD
INS
CA
PIT
AL
DE
SJA
RD
INS
FÉ
DÉ
RA
TIO
N
DE
S C
AIS
SE
SD
ES
JAR
DIN
SD
U Q
UÉ
BE
C
DE
SJA
RD
INS
CR
ED
IT U
NIO
N
OT
HE
R I
NF
OR
MA
TIO
N
As a
t D
ece
mb
er
31
20
04
20
03
Ma
nit
ob
a a
nd
To
tal
Ma
nit
ob
a a
nd
To
tal
Gro
up
(1)
Ne
w B
run
sw
ick
(2)
Gro
up
Gro
up
(1)
Ne
w B
run
sw
ick
(2)
Gro
up
Nu
mb
er
of
em
plo
yee
s3
8,0
48
1,2
99
39
,34
73
6,8
87
1,2
41
38
,12
8
Nu
mb
er
of
me
mb
ers
5,3
64
,49
72
19
,02
65
,58
3,5
23
5,3
36
,74
42
17
,86
55
,55
4,6
09
Nu
mb
er
of
ele
cte
d o
ffic
ers
7,2
10
45
07
,66
07
,68
14
46
8,1
27
Nu
mb
er
of
me
mb
er
cais
se
s5
72
40
61
26
35
41
67
6
Nu
mb
er
of
se
rvic
e c
en
tre
s9
11
74
98
59
63
73
1,0
36
Nu
mb
er
of
au
tom
ate
d t
ell
er
ma
ch
ine
s2
,79
91
23
2,9
22
2,8
16
12
32
,93
9
(1)
Exc
lud
ing
th
e f
ed
era
tio
ns o
f M
an
ito
ba
an
d N
ew
Bru
nsw
ick
.
(2)
Ca
isse
s a
nd
fe
de
rati
on
s.
(1)
Ve
ntu
re c
ap
ita
l, p
ub
lic f
un
d m
an
ag
ed
by
De
sja
rdin
s V
en
ture
Ca
pit
al
Ja
nu
ary
1,
20
05
No
te:
Ch
art
do
es n
ot
refl
ect
the
le
ga
l o
wn
ers
hip
str
uctu
re.
Ow
ne
rsh
ip l
ink
Au
xili
ary
me
mb
ers
(*)
Sh
are
d o
wn
ers
hip
AR
EA
S O
F A
CT
IVIT
Y
DE
SJ
AR
DIN
S G
RO
UP
’S F
INA
NC
IAL
AG
EN
T A
ND
TR
EA
SU
RE
R C
ais
se
ce
ntr
ale
pro
vid
es c
lea
rin
g
se
ttle
me
nt
se
rvic
es f
or
instr
um
en
ts t
ran
sit
ing
th
rou
gh
the
ca
isse
ne
two
rk.
It a
lso
su
pp
lie
s D
esja
rdin
s G
rou
p w
ith
fun
ds a
nd
va
rio
us t
rea
su
ry p
rod
ucts
an
d t
ak
es c
are
of
Ca
pit
al
De
sja
rdin
s d
eb
en
ture
iss
ue
s.
Fu
rth
erm
ore
, it
ma
na
ge
s c
ash
fo
r D
esja
rdin
s G
rou
p a
s w
ell
as m
ajo
r
liq
uid
ity
an
d i
nve
stm
en
t p
ort
foli
os f
or
De
sja
rdin
s e
nti
tie
s.
In a
dd
itio
n,
as t
rea
su
rer
for
the
Gro
up
, C
ais
se
ce
ntr
ale
de
velo
ps a
nd
im
ple
me
nts
liq
uid
ity
ma
na
ge
me
nt
an
d
ass
et
– l
iab
ilit
y m
atc
hin
g s
tra
teg
ies f
or
De
sja
rdin
s G
rou
p
as a
wh
ole
.
SA
VIN
GS
PR
OD
UC
T D
ES
IGN
ER
AN
D F
INA
NC
IAL
MA
RK
ET
SE
RV
ICE
S P
RO
VID
ER
off
eri
ng
an
ext
en
siv
e
lin
e o
f d
eri
vati
ves a
nd
tre
asu
ry p
rod
ucts
su
ch
as i
nte
rest
rate
an
d c
urr
en
cy
sw
ap
s,
forw
ard
exc
ha
ng
e c
on
tra
cts
,
op
tio
ns a
nd
“D
esja
rdin
s A
cce
pta
nce
s”.
In
re
cen
t ye
ars
,
ind
exe
d t
erm
sa
vin
gs s
olu
tio
ns,
wh
ich
are
qu
ite
po
pu
lar
in
the
ir t
arg
et
ma
rke
ts,
we
re p
eri
od
ica
lly
ad
de
d t
o t
his
lin
e
of
pro
du
cts
.
ww
w.d
es
jard
ins
.co
m/c
cd
CU
ST
OM
IZE
D F
INA
NC
ING
AN
D S
ER
VIC
ES
PR
OV
IDE
R f
or
oth
er
De
sja
rdin
s e
nti
tie
s a
nd
va
rio
us
ext
ern
al
cli
en
t b
ase
s w
hic
h c
an
dir
ectl
y b
en
efi
t fr
om
its
sp
ecia
l e
xpe
rtis
e,
su
ch
as l
arg
e c
orp
ora
tio
ns,
me
diu
m-
siz
ed
bu
sin
ess
es,
an
d p
ub
lic a
nd
pa
rap
ub
lic a
ge
ncie
s.
Su
ch
se
rvic
es i
nclu
de
op
era
tin
g c
red
its,
term
lo
an
s,
ba
nk
acc
ou
nts
an
d b
ill
coll
ecti
on
, to
na
me
a f
ew
. In
th
e c
orp
o-
rate
ma
rke
t, w
he
re C
ais
se
ce
ntr
ale
fo
cu
se
s o
n t
he
se
rvic
e
an
d m
an
ufa
ctu
rin
g s
ecto
rs,
ma
ny
of
its t
ea
ms s
pe
cia
lize
in a
gri
foo
d,
fore
st
pro
du
cts
, co
mm
un
ica
tio
ns,
en
erg
y, r
ea
l
esta
te,
ste
el
an
d t
ran
sp
ort
ati
on
. L
astl
y, m
ajo
r tr
an
sb
ord
er
fin
an
cin
gs a
re o
ffe
red
by
De
sja
rdin
s C
om
me
rcia
l L
en
din
g,
on
e o
f it
s U
.S.
su
bsid
iari
es.
INT
ER
NA
TIO
NA
L S
ER
VIC
ES
MA
NA
GE
R f
or
ind
ivid
ua
ls a
nd
bu
sin
ess
es,
Ca
isse
ce
ntr
ale
ca
n o
ffe
r
fore
ign
exc
ha
ng
e c
on
tra
cts
, fo
reig
n c
urr
en
cy
acc
ou
nts
,
imp
ort
/exp
ort
le
tte
rs o
f cre
dit
, fu
nd
s t
ran
sfe
rs,
exp
ort
fin
an
cin
g o
r U
.S.
ba
nk
ing
se
rvic
es,
thro
ug
h D
esja
rdin
s
Ba
nk
, it
s r
eta
il b
an
kin
g s
ub
sid
iary
.
ww
w.d
es
jard
ins
.co
m/f
lorid
a
CA
IS
SE
C
EN
TR
AL
EA
RE
AS
OF
AC
TIV
ITY
4
2 0 0 4 P E R F O R M A N C EC A I S S E C E N T R A L E 5
IN RECENT YEARS, OUR FINANCIAL PERFORMANCE HAS IMPROVED SIGNIFICANTLY.
AS DESJARDINS GROUP’S REPRESENTATIVE ON CAPITAL MARKETS, THIS KEY ELEMENT
IS A CONDITION FOR SUSTAINABILITY AND A GUARANTEE OF THE BEST SERVICE TO
MEMBERS AND CUSTOMERS. THIS PERFORMANCE, MEANT TO BE COMPREHENSIVE AND
SUSTAINABLE, DEPENDS ON MEMBER AND CLIENT SATISFACTION, ON EMPLOYEE
SATISFACTION AND MOTIVATION AND ON PRODUCTIVITY. ONCE AGAIN THIS YEAR, OUR
RESULTS PROVIDE CONCRETE PROOF THAT FINANCIAL PERFORMANCE AND THE
COOPERATIVE MOVEMENT ARE A WINNING FORMULA.
• Record contribution of $86 million
• Assets at a high of nearly $15 billion
• BIS capital ratio of 15.5%
• Enhanced reputation on capital markets
• Strong growth in the corporate and institutional segments
• Major breakthroughs in new geographic markets
• Vigorous expansion in complementary services
• Ongoing support for cooperative development
2004 PERFORMANCE
C A I S S E C E N T R A L EM A N A G E M E N T ’ S M E S S A G E 6
It is with great pride and enthusiasm that we present the
2004 results of Caisse centrale. In many respects, Caisse
centrale reached new heights in the last year, maintaining
its particularly prosperous momentum of the past few
years.
Thus, our contribution to the Desjardins cooperative
network reached an all-time high of $86.5 million. This
amount represents annual growth of close to 30% and
nearly 100% over five years. We cannot emphasize enough
the valuable contribution of all our business segments
where our human resources have continued to focus on
our major development lines of the past few years in
keeping with the Desjardins cooperative network’s
strategic plan.
ROLE OF TREASURERIn addition, to reinforce Desjardins Group’s strategic
orientation and the creation of six functions within the
Group’s scope, the president and chief operating officer of
Caisse centrale was appointed to the position of Chief of
the Treasury of the Group. In addition to its role as a
supplier of funds and treasury products, Caisse centrale
will henceforth take on a new role of manager of
liquidities and asset – liability matching strategies
throughout the entire Group.
Parallel to its new mandate, Caisse centrale has
substantially reduced is own liquidities, which it had
maintained as a preventive measure for the caisse
network. This reduction of preventive liquidities (designed
to meet the network’s growing need for funds) was made
possible through access to financial markets, which
continued to grow both on Canadian capital markets and
internationally. An increasing number of brokers with
large investment banks follow with interest the Desjardins
issues and expressly recommend our securities, both
across Canada and Europe.
MANAGEMENT’S MESSAGE
ALBAN D’AMOURS
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
JEAN-GUY LANGELIER
PRESIDENT AND CHIEF OPERATING OFFICER
M A N A G E M E N T ’ S M E S S A G EC A I S S E C E N T R A L E 7
This was evidenced by the second record issue of
500 million euros in the European markets and the fact
that close to 90% of all securities issued by Desjardins in
2004 were bought by institutions outside Québec.
All in all, this series of operations also enabled us to
better ladder the maturity of deposits and extend the
average term of our maturity dates by more than one
year. Moreover, these transactions enabled us to maintain
an annual growth of 10% of our assets, which reached a
historical high of close to $15 billion.
BUSINESS DEVELOPMENT – CORPORATE SECTOR In addition to being attributable to increased loans to the
caisse network, which doubled during the year, this
increase in assets is also proof of our business
development efforts in our target markets. For example,
in the business financing sector, Caisse centrale launched
a whole range of successful initiatives to extend its sphere
of influence, authorizing $1.1 billion in new business
during the year. On the one hand, such a result can be
explained by the growing number of successes that
Caisse centrale obtained by maintaining or gaining a
position as agent or coagent in certain banking
syndicates. On the other hand, our fundamental
development strategies were successful on all fronts,
propelling Caisse centrale toward another record year.
Thus, we were able to enter into more than one-third of
the year’s new business in markets across Canada and
the United States due to our geographical diversification
strategies for our loans portfolio and our ongoing support
to client companies throughout their expansion.
This rapid development is a result of our breakthroughs
with Canadian businesses and the establishment of a new
commercial loans subsidiary in the United States. Caisse
centrale is more solidly anchored than ever on American
soil and has better tools to finance companies’ activities
directly. Moreover, Desjardins Commercial Lending was
quick to take an active role in various cross-border
transactions.
With a view to optimizing Desjardins’ overall product
offerings for medium-sized businesses, Caisse centrale
is pleased to confirm that it has signed business
agreements with practically all Corporate Financial
Centres (CFCs). This leads to an ever-increasing synergy
among complementary entities in the Desjardins
distribution circuit. Closer ties with the network have,
among other things, opened the door to referrals of
several files between the caisse network and Desjardins
Bank. With its new commercial charter, our retail
subsidiary in Florida now has more latitude in financings
to SMEs. Moreover, outstanding business loans have risen
steadily over the past few quarters as have mortgage
loans due to increases planned under its portfolio
acquisition strategy.
For the private sector as a whole, 2004 loans have also
reached an impressive high over the past three years with
consolidated outstanding loans of $1.8 billion, which is
15% more than in the previous year.
C A I S S E C E N T R A L EM A N A G E M E N T ’ S M E S S A G E 8
INSTITUTIONAL SECTOR In the public and parapublic sectors, a much-coveted
market, Caisse centrale and all of Desjardins are
extremely satisfied with the progress recorded in 2004.
Caisse centrale started by gaining a more influential
position as coagent in the banking syndicate for
Hydro-Québec. There were also major breakthroughs in
banking services for both Hydro-Québec and the Ministère
des Finances du Québec. Finally, Caisse Centrale was
awarded the Ville de Montréal account following a bid
launched during the year. Caisse centrale’s successful bid
enabled Desjardins to become the city’s primary financial
institution.
COMPLEMENTARY PRODUCTS AND SERVICES The new team of treasury products business development
was instrumental in growing our derivative product offerings
for businesses and government agencies, as well as credit
unions in Western Canada. In the context of increasing trade,
the team also helped substantially increase the number of
foreign exchange transactions. The Desjardins International
Services Centre also played a key role by energetically
promoting our complementary services to the caisse and
CFC network and their members.
The current popularity of our full range of international
services is the result of several years of sustained efforts to
increase our visibility. This progress can no doubt be
attributed to our improved automated services, which are
accessible through the AccèsD Affaires service, as well as our
Desjardins Bank subsidiary.
In addition to these accomplishments, we have a mandate as
principal overseer of the development of Desjardins Credit
Union in Ontario on behalf of the Group. With the close
cooperation of several network components, DCU will be in a
position to present the integrated Desjardins service offering
to its personal and business members in 2005.
These accomplishments are all the more impressive given
the country’s slower economic growth since summer 2004,
particularly due to the strong Canadian dollar and its impact
on the country’s exports. Moreover, we have taken up the
challenge to grow in an environment where the competition
from major Canadian banks and, increasingly, foreign banks
is fierce. However, the current conditions promote various
innovative types of partnerships with the financial sector,
which we believe could prove very interesting.
M A N A G E M E N T ’ S M E S S A G EC A I S S E C E N T R A L E 9
ALBAN D’AMOURS
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
JEAN-GUY LANGELIER
PRESIDENT AND CHIEF OPERATING OFFICER
2005 ACTION PLANIn 2005, the entire Caisse centrale team will build on its
recent successes and step up business development
efforts in Québec, Canada and the United States. Caisse
centrale still has many diversification opportunities to
explore, and intends to expand its range of products and
services in a number of high-potential fields, including:
asset financings, real estate loans to large businesses,
cross-border financings, energy, etc.
Furthermore, in its role of Group treasurer, Caisse
centrale will pursue the initiatives launched last year to
support Desjardins Group’s expansion and ensure it
maintains an extremely healthy balance sheet for a long
time to come.
Thus, we end a year of significant milestones in all our
main development lines. This is not about mere
numbers… Our success is founded on the dedication of
the entire Caisse centrale team and the close cooperation
with our colleagues in the cooperative network and
Desjardins subsidiaries, whom we wish to thank.
With the commitment of its team and partners, Caisse
centrale will be able to enthusiastically and confidently
make great strides to reach new heights as representative
on the capital markets of the largest cooperative financial
group in Canada.
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 1 0
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 1 1
FOR A NUMBER OF YEARS, CAISSE CENTRALE HAS BEEN ASSUMING STRATEGICALLY
IMPORTANT FUNCTIONS THROUGHOUT DESJARDINS GROUP. IT FULFILS, IN PARTICULAR,
THE ROLES OF FUNDS PROVIDER, LIQUIDITY MANAGER AND DERIVATIVES PROVIDER.
AS A FUNDS SUPPLIER, IT HAS SET UP NUMEROUS FUNDING PROGRAMS IN CANADA,
AS WELL AS IN THE UNITED STATES AND EUROPE. IT ALSO MANAGES A NUMBER OF
INVESTMENT PORTFOLIOS TOTALLING CLOSE TO $10 BILLION, INCLUDING REGULATORY
LIQUIDITY PORTFOLIOS OF THE CAISSE NETWORK AND THE FÉDÉRATION DES CAISSES
POPULAIRES DE L’ONTARIO, AND THE DESJARDINS CREDIT UNION (DCU) LIQUIDITY
PORTFOLIO. FINALLY, IT SUPPORTS THE NETWORK IN ITS ASSET – LIABILITY
MANAGEMENT STRATEGIES AS A DERIVATIVES PROVIDER.
FINANCIAL MARKETS:
A TREASURY FUNCTION FOR THE ENTIRE DESJARDINS GROUP
0
1
2
3
20
04
20
03
20
02
2.7
1.4
0.2
LOANS TO THE CAISSE NETWORK(IN $B)
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 1 2
TREASURER FOR DESJARDINS GROUP The key role of Caisse centrale
within the Desjardins extended family was established in 2004 following the
implementation of Desjardins Group’s strategic orientation. In addition to its
traditional missions, Caisse centrale was assigned the role of integrating all
Desjardins Group’s treasury operations. Caisse centrale therefore devises and
implements liquidity management and asset – liability management strategies
for the entire Desjardins Group.
GROWING FUNDING REQUIREMENTS FROM THE CAISSE NETWORK In 2004, the
Desjardins caisses recorded strong growth in their operations, with personal and business
loans up substantially. To finance this growth, they turned to their funds provider, Caisse
centrale, through the Fédération. Our loans to the caisse network virtually doubled from
$1.4 billion to $2.7 billion.
STRICT LIQUIDITY MANAGEMENT In order to partially meet the caisses’
funding needs, we used our liquidities, which decreased from $3.7 billion at
the end of 2003 to $3 billion a year later. The securities now held are aimed
essentially at meeting regulatory requirements. In addition, this optimization
of our liquidities led to financial synergies.
DESJARDINS’ ACCESS TO FINANCIAL MARKETS CONTINUES TO GROW Such
optimization of preventive liquidity was the result of access to financial markets, which
continues to grow both in Canada and internationally. After many roadshows to investors, and
owing to our ongoing presence on capital markets, we have noticed that an increasing number
of brokers with large investment banks follow with interest the Desjardins issues and expressly
recommend our securities. This is happening both across Canada and in Europe. In 2004, two
major issues were successful: the first issue of approximately $300 million was made under
the Canadian bond program capped at $2 billion and established at the end of 2003; the second
was for 500 million euros, on the European market, matching the previous year’s record.
Nearly 90% of the issues floated by Caisse centrale in 2004 were bought up by Canadian
investors from provinces other than Québec, clearly demonstrating the scope of Desjardins
Group’s reputation on the markets.
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 1 3
OUR EXPERTISE AT THE SERVICE OF CAPITAL DESJARDINS As
Desjardins Group’s representative on capital markets, we participated in
arranging a $2 billion Canadian debenture funding program for Capital
Desjardins at the end of 2003. In early 2004, we made a Canadian roadshow to
investors, following which Capital Desjardins was able to proceed with a
$450 million issue for the funding of the caisse network. A clear indication of
Desjardins’ growing reputation throughout Canada is that only 14% of this
issue was sold to Québec investors.
STEADY GROWTH IN DERIVATIVES The caisses benefit from
Caisse centrale’s expertise in managing their interest and exchange rate risks. Critical
asset-liability management operations are managed chiefly through interest rate swaps
arranged by Caisse centrale. As a result of the growing requirements of both the network
and Caisse centrale, derivatives outstanding soared more than 40% to beyond $90 billion.
IN THE YEARS AHEAD, Desjardins Group’s funding requirements will
continue to increase primarily because of the robust growth in caisse network
assets. Caisse centrale will be required to use all Desjardins Group’s funding
programs with ceilings of about $12 billion, including the Capital Desjardins
program. Other avenues will also need to be explored, such as the
securitization of various types of Desjardins Group on-balance sheet assets.
Caisse centrale will moreover pursue its deposit maturities laddering strategy
in order to avoid concentrating issues in any given period and to reduce
dependency on short-term maturities.
0
20
40
60
80
100
20
04
20
03
20
02
92
65
82
DERIVATIVES(IN $B)
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 1 4
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 1 5
CAISSE CENTRALE HAS SPECIAL TIES TO MOST LARGE CORPORATIONS AND
INSTITUTIONS IN QUÉBEC. THE BUSINESS RELATIONSHIP IS BUILT AROUND THE
FINANCING OF THEIR OPERATIONS. OUR SERVICE OFFERING HAS MANY ADVANTAGES,
ESPECIALLY ITS FLEXIBILITY. WE STAND OUT FROM THE COMPETITION BECAUSE OF
OUR ABILITY TO ADAPT TO OUR CUSTOMERS’ SPECIFIC NEEDS AND TO OFFER THEM
CUSTOMIZED PRODUCTS TO SUPPORT THEIR DEVELOPMENT STRATEGIES. IN ADDITION,
WE CONTINUE TO REINFORCE OUR BUSINESS RELATIONSHIPS WITH OUR CUSTOMERS
BY OFFERING THEM AN INCREASINGLY BROADER AND MORE INTEGRATED LINE OF
PRODUCTS AND SERVICES. WE HAVE ALSO FORGED A CLOSE PARTNERSHIP WITH THE
CAISSE AND CFC NETWORK TO SERVE THE MEDIUM-SIZED BUSINESS AND
INSTITUTIONAL MARKET IN ALL QUÉBEC REGIONS.
CORPORATE AND INSTITUTIONAL MARKET:
A CUSTOMIZED SERVICE OFFERING
CLIENT SATISFACTION
• Satisfied and very
satisfied: 98%
• Very satisfied: 70%
• Retention: almost perfect
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 1 6
IT IS THEREFORE NOT SURPRISING THAT our customer satisfaction rate is so high,
year after year, as surveys have shown. In 2004, 98% of Caisse centrale’s corporate and
institutional clients said they were very satisfied or satisfied with our services, of which
close to 70% stated they were very satisfied. Our virtually perfect retention score is the
logical conclusion to our customers’ high satisfaction rate.
DEVELOPING THE CORPORATE SEGMENT Approved new business rose sharply in 2004
to over $1.1 billion, up almost 40% from the previous year. This performance is notably the
result of our Canadian development strategies (see Canadian Market) and greater penetration
of banking syndicates. Despite the fierce competition among Canadian banks, we were able to
grow the outstanding private-sector loan portfolio by 15% to $1.8 billion, almost matching the
record level in 2001. Inroads made among Québec businesses this year included Ultima
Foods Inc., Cominar Real Estate Investment Trust, Uni-Select, Dessau-Soprin and Groupe
Accueil International.
Nearly two thirds of new business came from our specialized industrial segments: agrifood, forest
products, communications, real estate, energy, steel and transportation.
OUR POSITION IN BANKING SYNDICATES has been strengthened. Pursuant to our
strategy, we have consolidated, even improved, our positions in banking syndicates. For
instance, we became the coagent and syndication agent for Gaz Métro and the managing agent
for Kruger, two significant breakthroughs. Moreover, we structured new financings for our
clients Cirque du Soleil and the CGI Group, respectively as agent and coagent, thus confirming
our position in these syndicates as well as our ability to innovate to always better meet our
customers’ needs. Owing to these special roles, we maintain very close relationships with our
clients, which in turn puts Desjardins Group in an ideal position to offer them its entire line of
products and services.
64% of new business in our
specialized segments
NEW BUSINESS2004
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 1 7
BUSINESS AGREEMENTS SIGNED WITH ALMOST ALL CFC In the mid-size business market
(companies with revenues between $10 million and $100 million), our complementary role with CFCs is
continuously being finetuned. The agreements signed set out the individual collaborative approach between
Caisse centrale and each CFC. Our authorized credits in this market amounts to approximately $600 million.
IN 2005, WE WILL PURSUE THIS STRATEGY focussed on the roles of agent and coagent.
We will also accelerate our development in other promising market segments: companies with
revenues between $100 and $250 million, asset financing and real estate financing for large
corporations (also see Canadian Market).
PUBLIC AND PARAPUBLIC SECTORS Caisse centrale plays a lead role in serving public and
parapublic institutions (specifically governments, municipalities, hospitals, school boards and
universities) in the area of both financing and banking services, whether directly or in
partnership with the caisse and CFC network.
SIGNIFICANT BREAKTHROUGHS HAVE BEEN MADE in this highly coveted market.
Together with the Fédération des caisses Desjardins du Québec, we were the successful bidder
in a Ville de Montréal call for tenders to provide all its banking services, making Desjardins
Group its primary financial institution. We were also awarded large contracts with the Ministère
des Finances du Québec and Hydro-Québec, two organizations fiercely solicited by financial
institutions. The quality of our service and our highly competitive offer have significantly
boosted our banking service revenues. Lastly, we gained a prominent and influential position
as coagent in the banking syndicate for Hydro-Québec.
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 1 8
WE HAVE CONTINUED TO ACTIVELY SUPPORT THE NETWORK of caisses and CFCs in
its offers to institutional members. In particular, we made the terms of use of “Desjardins
Acceptances”, our popular financing product that gives Desjardins clients access to money
markets, even more flexible. The minimum issue amount was drastically reduced, making the
instrument more accessible and enhancing the network’s competitiveness in this market. In
2004, the average volume of “Desjardins Acceptances” used in partnership with the network
increased 46% to roughly $500 million.
IN 2005, WE WILL CONTINUE TO EXPAND our presence in the Québec market so that
Desjardins Group can be a leading player. We will also invest in developing the Ontario
institutional market in conjunction with the Fédération des caisses populaires de l’Ontario and
Desjardins Credit Union.
TREASURY PRODUCTS Caisse centrale offers its private sector and public and parapublic
sector clients a vast array of sophisticated treasury products, especially derivatives.
Derivatives account for a major portion of the Desjardins integrated offer because of their
strategic role in managing business risks, in particular interest and foreign exchange rate
risks.
IN SETTING UP A TREASURY TEAM DEDICATED TO BUSINESS DEVELOPMENT at the
beginning of the year, we were able to significantly boost trading volume with our corporate and
institutional clients quite substantially. Foreign exchange trading with Caisse centrale’s clients
quite simply skyrocketed. Logically, the vigorous surge in volume translated into additional
revenue, with revenue from market operations soaring by over 60% in 2004.
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 1 9
OUR EXPERTISE HAS BEEN HONED in these complex financial product markets. We can
offer our clientele increasingly sophisticated treasury products integrating the latest
techniques. Combined with our thorough knowledge of our clients’ needs, this diversified and
innovative offering has enabled us to make our mark in a fiercely competitive market.
REPUTABLE AND DEMANDING CLIENTS have placed their trust in us. Our relationships
with large provincial agencies, already very close in the areas of financing and banking
services, were reinforced in the area of financial markets throughout the year. Many private-
sector clients also took advantage of the quality of our treasury product offering, such as
Cirque du Soleil, Vidéotron and Lauzon – Distinctive Hardwood Flooring.
C A I S S E C E N T R A L E
0
1
2
3
4
20
04
20
03
20
02
Businesses
Institutions
1.8
1.6
1.5
1.5
1.5
0.9
OUTSTANDING LOANS(IN $B)
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 2 0
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 2 1
SINCE ITS VERY BEGINNINGS, CAISSE CENTRALE HAS CARRIED OUT ITS OPERATIONS
THROUGHOUT CANADA. DEALING ON A CANADIAN BASIS THEREFORE COMES
NATURALLY TO US BECAUSE AS A FINANCIAL AGENT, WE REPRESENT DESJARDINS
GROUP WITHIN THE CANADIAN PAYMENTS ASSOCIATION, SIDE BY SIDE WITH THE BANK
OF CANADA AND MAJOR CANADIAN BANKS. IT IS NO ACCIDENT THAT WE HAVE BEEN
ESTABLISHED IN THE HEART OF TORONTO’S FINANCIAL DISTRICT FOR 20 YEARS; IT IS
TO ACCOMPANY OUR FINANCING CLIENTS AND OUR PARTNERS. WE ARE THEREFORE
SEASONED EXPERTS IN THE FINANCIAL INDUSTRY FROM COAST TO COAST. IN 2004, WE
STEPPED UP OUR DEVELOPMENT ACROSS THE COUNTRY, MAKING IT A YEAR OF
SIGNIFICANT BREAKTHROUGHS.
CANADIAN MARKET:
BREAKTHROUGHS ACROSS CANADA
0
60
120
180
240
300
20
04
20
03
20
02
26
0
921
16
NEW BUSINESS CANADA-WIDE(IN $M)
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 2 2
CANADIAN FINANCING Caisse centrale is a long-standing participant in the
Québec banking syndication market. It is represented in the vast majority of
syndicates, where it is very well perceived. Since many of its clients operate
domestically as well as internationally (being 67% of its authorized credits in
the corporate sector), Caisse centrale makes it a point to accompany them in
all their new markets. In addition, given the expertise and ties developed over
the years with other banking syndication players, we decided to diversify our
lending portfolio geographically by becoming a more important player on the
Canadian scene.
WE HAVE MADE INROADS IN THE CANADIAN MARKET THOUGH BANKING
SYNDICATION This market is obviously not new to us. Over the years, we have participated in
a number of financings through Canadian banking syndicates. Our new business across
Canada, of $260 million in authorized credits, accounted for appproximately one quarter of our
new business during the year, and enabled us to support the growth of our portfolio as well as
Desjardins Group in its strategy of developing profitable business in new markets.
THIS BREAKTHROUGH DEMONSTRATES OUR GROWING REPUTATION
THROUGHOUT CANADA with banking syndicate agents as well as borrowers.
In addition, it was made very prudently. Most of our new cross-Canada
customers are engaged in specialized segments, of which we have a long-time
knowledge and whose risks are thoroughly familiar to us. Take, for instance,
the forest product sector (Pope & Talbot and West Fraser Timber), the commu-
nications sector (TELUS, Alliance Atlantis, Osprey Media) and the energy sector
(EnCana and Nexen), a promising sector on which we will focus in 2005.
67% of our commitments
are made to companies of
national or international scope
COMMITMENTS TO THEPRIVATE SECTOR
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 2 3
INCREASINGLY STRONGER TIES WITH CREDIT UNIONS Our business development in
Canada aims not only to win new markets but also to strengthen cooperative financial
institutions throughout the country. In recent years, Caisse centrale has played a predominant
role in financing large Canadian credit unions, especially in British Columbia where we have
set up over $300 million in financings since 2002, as agent of cooperative financing syndicates.
In 2004, Caisse centrale developed its relationship with the cooperative financial sector to an
even higher level.
WE ENABLED CREDIT UNIONS TO CAPITALIZE ON our expertise in the area of
derivatives. Our new business development team for treasury products met the complex needs
of many credit unions with respect to interest rate risk management. Many of the largest
Canadian financial cooperatives relied on Caisse centrale concerning these sophisticated
products, including Envision Credit Union, North Shore Credit Union, Van City, Coast Capital and
Citizens Bank. Together they represent close to one quarter of our interest rate transaction
volume with clients.
ON THE STRENGTH OF THESE BREAKTHROUGHS, we will continue to develop Canadian
markets in 2005. Our aim will be in particular to share our expertise in derivatives with all our
client bases. As a result of the projected increase in our Toronto office resources, we will
continue to forge closer ties with Canadian banking syndicate leaders as well as with credit
unions across the country.
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 2 4
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 2 5
WE HAVE ALWAYS OPERATED ON INTERNATIONAL MARKETS. GIVEN OUR MISSION AS A
FUNDS PROVIDER TO DESJARDINS GROUP, WE HAVE SET UP FUNDING PROGRAMS OVER
THE YEARS IN THE UNITED STATES AND IN EUROPE, AND HAVE ALSO FORGED SOLID
LINKS WITH INVESTORS IN ASIA. AS A FINANCIAL AGENT, WE AIM TO ENSURE THAT
DESJARDINS CLIENTS AND MEMBERS CAN CARRY OUT THEIR INTERNATIONAL TRANS-
ACTIONS, AND THEREFORE MANAGE A VAST NETWORK OF OVER 600 CORRESPONDENTS
THROUGHOUT ALL CONTINENTS. THE INTERNATIONAL SCENE HAS ALWAYS BEEN A TOP
PRIORITY, AND ACCOUNTS FOR OUR PRESENCE IN FLORIDA THROUGH DESJARDINS
BANK SINCE 1992, AND EVEN OUR ROLE ALONGSIDE FOUR EUROPEAN COOPERATIVE
FINANCIAL INSTITUTIONS AS PART OF B.P. INVEST CONSULT, A FIRM SERVING SMES
THAT INTEND TO INVEST IN CENTRAL AND EASTERN EUROPE.
BORDERLESS MARKETS:
CAISSE CENTRALE, A CROSS-BORDER EMISSIARY
38% of the funding comes
from outside Canada
INTERNATIONAL FUNDING(DECEMBER 31, 2004)
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 2 6
DESJARDINS BANK HAS TAKEN FULL ADVANTAGE OF ITS NEW
COMMERCIAL CHARTER. Given our subsidiary’s increased latitude, it
expanded its commercial lending portfolio by over 60% in 2004. This increase is
due to both local business development and the development of Desjardins
business clients’ subsidiaries. Polycor Group, a Caisse centrale client, is a case
in point.
SERVICE OFFERING FOR BUSINESSES WAS ENHANCED IN 2004. For the added
convenience of its business clientele, two new services were introduced: online services and
the U.S. Merchant Service. Online services, which let clients view their account information
through the Internet, are quite popular (80 businesses that have already signed up).
Through the U.S. Merchant Service, Québec and Canadian companies doing business in the
United States can accept credit card payments from their U.S. clients.
RECORD RESULTS IN 2004 In addition to developing the commercial segment,
Desjardins Bank continued to pursue its strategy of acquiring mortgage lending
portfolios. Its annual balance sheet thus grew by 40% to reach a record high.
Adeptly controlling its costs despite a sharp increase in revenues, Desjardins Bank
continued to enhance productivity, which holds up at favourable levels compared
with competitors of a similar size. In fact, the Pompano Beach branch, which has
been open for only three years, is already turning a profit. Desjardins Bank’s
business strategies have therefore proven to be highly profitable, with income up
43% over the previous year.
A NEW U.S. SUBSIDIARY We have already expanded our presence in the United States by
establishing a second subsidiary, Desjardins Commercial Lending (“DCL”). Through DCL, we
can accompany Desjardins business clients operating in the U.S. market, and large financing
transactions can therefore be performed. Consequently, DCL rounds out the business service
offering of Caisse central and Desjardins Bank, which can provide business financing of up to
about US$2.5 million. In addition, the new subsidiary, set up by mid 2004, has quickly fulfill its
role by generating, for Caisse Centrale, more than $230 million of new businesses.
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 2 7
GROWTH GAINING MOMENTUM IN INTERNATIONAL SERVICES The
Desjardins International Service Centre (“DISC”) team of Caisse centrale steadily
pursued visibility activities with the caisse and CFC network and with business
members. It also expanded its line of products and services, first by designing a
customized service offering model for SMEs so that it could present customized
solutions for international services. Automated international funds transfers and
inter-currency transfers are also currently available through AccèsD Affaires.
Finally, Export D factoring is even more competitive now for all businesses.
As a result, all international products and services grew substantially in 2004.
FOREIGN EXCHANGE TRANSACTIONS UP SIGNIFICANTLY IN 2004. Given the sharp
appreciation of the Canadian dollar in 2004, companies were required to manage their foreign
exchange risks with skill and dexterity. Under the circumstances, Caisse centrale’s highly
competitive offer recruited numerous members. Thus, since 2004, 105 new businesses have
had direct access to foreign exchange traders, bringing the total number of businesses that
have signed up for this service to 450. Morever, the transaction volume with business members
in the network rose by more than 70% in 2004, for an all-time record volume.
IN 2005, WE WILL CONTINUE TO PRESS FORWARD IN THE INTERNATIONAL MARKET
Since we can capitalize on a comprehensive line of products and services, as well as on the
infrastructure implemented in recent years, we will step up our prospecting of Canadian
businesses operating on both sides of the border or those with expansion projects. In order to
further broaden our service offering in the United States, we will also continue to study the
possibility of establishing a U.S. branch.
300
450
600
750
900
1050
1200
20
04
20
03
20
02
11
39
66
2
54
3
FOREIGN EXCHANGEVOLUME WITH SMES(IN US$M)
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 2 8
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 2 9
EVEN IF CAISSE CENTRALE PRIMARILY OPERATES ON CAPITAL MARKETS AND SERVES
BUSINESSES, IT IS ALSO WORKING TOWARD DESJARDINS GROUP’S STRATEGIC
OBJECTIVE OF BECOMING THE LEADING WEALTH MANAGER FOR INDIVIDUAL
QUEBECKERS. THIS IS FIRST AND FOREMOST BECAUSE WE DESIGN AND MANAGE
SAVINGS PRODUCTS FOR THOUSANDS OF CAISSE MEMBERS, MAKING OUR EXPERTISE
IN THE LATEST FINANCIAL TECHNIQUES AVAILABLE TO THEM. IT IS ALSO BECAUSE OUR
SUBSIDIARY DESJARDINS BANK PROVIDES QUALITY BANKING PRODUCTS AND
SERVICES TO DESJARDINS MEMBERS (AND OTHERS) WHO STAY IN FLORIDA OR
TRAVEL IN THE U.S.
RETAIL MARKET:
SUPPORTING DESJARDINS’ WEALTH MANAGEMENT BUSINESS
0
100
200
300
400
500
600
700
20
04
20
03
20
02
68
2
37
3
61
TRMTS OUTSTANDINGS(IN $M)
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 3 0
TRMTS: ON TARGET WITH ANNOUNCED RETURNS Tactical Rate
Management Term Savings (“TRMTS”) is a savings product that has been
available through the caisses since 2002. It was designed according to very
specific criteria by Caisse centrale’s financial market experts. In the world of
finance, risk and return are closely related: the more profitable an investment
promises to be, the more volatile or risky it is. With TRMTS, Caisse centrale’s
aim was to offer caisse depositors a savings product that would combine
performance and stability. This was a great challenge that Caisse centrale was
able to meet.
MISSION ACCOMPLISHED Launched almost two and a half years ago, TRMTS has delivered
what it promised. In fact, a vast majority of the campaigns of over six months achieves a higher
return than traditional savings instruments with the same maturity date. For instance, the third
campaign initiated in January 2003 had, as year-end 2004, a cumulative return of 7.9%,
resulting in a 40% higher return. These results were achieved by maintaining low volatility.
SUPERIOR RETURNS GENERATE OUTSTANDINGS Over the past
12 campaign periods, TRMTS has elicited keen interest from individual
investors who are caisse members. They did not fail to take advantage of such a
high-performing product and at such a low risk, and therefore bought it on a
large scale. In 2004, TRMTS outstandings almost doubled from $373 million
to $682 million.
CAISSE CENTRALE ALSO PLAYED AN IMPORTANT ROLE in launching the new
Desjardins indexed savings product, Perspectives Plus Term Savings (“PPTS”). As it was the
case with Alternative Term Savings (“ATS”), we also help finance PPTS. Note that Caisse
centrale intervenes in the management of stock market-indexed term savings products by
contributing its expertise in stock index options.
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 3 1
DESJARDINS BANK: ONLINE FINANCIAL SERVICES This year, Desjardins Bank
significantly enhanced its offering with the addition of online financial services. Customers can
now access their accounts and obtain information without having to wait for their monthly
statement or line up in front of an ATM. They can view all their transactions directly on screen
via the Internet and make electronic funds transfers between Desjardins Bank accounts. Close
to 250 people have already signed up for this service.
STRONG VOLUMES IN FLORIDA In addition, transfers from the caisse network to Desjardins
Bank increased by 150% in 2004. AccèsD has made it much easier to make deposits from a
distance and transfer funds. These new services have benefited a client base, attracted not only
by the Florida sun, but also by a strongly appreciating Canadian dollar in 2004.
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 3 2
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 3 3
CONCRETELY DEMONSTRATING THE COOPERATIVE DIFFERENCE IS WHAT LARGELY
SHAPES OUR COMMUNITY INVOLVEMENT. WHETHER THIS TAKES THE FORM OF
SOLIDARITY, SOCIO-ECONOMIC OR COMMUNITY COMMITMENT OR ANY OTHER ACTION,
OUR PRIMARY AIM IS TO SERVE OUR MEMBERS WELL, NAMELY THE DESJARDINS
CAISSES AND THE AUXILIARY FEDERATIONS. IN THIS AREA, SATISFACTION SURVEYS
CONDUCTED AMONG OUR MEMBERS SHOW THAT ONCE AGAIN THIS YEAR, THEY WERE
VERY PLEASED WITH THE QUALITY OF OUR SERVICES BECAUSE 92% OF THE CAISSES
AND CFCS RATED THEMSELVES AS VERY SATISFIED OR SATISFIED WITH CAISSE
CENTRALE’S SERVICES. OUR FINANCIAL RESULTS CAN ALSO ONLY BE A SOURCE OF
ADDED SATISFACTION BECAUSE THEY CONTINUED TO GROW AND REACHED RECORD
LEVELS IN 2004.
AS PART OF ITS SERVICE OFFERING, CAISSE CENTRALE SUPPORTS THE DEVELOPMENT
OF A NUMBER OF COOPERATIVES. IN ADDITION TO SERVING THE CREDIT UNIONS IN
ONTARIO AND BRITISH COLUMBIA, CAISSE CENTRALE IS, FOR INSTANCE, COAGENT FOR
THE FINANCINGS OF THE COOPÉRATIVE FÉDÉRÉE DE QUÉBEC AND AGROPUR
COOPÉRATIVE. IF LOANS EXTENDED TO FUNERAL AND FOREST PRODUCT COOPERATIVES
ARE ALSO INCLUDED, CAISSE CENTRALE HOLDS $700 MILLION IN AUTHORIZED CREDITS
ISSUED TO COOPERATIVE INSTITUTIONS.
THE COOPERATIVE DIFFERENCE:
CAISSE CENTRALE SERVING ITS MEMBERS AND THE COMMUNITY
0
20
40
60
80
100
20
04
20
03
20
02
20
01
20
00
19
99
5-YEAR CONTRIBUTION TO NETWORK(IN $M)
C A I S S E C E N T R A L ER E V I E W O F O P E R AT I O N S 3 4
RECORD CONTRIBUTION Our $86.5 million contribution to the caisse
network this year is up 28% from 2003. Over the past five years, it grew by
nearly 100%. The caisses, which increased the capitalization of Caisse centrale
in 2003, have been amply rewarded. Our contribution, representing a 13%
return on the capital stock held by our members this year, was undoubtedly a
factor in Desjardins Group’s milestone financial performance.
OVERSEEING DEVELOPMENT OF DESJARDINS CREDIT UNION (DCU)
In conjunction with the Federation and numerous subsidiaries, we continued to coordinate the
development of DCU as part of our oversight role. We are still also paying special attention to
broadening its service offering. In addition, as treasurer for Desjardins Group, we are managing
the investment portfolio and asset – liability matching strategy of this major Ontario credit
union. At the same time, DCU has taken advantage of our corporate financing expertise and our
Canadian development strategy. With Caisse centrale acting as its intermediary, DCU
participated in some financings through which it was able to start to build a commercial lending
portfolio. One of these loans, extended to an Ontario residential construction and development
company, also gave it access to a pool of future home buyers, who are now seeking mortgage
financing.
OUR EXPERTISE AVAILABLE TO REGIONS With our regional offices in
Sherbrooke, Gatineau, Québec City, Saint-Lambert (South Shore of Montréal)
and Saguenay, Caisse centrale can claim to have an influence throughout
Québec. Our teams provide support to the network in financing businesses in
the mid-market, and they often work together with the local caisses and
Corporate Financial Centres.
Our International Service Centre, which is in charge of promoting our international product and
service offering to local businesses, has also established a province-wide presence. Our
members can thus benefit from the expertise of our specialists, whose offices are located in
Montréal, Québec City and Trois-Rivières.
R E V I E W O F O P E R AT I O N SC A I S S E C E N T R A L E 3 5
SOLIDARITY Another aspect of Desjardins’ cooperative difference is our
commitment towards the community. We annually support some 300 social,
cultural, scientific or educational organizations. Whether through donations,
sponsorships, benefit events or the wholehearted involvement of Caisse
centrale employees in the United Way/Centraide fundraising campaign, these
organizations benefit greatly.
In 2004, we supported the youth program initiated by Desjardins notably by providing
internships and temporary employment to many students. In addition, some $80,000 was
granted to various organizations promoting youth development, including, in particular,
Fondation Desjardins, Forces Avenir and the Fondation de l’École nationale de cirque. We also
initiated closer ties with ethnic communities through diverse organizations, such as the Asia
Pacific Foundation of Canada and the Fondation de bienfaisance Hoa Sen Vietnam-Canada,
among others, as well as with international organizations such as the Red Cross and
Oxfam-Québec. Health sector and research organizations were also supported, especially the
Fondation de l’Hôpital Maisonneuve-Rosemont, the Kidney Foundation of Canada and the
Association québécoise des allergies alimentaires, to name a few. Finally, we sponsored a
number of events organized by economic organizations.
Last but not least, our ninth annual golf tournament, was once again a
tremendous success. It alone raised $80,000 in the spring of 2004, thanks to
the involvement of several of our clients and business partners. This brings
the total donations from this activity to nearly $400,000 in less than 10 years,
for the benefit of about 10 organizations primarily dedicated to children in
need causes.
C A I S S E C E N T R A L EH I G H L I G H T S 3 6
HIGHLIGHTS
0
50
100
150
200
20
04
20
03
20
02
15
9
13
0
12
3
GROSS INCOME(IN $M)
0
5
10
15
20
25
30
20
04
20
03
20
02
151
6
21
PROVISION FOR CREDITLOSSES(IN $M)
0
2
4
6
8
10
12
20
04
20
03
20
02
10
8
5
LOAN PORTFOLIO(IN $B)
0
20
40
60
80
100
20
04
20
03
20
02
86
67
60
TOTAL CONTRIBUTION TO NETWORK (IN $M)
0
5
10
15
20
20
04
20
03
20
02
15
.516
.4
13
.7BIS CAPITAL RATIO (IN %)
CREDIT RATINGS
Moody’s Standard & Poor’s D.B.R.S.
Short term P-1 A-1+ R-1 M
Medium- and long-term Aa3 AA- AA (low)
0
20
40
60
80
100
20
04
20
03
20
02
92
65
82
DERIVATIVES(IN $B)
F I N A N C I A L R E V I E WC A I S S E C E N T R A L E 3 7
38 FINANCIAL REVIEW
38 Caution regarding forward-looking statements38 Risk factors that may affect future results39 Controls and procedures over financial reporting40 Analysis of consolidated financial statements and critical
accounting policies41 Recently adopted accounting standards41 Future effect of recent accounting standards42 Strategy of Caisse centrale43 Economic Review44 Analysis of consolidated results
Net income and contribution to networkNet interest incomeOther incomeSegment analysisProvision for credit lossesNon-interest expensesOther payments to the Desjardins networkIncome taxes and other taxesRemuneration of capital stock
50 Analysis of quarterly trends50 Analysis of fourth quarter results51 Comments on assets53 Risk management review55 Credit risk58 Liquidity risk management61 Market risk management64 Operational risk management65 Capital management
71 CONSOLIDATED FINANCIAL STATEMENTS
71 Audit commission’s annual report72 Management’s report73 Auditors’ report74 Consolidated financial statements78 Notes to the consolidated financial statements
101 CONSTITUTION, REGULATION AND CONTROL
103 CORPORATE GOVERNANCE
113 OTHER INFORMATION
116 FINANCIAL GLOSSARY
TABLE OF CONTENTS
C A I S S E C E N T R A L EM A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 3 8
MANAGEMENT’S DISCUSSIONAND ANALYSIS
This Management’s Discussion and Analysis (MD&A) compares thefinancial condition and results of operations of La Caisse centraleDesjardins (Caisse centrale) for the years ended December 31, 2004and 2003, prepared in accordance with Canadian generally acceptedaccounting principles. This MD&A is dated February 11, 2005 andunless otherwise indicated, all stated figures are in Canadian dollars. It also discusses forecasts and risk management. To assist the reader,we have added a glossary of financial terms at the end of the AnnualReport on page 116. Additional information on Caisse centrale, notablyits Annual Information Form, is also available on the SEDAR website(www.sedar.com).
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements regarding theactivities, objectives and strategies of Caisse centrale. By their verynature, these forward-looking statements are based on assumptionsand necessarily involve both general and specific risks anduncertainties. Risks exist that the express or implied projections inthese statements will not materialize or that they will be inaccurate. A number of factors could cause future results, conditions,measurements or events to differ materially from the objectives,expectations, estimates or intentions expressed in such statements.These variances may be the result of factors, many of which arebeyond the control of Caisse centrale, such as changes affectinglegislative and regulatory developments, competition, technologicalchanges, international capital market activities, interest rates andCanadian, North American and global economic conditions. Thesefactors and other variables should be carefully analyzed, and readersshould not place undue reliance on the forward-looking statements of Caisse centrale.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
As indicated in the caution regarding forward-looking statements, therisks and uncertainties inevitably associated with any such statementsare both general and specific, and may cause the actual results ofCaisse centrale to differ from those in forward-looking statements.Some of these factors are presented below.
INDUSTRY RISK FACTORS
General economic and business conditions in regions where Caissecentrale conducts business General economic and business conditionsin the regions in which Caisse centrale operates may significantlyaffect its revenues. These conditions include short and long-terminterest rates, inflation, capital market fluctuations, foreign exchangerates, the strength of the economy, terrorist threats and the volume of business conducted by Caisse centrale in a given region.
Monetary policy The monetary policies of the Bank of Canada and the Federal Reserve Board in the United States, as well as otherinterventions in capital markets, have an impact on the revenues ofCaisse centrale. Changes in the money supply and the general level of interest rates may affect the profitability of Caisse centrale. Afluctuation in the level of interest rates affects the spread betweeninterest paid on deposits and interest earned on loans, leading to avariation in Caisse centrale’s net interest income. Caisse centrale has no control over changes in monetary policies or capital marketconditions, and consequently, it cannot forecast or anticipate them.
Competition The degree of competition in markets in which Caissecentrale operates affects its performance. Customer retention dependson many factors such as product and service pricing, customer servicedelivery and changes to the products and services offered.
Changes in standards, laws and regulations Changes made tostandards, laws and regulations, including changes affecting theirinterpretation or implementation, could have an impact on Caissecentrale by restricting its product or service offering or by enhancingthe ability of competitors to compete with its products or services.
Completeness and accuracy of information concerning customers and counterparties Caisse centrale relies on the completeness andaccuracy of the information concerning customers and counterparties.When deciding to authorize credit or other transactions with customersor counterparties, Caisse centrale may use information provided bythem, including financial statements and other financial information. It may also rely on representations made by customers andcounterparties regarding the completeness and accuracy of suchinformation, and on auditors’ reports regarding the financialstatements. The financial condition and revenues of Caisse centralecould be adversely affected if it relied on financial statements that donot comply with generally accepted accounting principles, aremisleading or do not present fairly, in all material respects, thefinancial condition and the results of the operations of customers and counterparties.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I SC A I S S E C E N T R A L E 3 9
RISK FACTORS SPECIFIC TO CAISSE CENTRALE
New products and services to retain or increase market shareThe ability of Caisse centrale to retain or increase its market sharedepends partly on its skill in adapting its products and services tochanging industry standards. Financial services companies are subjectto increasing pressure regarding the pricing of their products andservices. This factor may reduce net interest income or revenues fromcommission-based products and services. Moreover, the adoption ofnew technology, including Internet services, could result in majorexpenses for Caisse centrale, as it would be required to modify oradapt its products and services.
Ability to recruit and retain key officers Caisse centrale’s futureperformance depends partly on its ability to recruit and retain keyofficers. In addition, intense rivalry to attract the best people pervadesthe financial services industry. Caisse centrale cannot however be surethat it will be able to continue to recruit and retain key officers, eventhough this is one of the objectives of its resources managementpolicies and practices.
Business infrastructure Third parties provide some of the essentialcomponents of Caisse centrale’s business infrastructure, such asInternet connections and network access. Interruptions in networkaccess services or other communication services, as well as in thedata provided by such third parties could adversely affect the ability of Caisse centrale to offer products and services to customers and tootherwise conduct its business.
Foreign exchange rate Exchange rate fluctuations in the Canadiandollar, the U.S. dollar and other foreign currencies may affect Caissecentrale’s position and its future earnings. A higher Canadian dollarmay also adversely affect the earnings of Caisse centrale’s businessclients in Canada.
OTHER FACTORS
Other risk factors such as strategic, credit, market, liquidity, interestrate and operational risks, to name a few, are presented in the “RiskManagement” section starting on page 53 of the report.
Caisse centrale cautions the reader that factors other than theforegoing could affect future results. When investors and otherstakeholders rely on forward-looking statements to make decisionswith respect to Caisse centrale, they should carefully consider thesefactors as well as other uncertainties, potential events, and industryfactors or factors specific to Caisse centrale, which could adverselyimpact its future results. Caisse centrale will not update any forward-looking statements, whether written or oral, that may be made fromtime to time by it or on its behalf.
CONTROLS AND PROCEDURES OVERFINANCIAL REPORTING
In March 2004, the adoption of Multilateral Instrument 52-109 by theCanadian Securities Administrators confirmed their resolve to restoreinvestor confidence in capital markets. This Instrument requires chiefexecutive officers and chief financial officers to certify the quality offinancial reporting quarterly and annually. In fiscal 2004, Caissecentrale set up a Disclosure Committee to review all existing quarterlyand annual disclosure activities so that the requested certificationscould be signed.
Caisse centrale is also actively pursuing the next phases that shouldlead to the certification of disclosure controls and procedures, as wellas of internal control over financial reporting. In this regard, Caissecentrale is very involved in the task force led by the Fédération descaisses Desjardins du Québec whose mandate is to ensure thatDesjardins Group will be in a position to comply with the standardswhen they come into force.
C A I S S E C E N T R A L EM A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 4 0
ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS AND CRITICALACCOUNTING POLICIES
This section contains the analysis of the financial results of Caissecentrale, which focuses on the statement of income and the balancesheet in the consolidated financial statements starting on page 71 of the Annual Report. Note 2 to the consolidated financial statementspresents a summary of the significant accounting policies used inpreparing the consolidated financial statements of Caisse centrale.Some of the accounting policies are considered critical because theyare key to understanding the financial condition and results of opera-tions of Caisse centrale; they require management to make difficult,subjective and complex estimates and assumptions since they concernbasically uncertain issues. Any change in these estimates and assump-tions could have a material impact on the consolidated financialstatements of Caisse centrale. Critical accounting policies concern the allowance for credit losses, financial instruments measured at fair value, the valuation of investment account securities, andincome taxes.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is an estimate of probable credit losses related to financial instruments, whether or not presented in the consolidated balance sheet of Caisse centrale, including loans, off-balance sheet commitments, acceptances and derivative instruments.This allowance comprises a general provision for credit losses andspecific provisions. A number of factors affect the estimates for theallowance for credit losses, including risk assessment, default proba-bility, loss in the event of default, valuation of security, economicconditions and borrowers’ specific situations. Any change in theestimates can lead to modifications of the allowance for credit losses.Note 4 to the consolidated financial statements provides more detailson the allowance for credit losses.
FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE
Caisse centrale measures securities held for trading purposes and derivative financial instruments at their fair value. Fair valuerepresents the estimated amounts at which these instruments couldactually be exchanged in a current transaction between willing parties.The fair values of a number of financial instruments are based onmarket prices. If market prices are unavailable, fair values are esti-mated by using various valuation techniques or the prices of similarsecurities. Valuation techniques used include the discounted cash flow method and option pricing models. The methods to determine fair value and the assumptions used in the valuation models can affectfair value and the corresponding gains and losses. Other informationon the methods used to determine fair values by Caisse centrale isprovided in notes 2 and 12 to the consolidated financial statements.
VALUATION OF INVESTMENT ACCOUNT SECURITIES
Under Canadian generally accepted accounting principles, investmentaccount equity securities are stated at cost, while debt securities arecarried at amortized cost. If there is a loss in value of an investmentaccount security that is other than a temporary decline, its carryingamount must be written down to its net realizable value. Determiningwhether there has been a loss in value that is other than a temporarydecline and establishing the net realizable value require subjectivejudgment and estimates. Management reviews the value of investmentaccount securities on an ongoing basis in order to determine if therehas been a loss in value that is other than a temporary decline. Thisreview includes an analysis of the specific facts of each investment and an assessment of expected future returns.
As part of this exercise, Management assesses a series of factors thatcould indicate a loss in value that is other than a temporary decline.Such factors include the type of investment, how long fair value wasless than the carrying amount and the significance of this difference,the issuer’s financial condition and its short-term prospects, as well as Caisse centrale’s intention and ability to hold the investment for asufficiently long period so that its value would increase. When Mana-gement has determined that there has been a loss in value of asecurity that is other than a temporary decline, it must form ajudgment as to the estimated net realizable value.
Any change in the judgment used to identify securities for which there has been a loss in value that is other than a temporary declineand to estimate their realizable value could impact on the amount of losses recorded.
Caisse centrale presents the estimated fair value of investmentaccount securities in note 3 to the consolidated financial statements. In Management’s opinion, gross unrealized losses on investmentaccount securities are not a loss in value that is other than a temporary decline. Further information on recording investmentaccount securities is presented in note 2 to the consolidated financial statements.
INCOME TAXES
The income tax provision is established on the basis of the expected tax treatment of transactions recorded in the consolidated statement of income or the consolidated statement of members’ equity. In orderto determine the current and future portions of the income taxprovision, analyses and assumptions are established concerning thetax laws and the dates on which future tax assets and liabilities willreverse. If this interpretation differs from that of tax authorities or ifthe date on which future tax assets and liabilities will reverse is not the same as estimated, the income tax provision could increase ordecrease over subsequent periods.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I SC A I S S E C E N T R A L E 4 1
RECENTLY ADOPTED ACCOUNTING STANDARDS
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
On January 1, 2004, Caisse centrale adopted, on a prospective basis,the requirements of Section 1100, “Generally Accepted AccountingPrinciples” (GAAP), issued by the Canadian Institute of CharteredAccountants (CICA). This section establishes standards for financialreporting in accordance with GAAP and provides guidance on sourcesto consult when selecting accounting policies and determiningappropriate disclosures, when a matter is not dealt with explicitly inthe primary sources of GAAP. This standard eliminates the applicationof certain practices sometimes used in specific industries.
Further to the adoption of this section, net amounts receivable fromfinancial institutions arising from the clearing and settlement systemare now presented in assets while net amounts payable to financialinstitutions are included in liabilities. As at December 31, 2003, the netbalance for all financial institutions was presented in assets. Moreover,certain other items in transit have been reclassified. The impact ofthese reclassifications on the consolidated financial statements was immaterial.
HEDGING RELATIONSHIPS
On January 1, 2004, Caisse centrale adopted Accounting Guideline 13,“Hedging relationships,” (AcG-13) issued by the CICA and EmergingIssues Committee Abstract 128, “Accounting for Trading, Speculative or Non-Hedging Derivative Financial Instruments” (EIC-128). Thisaccounting guideline addresses identification, designation, docu-mentation and efficiency of hedging relationships and deals with thecircumstances leading to discontinuance of hedge accounting.Pursuant to EIC-128, any derivative instrument that does not qualify for hedge accounting should be recognized as an asset or a liability on the balance sheet and measured at fair value, with changes in fair value recognized in income.
Caisse centrale has examined its existing hedging relationships andhas discontinued the use of hedge accounting for those hedgingrelationships that did not meet all required conditions. Pursuant totransitional provisions of AcG-13, the difference between the fair valueand the carrying amounts of derivative financial instruments that werepart of discontinued hedging relationships has been deferred and willbe amortized over the life of such derivatives. Results for the year wereaffected by the application of this guideline through a $0.1 million gainbefore income taxes.
In addition, as part of the adoption of the accounting guideline onJanuary 1, 2004, Caisse centrale revised its accounting policies torecognize all derivative financial instruments in the balance sheet atfair value, while previously only those used for trading purposes wereaccounted for in such manner. The balance sheet as at December 31,2003, was therefore restated in order to give effect to the transitionalprovisions of AcG-13 and to the recognition at fair value, increasing“Assets related to derivatives” and “Other liabilities” by $31,038,000and “Liabilities related to derivatives” and “Other assets” by $54,017,000.
FUTURE EFFECT OF RECENT ACCOUNTING STANDARDS
VARIABLE INTEREST ENTITIES (VIE)
In June 2003, the CICA issued Accounting Guideline 15 (revised inAugust 2004), “Consolidation of variable interest entities” (AcG-15),which applies to annual and interim periods beginning on or afterNovember 1, 2004. A variable interest entity (VIE) is an entity whoseequity is not sufficient to permit it to finance its activities withoutadditional subordinated financial support provided by a third party, oran entity whose equityholders do not have, as a group, the ability tomake decisions, the obligation to absorb the expected losses or theright to receive the expected residual returns, if any. In accordance withthis standard, a VIE should be consolidated by its primary beneficiary,namely the enterprise that absorbs a majority of the expected lossesand/or has the possibility of receiving a majority of the expectedresidual returns. Caisse centrale does not expect to be the primarybeneficiary of a VIE nor that the application of this standard will have amaterial impact on its financial condition or its operating results.
C A I S S E C E N T R A L EM A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 4 2
STRATEGY OF CAISSE CENTRALE
CAPITAL MARKET
In the past two years, loans granted to the Desjardins network haveincreased by nearly $3 billion as a result of the success of the caissesin the credit market. As a funds supplier, Caisse centrale has beenactive on capital markets both in terms of roadshows to Canadian andEuropean investors, and in terms of issues. As the representative ofDesjardins Group, it enjoys top-quality credit ratings.
Two Canadian funding programs, each with a ceiling of $2 billion, havebeen set up since 2003: one for senior debt (Caisse centrale) and theother for subordinated debt (Capital Desjardins).
Moreover, in the past two years, funding of $3.8 billion, with $450 million of this amount for Capital Desjardins, was raised on both Canadian and European markets, including two record issues of $500 million euros. The two issues floated in 2004 allowed us to extendthe average term of deposits by over 12 months, while staggering thematurities of the issues.
In the next few years and mainly as a result of robust growth in theassets of the caisse network, Desjardins Group’s funding requirementswill continue to grow. In addition to the amounts borrowed on theCanadian money market, for which no program has to be set up,Caisse centrale will be required to use all the Desjardins fundingprograms up to authorized amounts of approximately $12 billion. Other avenues will also be considered, including the securitization ofthe various types of assets on Desjardins Group’s balance sheet.
Caisse centrale will also pursue its deposit maturities distributionstrategy in order to avoid a concentration of issues during a givenperiod and to reduce dependence on short-term maturities.
Caisse centrale will also continue to manage its liquidities rigorously.As a result of broader access to funding on the Canadian market,liquidity management can be optimized, thus generating financial synergies.
In the area of business development, Caisse centrale intends to makethe most of its breakthrough in 2004 in offering sophisticated treasuryproducts to its corporate and institutional clients. It aims in particularto become a market maker in foreign exchange and rate options sothat it can better meet the needs of all Desjardins customers and growits revenues. In addition, provincial governments and credit unionsacross Canada will continue to be approached in order to offer themour treasury products.
CORPORATE SERVICE OFFERING
In the corporate services market as well as in the public andparapublic sectors, competition is becoming fiercer both from majorbanks because of their high level of capital and liquidities, and from the increasing presence of European and U.S. banks. Furthermore, the presence of non-bank financial institutions paves the way for newpartnerships with Caisse centrale and Desjardins.
Despite the competitive context, Caisse centrale represents DesjardinsGroup in most banking syndicates for large corporations in Quebec,and it aims to enhance its position in order to act as agent or coagent.Thus, for a number of years, Caisse centrale has been forging veryclose ties with its customers. This is reflected by a customersatisfaction rate in excess of 98% and a virtually perfect retentionscore. As a result of its ties, Caisse centrale can offer its customers an increasingly broad and integrated line of products and services.
The expertise of its account managers in various industrial sectors is also highly appreciated. Caisse centrale’s service is flexible andcustomized to meet the specific needs of its customers.
Geographic diversification of its loan portfolio is already well underway, as evidenced by the new business authorized in new markets,which totalled $370 million in 2004. In addition, with its new U.S.subsidiary, Desjardins Commercial Lending U.S.A. Corp., Caissecentrale is even better positioned to provide support to clients withoperations in the United States.
As part of Desjardins Group’s ongoing three-year plan, Caisse centrale will focus its development efforts in 2005 more specifically on businesses with revenues of between $100 and $250 million.
In addition, in order to expand its loan portfolio, additional resourceswill be dedicated to real estate financings in the corporate segment,asset financings with higher margins and corporate financings involvedin public-private partnerships.
Geographic diversification of financings throughout Canada will becontinued, in particular by reinforcing direct relationships withbusinesses and lead managers in banking syndicates. Caisse centralewill build on its specialized sectors, but, in particular, it will hone its expertise in the resource sector, a major economic segment in Western Canada. Finally, it will continue its efforts to open a Caisse centrale branch in the United States in order to broaden the spectrum of services offered to Canadian businesses operating in the United States.
Bolstered by its success in recent years with the Quebec government,public agencies and Crown corporations, Caisse centrale will continueits offensive to sell complementary products to Quebec institutions thatare not yet clients. Finally, it will focus on developing the institutionalsegment in Ontario, in conjunction with the Fédération des caisses del’Ontario and Desjardins Credit Union.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I SC A I S S E C E N T R A L E 4 3
ECONOMIC REVIEW
The North American economy continued to expand in 2004, asdomestic demand soared. Stronger job creation definitely helped toincrease household disposable income and, by the same token, sustainconsumer spending. The main engine of the economy, however, waslow interest rates, which reinvigorated the real estate market andsharply stimulated business investment spending.
U.S. national production grew at an annualized rate of 4.4% in 2004,versus 3.3% the previous year. Even though Canada trailed itsneighbour to the south, it posted a solid performance of 2.6% in 2004, compared with 2.0% in 2003.
Economic growth in Canada got off to a vigorous start at the beginningof the year owing to a highly accommodating monetary policy. Inflation,in fact, no longer appeared to be a threat, with an annual priceincrease of 1% to 2%, which was within the Bank of Canada’s targetrange. The overnight rate was therefore lowered five times between the summer of 2003 and April 2004 to give full throttle to the economy,beyond the projected growth potential of 3%.
Two factors, however, clouded the picture; namely the sharp rise in oilprices and the relentless surge in the Canadian dollar. With the chaoticsituation in Iraq, oil prices soared to new highs beyond US$50.00 oninternational markets. As for the Canadian dollar, it continued to risesharply against the greenback to nearly US$0.85 at year-end. Firmercommodity prices contributed to this appreciation, but the Canadiandollar mainly took advantage of the structural weakness of the U.S.dollar, battered as it was by record U.S. deficits in public accounts and foreign trade.
In 2004, the credit market mirrored the robust performance of theeconomy. Until October, consumer credit maintained an annualizedgrowth rate of 11%, and residential mortgage credit continued toexpand at a rate of 10%, as housing starts reached almost 230,000units and housing inventory surged in value.
Business credit also recovered in 2004 as a result of increasedinvestment spending and an improved business climate. Sales andprofits were higher, which accounted for the firmer resolve to build up inventories and for the greater use of short-term credit. Credit demand from businesses was stimulated by low interest ratesand sharply compressed financing costs in relation to the rates ofbenchmark securities, namely Government of Canada bonds. Spreads were very narrow in 2004, prompting businesses to resort more to the capital market.
2003
2004
2005
%
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-1
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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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Chart I
CHANGES IN REAL GDP IN CANADA (Annualized Quarterly Change)
2002
2003
2004
%
12
10
8
6
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2
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Consumer credit
Residential mortgage credit
Business credit
Chart II
DEVELOPMENTS IN CREDIT GROWTH IN CANADA(Annual Change)
This section briefly summarizes the economic conditions in 2004and includes our forecasts for 2005.
C A I S S E C E N T R A L EM A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 4 4
In 2005, the U.S. economy should maintain strong momentum, butsteadily increasing interest rates imposed to reduce the risk ofoverheating should limit growth to 3.3%. In Canada, the perniciouseffect of sharply higher energy prices on household spending and thedetrimental implications of an excessively high currency for the exportcapabilities of businesses should have a moderating effect onaggregate demand. Domestic production is expected to grow by 2.6%.
Canadian interest rates will be adjusted upward, but to a lesser extentthan in the United States, resulting in higher U.S rates that Canadianrates. This should curb the soaring Canadian dollar and allow theeconomy to maintain its cruising speed.
ANALYSIS OF CONSOLIDATED RESULTS
NET INCOME AND CONTRIBUTION TO NETWORK
Caisse centrale’s contribution to the caisse network in 2004 reached a record $86.5 million, representing a return on capital stock of 13%,up from the return of last year. This steady increase is attributable to the development strategies adopted in recent years in all business segments.
The gross income of Caisse centrale stood at $158.7 million, up $28.4 million or 22% from 2003. Primarily due to the growth in foreignexchange transactions with the caisses and the favourable results ofmanagement of funds from the Tactical Rate Management TermSavings (TRMTS) product, the other payments to the Desjardinsnetwork, which were deducted from its income, were up $12.6 millionor 73% over 2003. Net income totalled $44.1 million, compared to$39.8 million in 2003, for 11% growth. The following sections provide a detailed analysis of income and expenses.
NET INTEREST INCOME
Table I presents the changes in net interest income by major asset and liability class. The last three columns in the table show the relativecontribution of rate and volume changes to assets and liabilities. Theimpact is broken down into its volume and rate components.
In 2004, net interest income was up $10.3 million or 11% from the prior year, closing the year at $105 million. Acting as treasurer forDesjardins Group, Caisse centrale promptly met liquidity needs arisingfrom the strong growth of the caisses following their success in theirmarkets. Average loans made to the Fédération des caisses Desjardinsdu Québec for this purpose therefore rose from $403 million to $1.7 billion, up very substantially by $1.3 billion or 323%. Since theseadvances were made on more favourable conditions than those granted to unrelated third parties, namely without a margin, thissignificant increase in average assets adversely affected net interestmargin expressed as a percentage of average assets. Net interestmargin in fact fell from 0.89% to 0.81% by the end of fiscal 2004. This impact was nonetheless mitigated by the reduction in the average level of liquidity following a review of our managementmethods. If loans granted to meet the treasury needs of the Desjardins caisses are excluded, net interest margin would improvefrom 0.92% for the previous year to 0.94% by the end of 2004.
OUTLOOK Caisse centrale expects net interest income to grow in 2005.
4
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Canadian 3-month rate
U.S. 3-month rate
Exchange rate
% US$ / CAN$
2003
2004
2005
Chart III
TRENDS IN INTEREST RATES AND FOREIGN EXCHANGE RATE
Net interest income is the difference between the interest incomeearned on assets such as loans and securities, and the interestexpense paid on liabilities such as deposits and debenture. Netinterest income is affected by interest rate fluctuations, fundingstrategies and the composition of interest-earning and non-interest-earning financial instruments.
Table I NET INTEREST INCOME ON AVERAGE ASSETS AND LIABILITIES
For the years ended December 31(in thousands of dollars)
ASSETSCash and securities $ 2,885,845 $ 118,165 4.09% $ 3,272,461 $ 136,194 4.16% $ (15,831) $ (2,198) $ (18,029 )Loans
Securities purchasedunder resale agreements 65,997 690 1.05 19,122 327 1.71 490 (127) 363Day to day 224,129 5,221 2.33 215,550 6,403 2.97 200 (1,382) (1,182 )Fédération- treasury activities 1,695,643 49,543 2.92 402,859 12,310 3.06 37,772 (539) 37,233- financing activities 2,266,935 56,359 2.49 1,870,593 47,438 2.54 9,854 (933) 8,921
Entities under common control 985,252 31,356 3.18 637,836 20,872 3.27 11,057 (573) 10,484Public and parapublic institutions 1,458,556 47,993 3.29 1,067,636 39,694 3.72 12,863 (4,564) 8,299Private sector2 1,601,499 68,515 4.28 1,570,617 72,169 4.59 1,321 (4,975) (3,654 )Loans purchased from Desjardins Group 98,652 4,682 4.75 165,141 9,536 5.77 (3,156) (1,698) (4,854 )
8,396,663 264,359 3.15 5,949,354 208,749 3.51 77,051 (21,441) 55,610
Total interest-earning assets 11,282,508 382,524 3.39 9,221,815 344,943 3.74 69,866 (32,285) 37,581Other assets 1,602,040 — — 1,470,070 — — — — —
TOTAL ASSETS $ 12,884,548 $ 382,524 2.97% $10,691,885 $ 344,943 3.23% $ 65,097 $ (27,516) $ 37,581
LIABILITIES AND MEMBERS’ EQUITYDeposits
Payable on demand $ 590,808 $ 12,046 2.04% $ 724,933 $ 15,147 2.09% $ (2,735) $ (366) $ (3,101 )Payable on a fixed date 9,081,607 258,753 2.85 7,131,934 228,500 3.20 55,550 (25,297) 30,253
Subordinated debenture 122,831 6,774 5.51 120,361 6,642 5.52 136 (4) 132
Total interest-bearing liabilities 9,795,246 277,573 2.83 7,977,228 250,289 3.14 51,518 (24,234) 27,284Other liabilities 2,431,617 — — 2,102,664 — — — — —Members’ equity 657,685 — — 611,993 — — — — —
TOTAL LIABILITIES AND MEMBERS’ EQUITY $ 12,884,548 $ 277,573 2.15% $10,691,885 $ 250,289 2.34% $ 47,237 $ (19,953) $ 27,284
NET INTEREST INCOME $ 12,884,548 $ 104,951 0.81% $10,691,885 $ 94,654 0.89% $ 17,860 $ (7,563) $ 10,2971 Reclassified to conform to the current year’s presentation.2 Average impaired loans, net of specific provisions, are included in this caption.
Average Average Average Average Volume Rate Incomevolume Interest rate volume1 Interest1 rate gap gap gap
2004 2003 2004/2003
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I SC A I S S E C E N T R A L E 4 5
C A I S S E C E N T R A L EM A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 4 6
OTHER INCOME
Other income, which accounted for 34% of Caisse centrale's grossincome, as against 27% in 2003, amounted to $53.8 million, versus$35.7 million a year earlier, for an increase of $18.1 million or 51%.The difference stems mostly from the improved results of tradingactivities and foreign exchange revenue.
Revenue from trading activities with corporate and institutional clientswas up significantly as a result of the business development efforts of a new derivatives team. The management of funds collected fromTRMTS campaigns also accounted for the major growth in tradingactivities. It should be borne in mind that the uncertain trend ininterest rates over the last few months of 2003 pushed down theincome generated by management of funds from the TRMTS product.
With the investment strategies adopted and the use of derivatives forasset/liability management purposes, whose revenue was recordedunder investment activities, it was possible to limit the impact of lowinterest rates on net interest income from capital market segmentactivities. It should also be noted that the coming into force of Accoun-ting Guideline 13 (AcG-13), “Hedging Relationships,” concerningaccounting for derivatives had only a limited effect on the year’sresults, with a gain of $104,000.
Foreign exchange activities, one of the core business developmentareas favoured by Caisse centrale in recent years, continued to grow at a steady pace.
Foreign exchange revenue posted an increase of 47% over the previous year as a result of the success of our direct access service to foreign exchange traders and our preferred access service, therebyimproving our market share. As at December 31, 2004, 438 businessmembers had signed up for the direct access service, one of the mostflexible in the industry. All international services also performed very well in 2004.
Reflecting the major inroads made with new clients, revenue fromservice charges on chequing and deposit accounts climbed 24% withinthe past two years.
These items helped offset the reduction in commissions on “DesjardinsAcceptances” resulting from the decision of certain Desjardins entitiesto focus more on financing through loans.
OUTLOOK Caisse centrale expects an increase in its other income in the coming year.
SEGMENT ANALYSIS
All segments contributed to the growth in total income in 2004.
Capital market Low interest rates were mirrored in net interest incomefrom capital market segment activities, in particular income fromliquid assets. As shown in Table III on net interest income and otherincome, net interest income from this segment was down $2.0 millionfor a total of $48.1 million by year-end. Derivatives were used andcertain investments were disposed of in order to modify the terms ofthe assets and benefit from market opportunities. Gains on thedisposal of investments and revenue from derivatives used forasset/liability management purposes are presented under investmentactivities in the “Other Income” section (Table II). Therefore, despitelow interest rates, aggregate results obtained by the capital marketsegment surpassed the exceptional performance recorded in 2003.
It should be noted that the breakdown of income from capital marketsegment activities (interest income or other income) may varysignificantly based on market opportunities. Overall, for all of itsactivities, including foreign exchange activities and trading activitiespresented under “Other income,” the capital market segmentgenerated total income of about $79.3 million, up $18.1 million or 30% from a year earlier.
Table II OTHER INCOME
For the years ended December 31 (in thousands of dollars)
Service charges on chequing and deposit accounts $ 12,326 $ 10,805 $ 1,521Foreign exchange revenue 21,403 14,559 6,844Trading activities 3,814 (5,542) 9,356Investment activities 4,854 1,280 3,574Commissions on “Desjardins Acceptances” 6,289 10,164 (3,875)Credit fees 2,477 2,115 362Other 2,602 2,321 281
TOTAL $ 53,765 $ 35,702 $ 18,0631 Reclassified to conform to the current year’s presentation.
Other income includes all income that is not interest.
Change2004 20031 $
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I SC A I S S E C E N T R A L E 4 7
Financing As also shown in Table III, growth in the volume of other loancategories resulted in a sharp rise of 29% in the net interest margin forthe Financing segment. As in 2003, the loan portfolio for the public andparapublic sectors continued to grow at a steady pace and averagevolume therefore recorded an increase of $391 million or 37%. Thisstrong growth reflects our larger market shares as a result of ourbusiness development efforts. In line with the popularity of Desjardinsalternative savings products, the average loan volume to entities undercommon control also jumped by $347 million or 54%. After havingvoluntarily reduced its exposure to certain corporate risks, whichtranslated into a reduction of private sector loans outstanding, theaverage volume of this portfolio rebounded in 2004, particularly as aresult of the significant breakthroughs in new markets. In 2004 as well,some entities under common control and business units of theFédération des caisses Desjardins du Québec opted for financing theiractivities more through loans than “Desjardins Acceptances,” whereasthe opposite was true a year earlier. This accounts for the reduction in“Desjardins Acceptance” commissions recorded under “Other income”and an increase in net income in 2004. Overall, if net interest incomeand other income is taken into account, the Financing segment saw an $8.2 million or 14% increase in its total income.
Other Net interest income from “Other” segments rose by 20% in 2004,chiefly as a result of U.S. subsidiary activities.
OUTLOOK In 2005, all segments are expected to record an increase in their income.
PROVISION FOR CREDIT LOSSES
The provision for credit losses is an amount allocated during the yearto the allowance for credit losses to cover credit losses.
In 2004, the provision for credit losses charged to income amounted to$15.2 million, compared with $16.4 million in 2003, a decrease of 8%.The difference is basically due to improved portfolio quality.
A more detailed analysis of the specific provisions and the generalprovision for credit losses is provided on page 57.
OUTLOOK Even though we expect the provision for credit losses in2005 to be comparable overall to that in 2004, there may be somevolatility from one quarter to the next.
Table III COMPONENTS OF NET INTEREST INCOME AND OTHER INCOME BY BUSINESS SEGMENT
For the years ended December 31 (in thousands of dollars)
CAPITAL MARKETNet interest income $ 48,051 $50,085 $ (2,034) (4)Other income 31,225 11,047 20,178 183
79,276 61,132 18,144 30
FINANCING Net interest income 50,807 39,347 11,460 29Other income 16,803 20,044 (3,241) (16)
67,610 59,391 8,219 14
OTHER Net interest income 6,093 5,222 871 17Other income 5,737 4,611 1,126 24
11,830 9,833 1,997 20
Total - Net interest income 104,951 94,654 10,297 11Total - Other income 53,765 35,702 18,063 51
TOTAL $ 158,716 $ 130,356 $ 28,360 22
Change Change2004 2003 $ %
C A I S S E C E N T R A L EM A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 4 8
NON-INTEREST EXPENSES
Table IV above shows the breakdown of non-interest expenses bycategory. Non-interest expenses totalled $54.7 million in 2004,compared to $47.5 million in 2003. This increase in expenses resultsprimarily from a higher volume of activity, new product developmentinitiatives and enhancements to customer service. Fiscal 2004 was infact marked by a significantly higher volume of activity. Gross incomerose by $28.4 million or 22% in 2004. As a result of this growth, theefficiency ratio, represented by non-interest expenses in relation togross income, showed improvement from 36.4% in 2003 to 34.5% in 2004.
Staff salaries and benefits accounted for almost half of all non-interestexpenses. In 2003, Caisse centrale had delayed certain activities andextended the deadline for filling vacant positions. Hiring predominantlytemporary employees and overtime were required to absorb thesurplus volume and maintain the growth rate for activities. In addition,full contribution was reinstated for the Desjardins Group pension planin 2004. Growth in the volume of activity and the termination of thepartial contribution holiday, coupled with annual salary indexation andhigher related employee benefits essentially account for the $4 millionincrease in salaries and employee benefits. As at December 31, 2004,the number of employees (on a full-time equivalent basis) working forCaisse centrale and its U.S. subsidiaries was 284 in 2004, compared to265 in 2003.
The $879,000 or 17% increase in subcontracting expenses also stemsprimarily from the much higher transaction volume. This increase hasresulted in supplementary revenue from service charges billed to our clients.
Professional fees for various new product development initiatives andenhancements to customer service account for most of the growthunder “Professional fees.”
Also noteworthy is that Caisse centrale has carried on with themanagement applications and systems re-engineering project to becompleted in 2005. This project aims to design a system solution tosupport banking and loan management activities, support services fortreasury operations, payment functions, accounting functions andmanagement information. As mentioned in note 15 to the consolidatedfinancial statements, as at December 31, 2004, Caisse centrale wascommitted to pay $2.6 million under a service contract related to thisproject.
OUTLOOK Due to the amortization of the new managementapplications and systems, the efficiency ratio is expected to riseslightly in 2005. Caisse centrale intends to continue to rigorouslymanage its non-interest expenses, with a view to enhancing itsfinancial performance.
Table IV NON-INTEREST EXPENSES
For the years ended December 31 (in thousands of dollars)
SALARIES AND BENEFITS $ 26,391 $ 22,354 $ 4,037
PREMISES, EQUIPMENT AND FURNITURE, INCLUDING DEPRECIATIONRent and taxes 2,170 1,945 225Depreciation of fixed and intangible assets 2,656 2,848 (192)Subcontracting 5,937 5,058 879Other 2,087 1,980 107
12,850 11,831 1,019
OTHER FEESCommunications and external relations 4,969 4,566 403Professional fees 5,544 3,791 1,753Other 4,940 4,964 (24)
15,453 13,321 2,132
TOTAL $ 54,694 $ 47,506 $ 7,188
Efficiency ratio 34.5% 36.4% —
Non-interest expenses include salaries and benefits, premises,equipment and furniture and other operating expenses.
Change2004 2003 $
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I SC A I S S E C E N T R A L E 4 9
OTHER PAYMENTS TO THE DESJARDINS NETWORK
In cooperation with the Desjardins network, Caisse centrale offers abroad spectrum of banking and financing services and treasuryproducts to Canadian private and public entities. Of the total feescollected, $29.9 million was redistributed to the Desjardins network,including patronage allocations paid on interest margins onparticipating loans and foreign exchange transactions. Primarilyreflecting the growth in foreign exchange transactions with the caissesand favourable results of the management of the TRMTS productfunds, other payments to the Desjardins network were up $12.6 millionor 73% over 2003.
OUTLOOK Caisse centrale expects that its other payments willcontinue to grow over the next year.
INCOME TAXES AND OTHER TAXES
The increase in income taxes charged to the consolidated statement of income resulted from higher net income and the rate change thatoccurred in 2003, which led to the recording of future tax liabilities ofapproximately $2.6 million.
In the budget tabled on June 12, 2003, the Quebec Minister of Financeadopted measures to abolish the lower tax rate for savings and creditunions that had applied to Caisse centrale.
It should be noted that Caisse centrale can recover a substantialportion of the income taxes when it declares remuneration of capitalstock. Accordingly, a $12.4 million income tax recovery was recorded in the statement of retained earnings as a result of the remunerationof capital stock in 2004.
OUTLOOK Given the increase in other payments to members, Caissecentrale expects its income tax provision to decline slightly in 2005.
REMUNERATION OF CAPITAL STOCK
Under An Act respecting the Mouvement Desjardins (the ConstituentLegislation), the Board of Directors of Caisse centrale may declareinterest on capital shares; it then determines the terms of paymentthereof. For the past few years, the Board of Directors of Caissecentrale has applied the principle of declaring, as remuneration ofcapital stock, an amount corresponding to its consolidated net income,including recovery of related income taxes. However, given the capitalrequirements for the forthcoming years, the Board of Directors alsoapplied the principle of suspending the quarterly payment of theremuneration on capital stock, notably for the purpose of retainingamounts that could be quickly made available to Caisse centrale when needed. For the year ended December 31, 2004, interest of $56.5 million was declared on subscribed and paid-up capital shares,representing an increase of $6.4 million or 13% compared to thepreceding year. An amount of $123.3 million is recorded on theconsolidated balance sheet as remuneration of capital stock payable.
Overall, amounts paid to the Desjardins network, including otherpayments to members, amounted to $86.5 million, up $19 million or28% from $67.5 million in 2003. This represents a return on capitalstock of 13% compared to 11.4% in 2003.
OUTLOOK Caisse centrale expects its remuneration of capital stockand its total contribution to the network to increase in 2005.
C A I S S E C E N T R A L EM A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
ANALYSIS OF QUARTERLY TRENDS
In the past two years, Caisse centrale’s quarterly results have beensignificantly influenced by macroeconomic and regulatory changes inboth Canada and the rest of the world. Macroeconomic changes mayinclude the interest rate situation, monetary policies and economicgrowth. The main quarterly financial information is presented on page 70.
In 2003 as in 2004, the quarterly change in results can be explainedprimarily by fluctuating income from capital market segment activities,and in particular income from management of TRMTS funds, whichare, by their very nature, more volatile. Net interest margin was also upsince the beginning of fiscal 2004, notably as a result of developmentefforts in the Financing segment.
The terms and conditions offered to our customers, which are amongthe most flexible in the industry, explain why foreign exchange revenuesoared in 2004.
The business development efforts of a new derivatives team and theresults of management of the funds collected from TRMTS campaignsalso accounted for the growth in other income.
ANALYSIS OF FOURTH QUARTER RESULTS
NET INTEREST INCOME
Net interest income for the three-month period ended December 31,2004 totalled $28.0 million, up $8.1 million over the fourth quarter of 2003.
Business development efforts in the Financing segment accounted for the solid performance during the quarter, with a 24% increase innet interest income.
OTHER INCOME
Other income stood at $6.3 million for the fourth quarter of 2004,versus $12.2 million for the corresponding quarter in 2003. Thisdecline was due to the lower returns from management of TRMTSfunds caused by uncertain interest rate trends.
PROVISION FOR CREDIT LOSSES
Caisse centrale recorded a provision for credit losses of $3.1 million,versus $6.4 million in 2003. As previously mentioned, the improvedquality of the loan portfolio accounted for this decline.
NON-INTEREST EXPENSES
Non-interest expenses totalled $16.3 million in the fourth quarter, up $3.3 million over the corresponding quarter of 2003.
It should be borne in mind that the volume of activity increasedsubstantially in 2004, with the fourth quarter making a significantcontribution. A much higher volume of activity and the computerexpense incurred for customer service enhancement explain this increase.
OTHER PAYMENTS TO THE DESJARDINS NETWORK
Amounts redistributed to the Desjardins network totalled $2.4 millionin the fourth quarter, down $2.8 million from 2003. As mentioned, thisdecrease basically reflects the one-time decline in returns from theTRMTS product paid as patronage allocations to the network.
5 0
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
COMMENTS ON ASSETS
Total assets on the consolidated balance sheet of Caisse centraleamounted to $14.8 billion as at December 31, 2004, or $1.3 billionhigher than at the end of 2003. Average assets increased by $2.2 billion or 21% over 2003 to $12.9 billion in 2004.
Cash and securities totalled $3.0 billion at the end of 2004, comparedto $3.7 billion as at December 31, 2003. A change in our liquiditymanagement methods as a result of greater access to funding on the Canadian market accounted for this decline. The liquidity ratio,consisting of cash and securities to total assets, was 20% at year-end,down from 28% at the close of the year in 2003. In addition, asexpected, funding requirements for the Desjardins network grewduring the year. In fact, loans granted for treasury purposes to thecaisse network totalled $2.7 billion as at December 31, 2004, versus$1.4 billion at the close of fiscal 2003. Funds requirements of thecaisse network should reach $4 billion in 2005. It should be borne inmind that the purpose of Caisse centrale’s liquidities is essentially to meet regulatory requirements.
It also bears mentioning that 82% of securities held were securitiesissued or guaranteed by the federal and provincial governments,municipal, school or public corporations, as well as by Canadianbanks. Note 3 to the consolidated financial statements presents a detailed analysis of the securities portfolio.
At the end of 2004, the loan portfolio stood at $10.2 billion, up $2.1 billion or 25% from 2003. As a result of the network’s increasedfunding requirements, loans to the Fédération des caisses Desjardinsdu Québec for treasury activities rose sharply, as shown in Table VI.Loans for financing activities grew by $367 million. As previouslymentioned, some business units opted for financing more of theiractivities through loans than through “Desjardins Acceptances,”contrary to the situation a year earlier. Loans to entities under common control remained relatively stable and ended the year at $1 billion.
Caisse centrale concluded a number of financing transactions in theform of loans and “Desjardins Acceptances” with member businessesor entities under common control. For more information about theentities concerned, please refer to the Desjardins Group organizationchart. As mentioned in note 16 to the consolidated financial state-ments, transactions with the Fédération des caisses Desjardins du Québec for the benefit of its member caisses are concluded under more favourable conditions than those granted to unrelated third parties. Moreover, transactions concluded with the Fédération for its own financing needs and with entities under common control are carried out under conditions similar to those negotiated with unrelated third parties.
Reflecting increased business development activities, the privatesector loan portfolio recorded a 15% increase in outstandings. This increase was attributable, in particular, to our penetration of new markets, whether in Canada-wide financings or cross-borderfinancings in the United States through our new subsidiary, DesjardinsCommercial Lending U.S.A. Corp. The growth in the loans of oursubsidiary, Desjardins Bank, is also noteworthy.
Another factor fuelling growth was the increase in the “Publi-privilège”securities and “Desjardins Acceptances” issued, whose combinedaverage outstandings reached $1.1 billion. These instruments givepublic entities access to low-cost money market financing. Note thatthe “Publi-privilège” program does not appear on the balance sheet of Caisse centrale. This program is guaranteed by Caisse centrale,whose commitment is presented under "Guarantees and standbyletters of credit" in the “Off-balance sheet credit instruments andderivatives” section.
Other assets amounted to $1.6 billion in 2004, remaining relativelystable in relation to the preceding year.
OUTLOOK Caisse centrale expects to grow its balance sheet in 2005.
C A I S S E C E N T R A L E 5 1
Table V ASSET MIX
As at December 31 (in millions of dollars)
Cash and securities $ 2,967 20% $ 3,731 28% $ 3,935 36% $ 3,323 32% $ 3,308 31%Loans 10,187 69 8,122 60 5,087 47 5,501 53 5,528 51Other 1,616 11 1,665 12 1,777 17 1,533 15 1,925 18
TOTAL $ 14,770 100% $ 13,518 100% $ 10,799 100% $ 10,357 100% $ 10,761 100%
Average assets $ 12,885 $ 10,692 $ 10,722 $ 10,257 $ 10,531
1 Reclassified to conform to current year’s presentation.
2004 20031 20021 20011 20001
C A I S S E C E N T R A L EM A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 5 2
Table VI LOAN PORTFOLIO Net of allowance for credit losses
As at December 31 (in millions of dollars)
COMPOSITIONSecurities purchased under resale agreements $ 96 $ 15 $ 6 $ 2 $ 38Day, call and short-term loans to investment dealers and brokers 446 218 159 38 —Public and parapublic institutions 1,455 1,523 918 1,188 1,050Members
Fédération- treasury activities 2,706 1,350 179 413 1,424- financing activities 2,737 2,370 1,875 1,503 928Other 44 — — — 20
Entities under common control 961 1,032 291 223 169Loans purchased from Desjardins Group — 134 206 328 430Private sector 1,803 1,570 1,532 1,865 1,515
Allowance for credit losses (61) (90) (79) (59) (46)
TOTAL $ 10,187 $ 8,122 $ 5,087 $ 5,501 $ 5,528
GEOGRAPHIC DISTRIBUTION (AS PER HEAD OFFICE ADDRESS)Quebec $ 8,939 $ 7,068 $ 4,676 $ 5,020 $ 5,251Other Canadian provinces 1,077 939 265 377 225International 171 115 146 104 52
TOTAL $ 10,187 $ 8,122 $ 5,087 $ 5,501 $ 5,528
Average loans $ 8,397 $ 5,949 $ 4,948 $ 5,484 $ 4,763
2004 2003 2002 2001 2000
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I SC A I S S E C E N T R A L E 5 3
RISK MANAGEMENT REVIEW
OVERVIEW
The risk management objective of Caisse centrale is to optimize therisk/return trade-off by applying integrated management and controlstrategies, policies and processes to all functions of the organization.
Caisse centrale’s policies and processes aim to proactively identify,measure and assess potential risks, and ensure their sound andprudent management, in particular by specifying the controls to beapplied and the reporting responsibility to officers.
In June 2004, the Basel Committee on Banking Supervision approved a new accord intended to emphasize capital and promote the ongoing development of risk assessment capabilities in financialinstitutions by closely associating capital requirements with modernrisk management methods.
Caisse centrale, in conjunction with Desjardins Group, is committed to applying best practices in the area of risk management. During theyear, it continued to implement its Integrated Risk Management andBasel Accord program (IRMBA). Such integrated management willpromote risk identification and measurement as well as optimalallocation of capital, and will become integrated with strategic planning and performance evaluation. Extensive work on credit,liquidity, market and operational risks will be continued in 2005 and in coming years in order to finetune our global vision of risk and itsintegration into the overall management of the Group’s activities.
In addition to the ongoing risk monitoring performed by themanagement and business unit managers of Caisse centrale, theintegrated risk management framework is the responsibility of theBoard of Directors and the following commissions and boards: theCorporate Governance, Human Resources, Credit and Investment and Audit Commissions, the Board of Ethics and the managementcommittees of Caisse centrale. Furthermore, a Risk ManagementCommission, comprised of four outside directors, was set up inDecember 2004.
COMMITTEES AND COMMISSIONS OF THE BOARD OF DIRECTORS OF CAISSE CENTRALE 1
BOARD OF DIRECTORS• Ensures that Caisse centrale has an adequate strategic
management process that includes risk assessment.
CORPORATE GOVERNANCE COMMISSION• Supervises the program to evaluate Board effectiveness.• Recommends the orientation and professional development
program for Board members.• Examines the roles of the Board of Directors and its committees.
HUMAN RESOURCES COMMISSION• Ensures that the compensation plan is compatible with the
realization of objectives and the prudent management of activities and risks.
RISK MANAGEMENT COMMISSION • Assesses actions taken and organization set up to manage risks
to which Caisse centrale may be exposed.• Recommends oversight, approval limits, and rules and
techniques for risk management.• Is informed of changes made to risk management methods
and limits.• Examines reports from Management on material risks and on
compliance with risk management limits, and ensures the implementation and monitoring of the required measures for improvement.
• Examines key risk management findings from independent supervisory functions.
CREDIT AND INVESTMENT COMMISSION• Determines the credits to be granted by Caisse centrale as well
as investments and loans and other financial commitments, and accordingly exercises the necessary authority under the general policies adopted by the Board of Directors.
AUDIT COMMISSION• Ensures that Caisse centrale has a control environment that
promotes the appropriate management of its activities and risks.• Examines all financial information documents and recommends
their approval to the Board of Directors.
BOARD OF ETHICS• Ensures compliance with rules of professional conduct
regarding, among other matters, conflicts of interest and self-dealing.
1 Please refer to the Corporate Governance section of the Annual Report for a more detailed description of the roles and responsibilities of the committees and commissions of the Boardof Directors of Caisse centrale.
C A I S S E C E N T R A L EM A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 5 4
MANAGEMENT COMMITTEES OF CAISSE CENTRALE
MANAGEMENT COMMITTEE• Determines the mandate and composition of the management
committees of Caisse centrale.• Specifies the strategic orientations, performance objectives
and risk limits for Caisse centrale.• Approves delegation powers and limits for the management
committees of Caisse centrale.
RISK MANAGEMENT COMMITTEE• Evaluates and revises risk management policies.• Ensures that risks are managed in accordance with
established policies.• Reviews risk assessment program results.• Ensures the implementation of and compliance with
control procedures.• Examines the impact of succession planning and the methods
of managing the activities of Caisse centrale.
INTERNAL CREDIT COMMITTEE• Defines parameters for granting credit and monitors
their application.• Authorizes loans within its limits.• Reviews impaired loans and loans on the watch list.• Reviews loan delinquency and credit losses.
ASSETS/LIABILITIES COMMITTEE• Ensures compliance with operational limits concerning
liquidity and investment management, interest rate risk and foreign exchange risk.
• Evaluates hedging strategies to maintain the level of risk within the limits approved by the Board of Directors.
• Evaluates positioning strategies for loan, liquidity or derivative portfolios to adapt to market changes.
• Examines financial management and treasury policies.
DISCLOSURE COMMITTEE• Supervises the appropriate cutoff and reliability of financial
information in annual and interim disclosures.• Ensures that the financial information disclosed does not omit
any material facts or does not contain any misrepresentations or misleading information regarding such facts.
• Verifies that the financial information in annual and interim filinigs presents fairly the financial condition of Caisse centrale and the results of its operations and its cash flows.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I SC A I S S E C E N T R A L E 5 5
CREDIT RISK
Credit risk is the risk of credit losses that can occur if a counterpartyfails to honour its contractual obligations, whether or not presented inthe balance sheet. It also includes concentration risk. The term“counterparty” refers to an issuer, a debtor, a borrower, a brokerand a guarantor.
CREDIT RISK MANAGEMENT
Diversification is a key part of risk management. To improve the qualityof its credit portfolio, Caisse centrale has made a commitment toreduce its exposure by diversifying risk among categories of borrowers,industries, types of financing and geographic regions.
Credit losses can occur if a borrower or counterparty does not fullyhonour its contractual obligations to Caisse centrale. These obligationscan involve loans, commitments, guarantees and derivative contractswith positive replacement values.
Managing credit risk has both quantitative and qualitative aspects.Experienced credit officers evaluate the credit quality of counterpartiesand assign internal credit ratings based on this evaluation. Theseofficers, who have direct knowledge of clients and their industrysectors, are responsible for credit screening and monitoring creditrisks, which are reviewed by an independent department. Creditconcentration limits for various industries, products and geographicregions are set by the Internal Credit Committee and approved by theBoard of Directors. This committee also sets credit limits for clientsand counterparties which are also approved by the Board of Directors.Members of the Risk Management Commission of the Board of Direc-tors periodically review the authorized limits and their monitoring.
The quantitative aspect of examining credit risk consists of measuringCaisse centrale’s credit exposure to each counterparty. The InternalCredit Committee is responsible for monitoring the policies andpractices to measure such risk. Credit exposure is measured in termsof both current and potential credit exposure. Current credit exposureis generally represented by the notional or principal value for on-balance sheet financial instruments and by the replacement value forderivative instruments. Caisse centrale also estimates potential creditexposure by considering its sensitivity to market changes.
These elements are subject to review, as are products and credit risksrequiring strict follow-up. These risks are examined regularly by theInternal Credit Committee. This Committee evaluates the adequacy ofthe provisions for credit losses and informs the members of the Creditand Investment Commission of the Board of Directors of the portion ofcredit exposures that should be written off and the amount of anyprovision for credit losses.
Credit Policies Throughout the years, Caisse centrale has developedand adopted credit policies and practices to react rapidly and takeappropriate measures to mitigate or minimize file exposure. Thegeneral credit policy and operational policies are revised annually.During the year, significant effort was made to enhance the quality of the loan portfolio. Whenever required, collection or turnaround ofhigher risk files is transferred to specialized teams.
Follow-up procedures are designed to ensure detection of deterioratingloan risk in order to manage the risk or act on it immediately. Loanscan then be classified as impaired loans, and covered by a specificprovision at the appropriate time. The adequacy of the specificprovision is reassessed on a quarterly basis.
The general credit policy sets forth the principles and limits withinwhich financing transactions involving a credit risk must be conductedand the requisite authorizations. The policy enhances control anddiversification of the commitments portfolio while favouring orderlybusiness development. It defines borrowers’ eligibility criteria andestablishes the credit risk assessment mechanisms and the types offinancing available. It also establishes the monetary, sector-related,geographic, risk and term limits in order to ensure the desired level ofdiversification of the loan portfolio. Finally, the policy establishes thelevels of authorization and delegations of authority required for theapproval and management of credit commitments.
Borrower limits are based on a customer’s risk rating and themaximum commitment determined by the Desjardins Group’s creditmanagement framework. Credit commitment limits for each sector of activity in the private portfolio cannot be more than 15% of theaggregate of the credit commitments in this sector without the priorauthorization of the Credit and Investment Commission. At year-end,all sectors of activity were in compliance with this limit.
Caisse centrale also negotiates with foreign correspondents.International transactions involving credit risk are governed by theinternational services credit policy. More specifically, this policyensures sound apportionment of Caisse centrale’s foreign risks bysetting out eligibility criteria for countries and correspondents,monetary limits by country and correspondent, and term limits. This policy is also updated annually.
The loan portfolio of Caisse centrale is very diversified. Businesssegment loans from all sectors of the economy account for approxi-mately 18% of outstanding loans (Table VII). Caisse centrale monitorsthe economic sectors in which it is involved on an ongoing basis.
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Table VII PRIVATE SECTOR
Outstandings as at December 31(in millions of dollars)
Primary industries $ 73 4% $ 36 2%Manufacturing industries
Food and tobacco 182 10 193 12Textiles, rubber and plastics 22 1 41 3Wood and furniture 83 5 123 8Pulp and paper 119 7 96 6Metal products 34 2 40 3Other 65 4 65 4
Construction 11 — 2 —Real estate 63 3 46 3Transportation and warehousing 70 4 97 6Telecommunications 11 — 69 4Public services 29 2 27 2Retail and wholesale trade 172 10 173 11Financial intermediaries 288 16 217 14Service corporations 295 16 216 14Other 286 16 129 8
TOTAL $ 1,803 100% $ 1,570 100%1 Reclassified to conform to the current year’s presentation.
IMPAIRED LOANS
A loan is considered to be impaired and the interest thereon ceases to be recorded when (a) there is reason to believe that a portion of the principal or interest cannot be collected or (b) the interest orprincipal is contractually 90 days in arrears, except where the loan is fully guaranteed or is in collection. Further details on the accounting policies used are provided in note 2 to the consolidated financial statements.
The quality of the loan portfolio continues to be excellent. Grossimpaired loans amounted to $19.9 million at year-end, compared to $86.2 million in 2003, and their coverage by specific provisionsreached 40% as at December 31, 2004. It is worth noting that these loans represent only 0.2% of aggregate loans in a $10.2 billion portfolio.
Caisse centrale management intends to continue to closely monitor its loan portfolio as part of a cautious approach toward credit riskmanagement in order to maintain asset quality.
2004 20031
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ALLOWANCE FOR CREDIT LOSSES
As demonstrated in the foregoing sections, Caisse centrale willcontinue to rigorously manage its loan portfolio. The quality of the loan portfolio improved in 2004, as evidenced by the low proportion of impaired loans.
The provisions specifically related to particular elements of the loanportfolio were down in comparison to 2003. Consequently, theseprovisions amounted to $7.9 million, compared to $46.6 million at the same date in 2003. Table VIII provides the breakdown of specificprovisions by industry. The general provision for credit losses totalled$53.2 million as at December 31, 2004. It is determined by the creditrating, maturity dates, default probabilities, volatility, the type ofsecurity, and the expected collection.
It also takes into account the diversification of the counterparties andthe economic and geographic sectors of activity of the credit portfolio.This assessment is reviewed where conditions indicate that initialassumptions will not apply to actual results. Further details on our accounting policies are provided in note 2 to the consolidated financial statements.
Consequently, at the close of 2004, the specific and general provisionsamounted overall to $61.1 million. This amount represented 3.4% ofthe private sector loan portfolio and 0.6% of the total portfolio.
Table VIII BREAKDOWN OF SPECIFIC PROVISIONS
As at December 31 (in thousands of dollars) Variation
Manufacturing industries – Other $ 7,610 $ 11,800 $ 1,650 $ 2,600 $ 700Transportation and warehousing 250 250 250 2,000 2,000Other service corporations — — — 2,016 325Telecommunication — 34,500 34,500 — —Other 19 5 — — —
TOTAL $ 7,879 $ 46,555 $ 36,400 $ 6,616 $ 3,025
2004 2003 2002 2001 2000
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Table IX CASH AND SECURITIES
As at December 31 (in millions of dollars) Variation
Cash and deposits with Bank of Canada $ 24 $ 112 $ 67 $ 191 $ 105Securities 2,843 3,619 3,868 3,132 3,203
TOTAL $ 2,967 $ 3,731 $ 3,935 $ 3,323 $ 3,308
Average liquidity $ 2,886 $ 3,272 $ 4,231 $ 3,616 $ 4,787
2004 2003 2002 2001 2000
LIQUIDITY RISK MANAGEMENT
Caisse centrale’s liquidity management forms an integral part ofcapital market segment activities. Its purpose is to ensure that theorganization is not trapped by precipitous cash outflows or unexpecteddrawdowns on lines of credit. Even in adverse conditions, Caissecentrale must be in a position to honour its commitments and meet its customers’ requirements, while avoiding having to pay excessiverates on deposits.
Caisse centrale must be prudent in cash management in view of itsobligations as a direct clearer of the Canadian Payments Associationand as a member of The Canadian Depository for Securities Limited. In addition, as a wholesale purveyor of funds to the caisse network inQuebec and in other provinces, it maintains higher liquidities than itwould require for its own commitments.
Over the years, management practices have been instituted to ensurethat liquidities are available in sufficient quantity. In the near term, theCapital Market team strives to achieve an optimal combination of cashflows generated by all financial transactions conducted by Desjardinscomponent entities and their main clients. This requires day-to-daymonitoring and scenario projections. In the longer term, in order tomeet foreseeable needs, liquidity management is defined by asufficient quantity of prime quality liquidity from stable and diversified funding sources.
Caisse centrale maintains a liquidity level in compliance with theregulation approved by the Autorité des marchés financiers, whichstipulates that Caisse centrale must at all times have liquid assetscorresponding to 20% of its deposits with maturities of 100 days or less.
Regulatory liquidities are subject to specific management in order to achieve performance objectives set at the beginning of the year.
The securities portfolio of Caisse centrale declined from $3.6 billion in December 2003 to $2.8 billion by the end of 2004 as a result ofstronger demand for funds from the Desjardins caisse network. Loans to the Fédération des caisses Desjardins du Québec increasedfrom $3.7 billion in 2003 to $5.4 billion in December 2004.
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SOURCES OF FUNDS
One component of Caisse centrale’s mission is to assume the strategicrole of supplier of funds to the Desjardins network. Over the years,Caisse centrale has built national- and international-scale fundingsources by varying the markets, financial instruments, maturity datesand currencies of its deposits. Table XI and Chart IV present depositsas at December 31, 2004 by maturity and by program type.
Once again in 2004, as has been the case for many years, Caissecentrale was assigned high credit ratings by credit rating agenciesowing to the support of Desjardins Group, thus giving it access toattractive funding sources. In addition to resorting to the Canadianmoney market, Caisse centrale intervenes on capital markets using thefollowing instruments:
On the Canadian market:
• a medium-term deposit note program of $2 billion, allowing a public offering of the deposits issued.
On the international market:
• a short-term European commercial paper program of US$600 million;
• a short-term American commercial paper program of US$1 billion;• a European multi-currency medium-term deposit note program
of US$ 5 billion.
In line with the strategy devised a year ago, Caisse centrale issued two medium-term deposit issues through public offerings in 2004, one in the amount of 500 million euros maturing in September 2009and one in the amount of C$300 million maturing in November 2007.The caisses’ funding requirements were also met by a subordinateddebt issue made by Capital Desjardins Inc. The issue was for $450million maturing in March 2014 but it includes a right of redemptionin March 2009.
The financing cost of institutional debt issued by Desjardins Groupcurrently approximates the levels at rival banking institutions,reflecting the solid financial results of the past few years, but alsoattributable to greater awareness of Caisse centrale and its reputation in the Canadian and European investment communities.
Table X BREAKDOWN OF THE SECURITIES PORTFOLIO
As at December 31 (in millions of dollars) Variation
Canada $ 422 $ 681 $ 531 $ 309 $ 390Provinces and municipal corporations in Canada 1,293 1,375 1,431 1,524 862School and public corporations in Canada — 30 80 116 142Entities under common control 25 28 84 56 —Other Canadian issuers 1,066 1,447 1,616 931 1,601Foreign issuers 37 58 126 196 208
TOTAL $ 2,843 $ 3,619 $ 3,868 $ 3,132 $ 3,203
Average securities $ 2,840 $ 3,230 $ 4,028 $ 3,541 $ 4,7081 Reclassified to conform to current year’s presentation.
Canada and provinces
Commercial paper - US & Euro
Public issues - Europe
Public issues - Canada
Other
Desjardins Group
Commercial paper - Canada
MTN Europe
Demand deposits
30%
1%
4%
6%
8%
8%
9%
13%
21%
Chart IV
DEPOSITS AND DEBENTURE BY PROGRAM TYPE AS AT DECEMBER 31, 2004
Canadian dollars
U.S. dollars
Euro
Other currencies
2%
19%
21% 58%
Chart V
DEPOSITS AND DEBENTURE BY CURRENCY AS AT DECEMBER 31, 2004
2004 20031 2002 2001 2000
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As at December 31, 2004, outstanding deposits and subordinateddebenture (Table XII) totalled $11.4 billion, up $1.1 billion or 11% from the $10.2 billion posted the previous year.
As at December 31, 2004, 42% of the deposits and subordinateddebenture were denominated in foreign currencies and hedged in order to eliminate foreign exchange risk; moreover, 41% were for a term of more than one year versus 37% the previous year.
As a result of the two issues floated in 2004, the average term wasextended by over 12 months, while allowing the maturities of the issues to be staggered.
Funds raised on the Canadian market totalled $7 billion as at December 31, 2004, up $0.6 billion over December 31, 2003; thiscomprised 62% of the aggregate of the deposits and subordinateddebenture, versus 63% in 2003.
In 2005, some $2 billion is expected to be borrowed on a long-term basis on Canadian and European markets. Such a scenario couldhowever be modified with the implementation of a reorganization plan for business processes within Desjardins Group.
Table XII DEPOSITS AND SUBORDINATED DEBENTURE
As at December 31 (in millions of dollars)
Canada $ 199 $ 101 $ 15 $ 165 $ 169Provinces 177 301 344 347 132Banks and financial institutions 799 932 166 207 269Members
Fédération 1,071 1,033 1,951 1,553 1,846Other 198 206 274 228 177
Entities under common control 572 707 507 281 197Other 8,226 6,842 4,531 4,724 4,884
11,242 10,122 7,788 7,505 7,674Subordinated debenture 124 124 126 160 159
TOTAL $ 11,366 $ 10,246 $ 7,914 $ 7,665 $ 7,833
Average liabilities $ 9,795 $ 7,977 $ 8,004 $ 8,046 $ 8,536
2004 2003 2002 2001 2000
2004 2003 2002 2001 2000
Table XI DEPOSITS BY MATURITY
As at December 31 (in millions of dollars)
Canada $ 1 $ 198 $ — $ — $ — $ 199 $ 101Provinces 126 51 — — — 177 301Banks and financial institutions 12 423 264 31 69 799 932Members
Fédération 381 56 131 503 — 1,071 1,033Other 118 66 3 11 — 198 206
Entities under common control 122 227 201 22 — 572 707Other 295 3,420 562 3,940 9 8,226 6,842
TOTAL $ 1,055 $ 4,441 $ 1,161 $ 4,507 $ 78 $ 11,242 $ 10,122
Payable on a fixed datePayable Within Over 3 to 12 Over 1 to 5 Over
on demand 3 months months years 5 years Total Total2004 2003
GEOGRAPHIC DISTRIBUTION
Canada $ 7,048 62% $ 6,489 63% $ 4,519 57% $ 3,628 47% $ 3,310 42%International 4,318 38 3,757 37 3,395 43 4,037 53 4,523 58
TOTAL $ 11,366 100% $ 10,246 100% $ 7,914 100% $ 7,665 100% $ 7,833 100%
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I SC A I S S E C E N T R A L E 6 1
MARKET RISK MANAGEMENT
Market risk is the risk that results from changes in the market value of financial instruments due to a fluctuation in the parametersaffecting this value; notably in interest and foreign exchange rates andtheir volatility. The risk of losses related to interest rate and foreignexchange rate volatility is the main component of market risk to whichCaisse centrale is exposed. The estimation of potential losses is a keyelement of managing risk.
The integrated risk management group, which is independent from the sectors initiating transactions, is responsible for examining marketrisk exposure on a daily basis. It ensures that risks remain within theset limits and that only authorized activities are undertaken, anddevelops and implements risk assessment models. It reports daily tosenior management on profits and losses, value-at-risk (VAR) andcompliance with maximum limits with respect to losses resulting froma one-basis point change in interest rates on unmatched positions. The independent risk management unit is responsible for periodicallyexamining models and assessments.
VAR is a generally accepted risk measurement concept that usesstatistical models and information on historical market prices tocalculate, within a given confidence level, the maximum loss in market value that Caisse centrale would sustain in its asset/liabilitymanagement portfolios from adverse movements in market rates andprices in a single day. Caisse centrale’s VAR is based on a 99% and 95%confidence level and represents an estimate of the maximum loss thatCaisse centrale could sustain in its portfolios. Caisse centrale uses ahistorical simulation of scenarios from the previous two years tocalculate the VAR of its asset/liability management portfolios.Management recognizes that VAR is not an absolute measurement of market risk and that its use is limited, since it is based solely onhistorical information. Management therefore uses various measuresand information to help it assess and control the market risks to which its products and portfolios will be exposed.
Chart VI presents the daily changes in the overall VAR of Caissecentrale’s asset/liability management portfolios in Canadian dollarsduring 2004. Based on a 99% confidence level, the average VARamounted to $127,000 in 2004.
INTEREST RATE RISK MANAGEMENT
Interest rate risk is the sensitivity of Caisse centrale’s financialcondition to interest rate movements. The magnitude and direction ofthe effect depend on the amount of assets and liabilities that reprice in a given period.
Caisse centrale can lower or eliminate this risk by changing the mix of assets and liabilities or the use of derivative instruments.
Exposure to interest rate risk is reviewed on a regular basis by theAssets/Liabilities Committee. This committee establishes Caissecentrale’s position in view of anticipated interest rate changes andrecommends hedging any undesired or unexpected interest rate risk.
Note 13 to the consolidated financial statements shows Caissecentrale’s position with regard to interest rate sensitivity as atDecember 31, 2004, in accordance with the provisions of Section 3860of the Canadian Institute of Chartered Accountants Handbook,“Financial Instruments – Disclosure and Presentation.” Balance sheetand off-balance sheet assets and liabilities are presented in the tablebased on the earlier of the maturity date or the contractual repricingdate. This is the position at that particular date, but could havesubsequently changed, taking into account forecasted interest ratesand clients' preferences for products and terms.
Caisse centrale is very prudent with regard to interest rate sensitivity.Various means are used to monitor and manage interest rate risk. In addition, Caisse centrale has established policies describing riskmanagement principles and procedures, and periodic reports arereviewed by the Board of Directors.
0.5
0.4
0.3
0.2
0.1
0.0
$ Millions
January2004
June2004
December2004
Chart VI
2004 VALUE-AT-RISK
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FOREIGN EXCHANGE RISK MANAGEMENT
Caisse centrale has assets and liabilities denominated in a number offoreign currencies. Foreign exchange risk arises when the actual orforecasted assets in a foreign currency are either greater or lesserthan the liabilities in that currency. Caisse centrale has establishedspecific foreign exchange risk management policies.
OFF-BALANCE SHEET CREDIT INSTRUMENTS AND DERIVATIVES
In the normal course of its business, Caisse centrale offers its clientsvarious products to meet their liquidity requirements and protect themagainst a number of risks such as fluctuating interest and exchangerates. Caisse centrale uses some of these products itself to manage its own risks associated with fluctuating interest and exchange rates.These products can be divided into two broad categories: off-balancesheet credit instruments and derivatives.
All off-balance sheet credit instruments and derivatives are subject toCaisse centrale’s usual credit standards, financial controls, riskceilings and monitoring procedures. Caisse centrale constantlyimproves its risk management systems and assessment models forthese products. In the opinion of management, these transactions donot represent an unusual risk and no material losses are anticipatedas a result of these transactions. Notes 2 and 11 to the consolidatedfinancial statements provide further details on these instruments andtheir accounting.
OFF-BALANCE SHEET CREDIT INSTRUMENTS
Products in this category, which consist of guarantees, standby lettersof credit, commitments to extend credit and commitments to purchaseassets, are designed to provide clients with funds for anticipatedneeds. Since conditional commitments to extend credit are subject toclients’ compliance with particular credit standards, the risk associatedwith such commitments is reduced considerably. A firm commitmentrequires a duly signed offer, including confirmation of acceptance bythe customer. In such cases, Caisse centrale must pay out the amountspecified in the commitment even if the customer is unable to meet its financial or contractual obligations. Caisse centrale takes thesecommitments into consideration in its forward-looking management of liquidity needs to be met. Table XIII presents off-balance sheet creditinstruments by maturity over the next few years.
CONTRACTUAL COMMITMENTS AND GUARANTEES
In the normal course of its business, Caisse centrale, like other majorCanadian financial institutions, pledges part of its liquid assets in orderto participate in the clearing and payments systems. It also enters into long-term leases or service contracts entailing minimum futurepayments. Table XIV presents the contractual commitments bymaturity over the next few years. Further details are also provided in note 15 to the consolidated financial statements.
Table XIII OFF-BALANCE CREDIT INSTRUMENTS Notional Amount Maturities
As at December 31 (in millions of dollars)
Guarantees and standby letters of credit $ 168 $ 126 $ 21 $ — $ 315 $ 187Commitments to extend credit 11,095 152 553 927 12,727 14,258Commitments to purchase assets 481 — — — 481 34
TOTAL $ 11,744 $ 278 $ 574 $ 927 $ 13,523 $ 14,479
Table XIV CONTRACTUAL COMMITMENT MATURITIES
As at December 31 (in thousands of dollars)
$ 1,460 $ 635 $ 155 $ 143 $ 138 $ 127 $ 2,658
Less than 1 to 3 Over 3 to Over 5 Total Totala year years 5 years years 2004 2003
2010 and2005 2006 2007 2008 2009 next Total
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I SC A I S S E C E N T R A L E 6 3
DERIVATIVES
Derivative financial instruments are financial contracts which derivetheir value from the underlying price, interest or exchange rate orindex. Derivatives include many financial contracts such as futures,swaps, forward rate agreements, forward exchange contracts andoptions. Derivatives are a key risk management tool, both for Caissecentrale and for its clients. A description of derivatives and their use byCaisse centrale is provided in note 11 to the consolidated financialstatements.
Derivatives, like balance sheet financial instruments, are subject tomarket and credit risk. As outlined in the “Risk Management” section,Caisse centrale evaluates the risk associated with derivatives in muchthe same way as the risks associated with other financial instruments.However, unlike balance sheet financial instruments, where creditexposure is generally represented by the nominal or principal value,the credit exposure associated with derivatives is generally a smallfraction of the notional amount of the instrument and is represented by the positive market value of the derivative. The various derivativesallow for the transfer, modification or reduction of foreign exchangeand interest rate risks stemming from variations thereof. The vastmajority of currency and interest rate swaps, forward exchangecontracts and options are transacted with banks, members or entitiesunder common control.
As illustrated in Table XV, outstanding derivative and credit instrumentsincreased by 33% or $25.9 billion as at year-end. The most pronouncedincrease was in interest rate contracts, the value of which increased by48% to $74.6 billion from a year earlier, especially in transactions withother counterparties, reflecting the business development efforts ofthe new derivatives team.
Chart VII presents the distribution of the credit risk equivalent amountsof Caisse centrale’s derivative portfolio by credit rating of its partners.The chart shows that close to 79% of the real credit exposure isattributable to counterparties whose credit ratings are equal to orabove Caisse centrale’s own credit rating (Moody's Aa3).
To reduce risk, Caisse centrale uses risk mitigating techniques such asnetting, collateralization and setting counterparty limits.
Aaa to Aa1
Aa2 to Aa3
A1 to Baa2
17%
21% 62%
Chart VII
DERIVATIVE CREDIT RISK EQUIVALENT - By credit rating
Table XV OFF-BALANCE CREDIT INSTRUMENTS AND DERIVATIVES Notional Amounts
As at December 31 (in millions of dollars)
CREDIT INSTRUMENTSGuarantees and standby letters of credit $ 61 $ 254 $ 315 $ 43 $ 144 $ 187Commitments to extend credit
Over one year 58 1,574 1,632 260 1,231 1,491One year or less and conditional 7,213 3,882 11,095 8,617 4,150 12,767
Commitments to purchase assets — 481 481 — 34 34
7,332 6,191 13,523 8,920 5,559 14,479
DERIVATIVESInterest rate contracts 29,462 45,187 74,649 19,980 30,312 50,292Foreign exchange contracts 1,031 11,322 12,353 659 10,048 10,707Other contracts 2,198 2,681 4,879 2,022 2,046 4,068
32,691 59,190 91,881 22,661 42,406 65,067
TOTAL $ 40,023 $ 65,381 $ 105,404 $ 31,581 $ 47,965 $ 79,546
Members and Members andentities under entities under
common commoncontrol Other Total control Other Total
2004 2003
C A I S S E C E N T R A L EM A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 6 4
Chart VIII shows the distribution of derivative notional amounts by counterparty type. Measured by notional amounts, 55% ofcounterparties were banks. Members and entities under commoncontrol accounted for 36%. It should be remembered that Caissecentrale acts as an intermediary to meet the Desjardins network’sneeds in terms of derivative instruments. Additional information on the transactions carried out with Desjardins Group is found in note 16to the consolidated financial statements. Transactions with privatesector entities accounted for only 8% of the portfolio.
Chart IX shows the maturity profile of the derivative portfolio. As ageneral rule, the market risk associated with short-term financialinstruments is lower than with long-term ones. As measured bynotional amounts, 72% of these derivatives have remaining terms ofless than three years and more than half of these will mature withinone year. Of note is that close to 81% of the forward exchangecontracts have a remaining term of less than three months.
OPERATIONAL RISK MANAGEMENT
Operational risk is defined as the risk of inadequacy or failureattributable to processes, people, internal systems or external eventsand resulting in losses, failure to achieve objectives or a negativeimpact on reputation.
Operational risk is the potential risk that Caisse centrale may incurlosses arising from fraud, damage to tangible assets, acts in violationof legislation, lawsuits, system failures, problems in transactionprocessing or process management as well as disruptions due toexternal factors.
Operational risk is inherent to all of Caisse centrale's businessactivities and can never be completely eliminated. However, Caissecentrale endeavours to minimize operational risk through its internalcontrol systems which provide for segregation of duties, a disciplinedapproach to decision-making and delegation of authority, thedevelopment of appropriate policies, methods and infrastructures, andduly confirmed recording of transaction-related information. Internalcontrols also involve risk monitoring, financial reporting and insurancecoverage measures. In addition, Caisse centrale possesses back-upcapabilities and engages in business resumption planning to ensureongoing service delivery under adverse conditions. Effectivemanagement of operational risk depends as well on the commitment,competence and ability of Caisse centrale staff. The internal controlsand systems in place are examined from time to time by DesjardinsGroup internal auditors.
Striving to implement sound and prudent operational risk managementtools and methods, Caisse centrale has pursued its work withinDesjardins Group’s joint project, including the organization of anoperational risk incident data base and preparation of an ongoingoperational risk and controls self-assessment program.
In 2004, Caisse centrale created a new sector in charge of specificallyensuring regulatory compliance. The initial work undertaken by thissector aims to ensure our compliance with regulatory requirementsconcerning financial reporting. A Disclosure Committee was set up tovalidate the evaluation program for controls over financial reporting.
Through its committees and the completion of specific projects, Caissecentrale ensures that the assessment of its technology environment ismonitored and secure. Consequently, strategic planning with respect tothe implementation of these projects, disaster recovery, systemrobustness, security, management of human resources expertise, andproper control of its operations are considerations to which Caissecentrale devotes considerable effort in order to counter the specificrelated operational risks.
Within 1 year
1 to 3 years
3 to 5 years
Over 5 years
23%
5%
28%
44%
Chart IX
DERIVATIVE NOTIONAL AMOUNTS - By maturity
Banks
Members and entities under common control
Private sector
Government
8% 1%
36%
55%
Chart VIII
DERIVATIVE NOTIONAL AMOUNTS - By counterparty
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CAPITAL MANAGEMENT
Capital is an important factor for assessing the security and soundnessof Caisse centrale in relation to all the risks associated with itsactivities. In recent years, regulators and rating agencies have paid a great deal of attention to financial institutions' capital levels.
REGULATORY CAPITAL
The capital adequacy of Caisse centrale is regulated by the standardsof the Fédération des caisses Desjardins du Québec, which wereapproved by the Autorité des marchés financiers. These standards are based on the regulatory requirements of the Basel Committee onBanking Supervision of the Bank for International Settlements (BIS),which oversees the capital adequacy of financial institutions operatingon international markets. In this way, Caisse centrale can determinewhere it stands relative to other financial institutions also involved oninternational markets given its presence on such markets.
Total regulatory capital, which constitutes capital, differs from thecapital disclosed on the balance sheet. It comprises two classes: Tier I capital and supplementary or Tier II capital. Tier I capital includes more permanent capital items than Tier II capital. It consistsof members’ equity (which includes capital stock, retained earningsand the general reserve). Tier II or supplementary capital essentiallyconsists of subordinated debentures and the eligible general provisionfor credit losses. It should be noted that debentures must be amortizedon a straight-line basis over the five years preceding their maturity.
In 1998, the Board of Directors of Caisse centrale approved acapitalization plan for Caisse centrale aimed at ensuring thedevelopment of its operations and providing, in particular, for anaggregate $200 million injection of capital from the caisses through the Fédération des caisses Desjardins du Québec. A portion of $102 million was received in 1999. In fiscal 2003, Caisse centraleissued capital stock of $154.8 million. Members holding capital shares agreed that an equivalent amount of unpaid remuneration of capital stock should be reinvested in the form of capital shares. As previously stated, given the needs in forthcoming years, the Board of Directors agreed to suspend the quarterly payment of the remuneration of capital stock.
Consequently, as at December 31, 2004, capital, as defined by thestandards of the Fédération des caisses Desjardins du Québec, totalled $836 million, up $52 million over fiscal 2003.
RISK-WEIGHTED ASSETS, OFF-BALANCE CREDITINSTRUMENTS AND DERIVATIVES
The standards of the Fédération des caisses Desjardins du Québecrequire that “risk-weighted balances” be calculated for assets, off-balance credit instruments and derivatives, and that aggregate valuesbe weighted using a common definition of capital.
Off-balance credit instruments and derivatives are initially converted to“credit risk equivalents,” as shown in Table XVI. For credit instrumentssuch as guarantees, standby letters of credit and commitments toextend credit, the “credit risk equivalent” is determined by multiplyingthe principal or nominal amount by the appropriate “credit conversionfactor,” which can range from 0% to 100% depending on the nature ofthe instrument and the original term to maturity. The “credit riskequivalent” for foreign exchange, interest rate and currency contractstakes into account the replacement cost of contracts with a positivevalue and the potential credit exposure on the contracts, calculated on their residual term to maturity.
The “credit risk equivalent” for off-balance credit instruments andderivatives, together with on-balance sheet assets, are then multipliedby appropriate “risk weights” to determine risk-weighted balances.The risk weights depend on the relative credit risk of the counterpartyand vary from 0% for claims on or guaranteed by the Canadian orprovincial governments to 100% for claims on or guaranteed by thebusiness sector.
As shown in Table XVI, Caisse centrale’s risk-weighted assets, off-balance credit instruments and derivatives totalled $5.4 billion as at December 31, 2004, up slightly over the prior year.
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CAPITAL RATIO
Section 46 of the Act respecting the Mouvement Desjardins states that Caisse centrale must maintain an adequate capital base consistent with sound and prudent management, in accordance with the standards of the Fédération des caisses Desjardins du Québec(and approved by the Autorité des marchés financiers).
According to these standards, Caisse centrale must maintain, at alltimes, capital in accordance with the following ratios:
a) its total capital must be greater than or equal to 5.5% of its total assets;
b) its total capital must be greater than or equal to 8.5% of its risk-weighted assets, of which at least one half is Tier I capital.
Furthermore, the member federations formally undertook to maintain,in proportion to their respective holdings, Caisse centrale’s total capitalat a minimum level of (i) 5.5% of its total assets, or if higher, at (ii) 8.5%of its risk-weighted assets, as determined in accordance with theestablished standards.
The capital stock issued and outstanding of Caisse centrale iscomposed of 666,203 Class A capital shares and 600 qualifying sharesoutstanding.
As at December 31, 2004, the capital/asset ratio was 5.67%. Tier Icapital and total capital ratios determined in accordance with BIS rulesstood at 12.7% and 15.5%, respectively, compared to 14.4% and 16.4%,respectively, a year earlier.
It should be noted, however, that both the Tier I capital ratio and totalcapital ratio of Caisse centrale determined in accordance with BISrules exceed the 7% and 10% which the Office of the Superintendent of Financial Institutions Canada has determined to be characteristic of a financial institution with a sound capital structure.
OUTLOOK Caisse central expects to remain very well capitalizedin 2005.
CHANGES TO REGULATORY CAPITAL REQUIREMENTS
As stated, the BIS proposed a new capital adequacy framework toreplace the 1988 Basel Capital Accord. Amendments to the Accord are being completed.
OFF-BALANCE CREDIT INSTRUMENTS AND DERIVATIVES(in thousands of dollars)
OFF-BALANCE CREDIT INSTRUMENTSGuarantees and standby letters of credit $ 314,877 0-100% $ 314,877 20-100% $ 172,001 $ 153,359Commitments to extend credit
(Original term to maturity)Over one year 1,631,747 50% 815,874 0-100% 612,148 509,719One year or less and contitional 11,095,069 0% — 0% — —
Commitments to purchase assets 480,878 100% 480,878 0% — —DERIVATIVESInterest rate contracts 74,648,261 (1) 864,977 20-50% 172,539 191,055Foreign exchange contracts 12,352,660 (1) 616,934 20-50% 141,448 140,267Other contracts 4,879,629 (1) 465,447 20-50% 157,933 112,962
$ 105,403,121 $ 3,558,987 $ 1,256,069 $ 1,107,362Less impact of masternetting agreements (283,900) (235,707)
$ 972,169 $ 871,655
TOTAL RISK-WEIGHTED ASSETS, OFF-BALANCE CREDIT INSTRUMENTS AND DERIVATIVES $ 5,410,108 $ 4,776,4791 Derivatives are converted to their "credit risk equivalent" by adding the total replacement cost (at market value) of all outstanding contracts with a positive value and an amount for potential
credit exposure based on the total contract amount broken out by remaining term to maturity, as follows:
CreditNotional conversion Credit risk Risk-weighted balanceamount factor equivalent Risk-weight 2004 2003
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Table XVI RISK-WEIGHTED ASSETS, OFF-BALANCE CREDIT INSTRUMENTS AND DERIVATIVES
As at December 31 (in thousands of dollars)
ASSETSCash and deposits with Bank of Canada $ 124,307 0% $ — $ —Securities issued or guaranteed by Canada, provinces, municipal, school or public corporations in Canada 1,714,865 0-20% 6,728 8,503Securities issued or guaranteed by US public administrations 20,673 20% 4,134 5,800Securities issued by banks 625,752 20% 125,151 236,590Securities issued by members and entities under common control 25,438 100% 25,438 27,728Other securities 456,475 100% 456,475 293,627Loans issued or guaranteed by Canada, province, municipalities, school boards and public agencies 1,454,697 0-20% 287,980 301,881Loans to members and entities under common control 6,447,899 20-100% 1,467,716 1,333,950Securities purchased under resale agreements 95,625 0% — —Day, call and short-term loans to investment dealers and brokers, secured 446,000 0-100% 60,497 13,607Other loans 1,742,502 0-100% 1,701,702 1,512,372Other assets 1,616,113 0-100% 302,118 170,766
$ 14,770,346 $ 4,437,939 $ 3,904,824
Balance sheetamount Risk-weight Risk-weighted balance
2004 2003
Within 1 year 1.0% 0.0% 6%Over 1 year to 5 years 5.0% 0.5% 8%Over 5 years 7.5% 1.5% 10%
Remaining term to maturity Foreign exchange contracts Interest rate contracts Other contracts
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FIVE-YEAR CONSOLIDATED BALANCE SHEETS
As at December 31 (in thousands of dollars)
ASSETSCash and deposits with Bank of Canada $ 124,307 $ 112,509 $ 67,202 $ 191,142 $ 105,437Securities 2,843,203 3,618,539 3,868,115 3,131,843 3,203,401Loans
Securities purchased under resale agreements 95,625 14,919 6,222 2,477 37,598Day, call and short-term loans to investmentdealers and brokers 446,000 218,000 158,739 37,500 —Members
Fédération 5,443,248 3,719,748 2,054,660 1,916,180 2,352,606Other 43,863 — — — 20,000
Entities under common control 960,788 1,032,009 291,023 222,606 168,997Public and parapublic sectors 1,454,697 1,522,989 917,921 1,187,642 1,049,116Loans purchased from Desjardins Group 132 134,319 205,967 327,965 429,606Private sector 1,803,444 1,570,584 1,531,872 1,864,691 1,515,414Allowance for credit losses (61,074) (90,390) (78,922) (58,518) (46,146)
10,186,723 8,122,178 5,087,482 5,500,543 5,527,191
Assets related to derivatives 1,248,070 1,080,085 1,235,952 1,074,104 834,012Customers’ liability under acceptances 148,900 450,300 349,300 280,600 629,736Other 219,143 134,723 190,910 178,683 461,541
TOTAL ASSETS $ 14,770,346 $ 13,518,334 $ 10,798,961 $ 10,356,915 $ 10,761,318
LIABILITIES AND MEMBERS’ EQUITYDeposits
Payable on demand $ 1,055,131 $ 787,512 $ 698,940 $ 782,253 $ 762,069Payable on a fixed date 10,187,223 9,334,350 7,089,162 6,722,971 6,912,015
11,242,354 10,121,862 7,788,102 7,505,224 7,674,084
Liabilities related to derivatives 1,846,528 1,486,991 1,611,350 1,519,495 1,163,240Acceptances 148,900 450,300 349,300 280,600 629,736Other 721,645 648,219 392,155 358,896 602,579Subordinated debenture 123,868 123,911 125,806 160,452 159,431Members’ equity
Capital stock 666,206 666,206 511,403 511,403 511,403General reserve 20,845 20,845 20,845 20,845 20,845
687,051 687,051 532,248 532,248 532,248
TOTAL LIABILITIES AND MEMBERS’ EQUITY $ 14,770,346 $ 13,518,334 $ 10,798,961 $ 10,356,915 $ 10,761,3181 Reclassified to conform to current year’s presentation.
2004 20031 20021 20011 20001
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FIVE-YEAR CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 (in thousands of dollars) Variation
INTEREST INCOMELoans $ 264,359 $ 208,749 $ 187,318 $ 323,007 $ 304,826Securities 118,165 136,194 159,849 182,778 277,772
382,524 344,943 347,167 505,785 582,598INTEREST EXPENSE 277,573 250,289 254,725 406,127 519,634
NET INTEREST INCOME 104,951 94,654 92,442 99,658 62,964Other income 53,765 35,702 30,948 16,726 34,633
GROSS INCOME 158,716 130,356 123,390 116,384 97,597Provision for credit losses 15,193 16,425 21,146 12,605 3,124
143,523 113,931 102,244 103,779 94,473
NON-INTEREST EXPENSESSalaries and benefits 26,391 22,354 17,267 17,669 17,428Premises, equipment and furniture, including depreciation 12,850 11,831 10,571 9,072 9,071Other 15,453 13,321 12,229 10,397 10,848
54,694 47,506 40,067 37,138 37,347
NET INCOME BEFORE OTHER PAYMENTS TO THE DESJARDINS NETWORK AND INCOME TAXES 88,829 66,425 62,177 66,641 57,126Other payments to the Desjardins network 29,930 17,306 16,059 14,337 12,310
NET INCOME BEFORE INCOME TAXES 58,899 49,119 46,118 52,304 44,816Income taxes 14,797 9,313 10,790 11,843 9,530
NET INCOME $ 44,102 $ 39,806 $ 35,328 $ 40,461 $ 35,286
2004 2003 2002 2001 2000
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QUARTERLY FINANCIAL INFORMATION
(in thousands of dollars)
(Quarter-end)
BALANCE SHEETASSETSCash and deposits withBank of Canada $ 124,307 $ 83,577 $ 151,355 $ 190,696 $ 112,509 $ 85,436 $ 133,090 $ 58,965Securities 2,843,203 2,222,156 2,697,698 2,882,091 3,618,539 3,161,523 3,833,363 2,660,440Loans 10,186,723 9,026,285 7,718,095 8,678,923 8,122,178 6,982,975 5,796,878 5,356,344Assets related toderivatives 1,248,070 977,602 933,705 1,289,328 1,080,085 991,068 1,015,287 826,563Customers’ liabilityunder acceptances 148,900 440,900 594,300 410,100 450,300 316,100 464,300 548,030Other assets 219,143 197,750 188,983 208,624 134,723 173,936 194,710 225,847
$ 14,770,346 $ 12,948,270 $ 12,284,136 $ 13,659,762 $ 13,518,334 $ 11,711,038 $ 11,437,628 $ 9,676,189
LIABILITIES ANDMEMBERS’ EQUITYDeposits $ 11,242,354 $ 9,879,754 $ 9,255,931 $ 10,317,426 $ 10,121,862 $ 8,488,409 $ 7,978,197 $ 6,928,100Liabilities relatedto derivatives 1,846,528 1,425,357 1,341,847 1,796,600 1,486,991 1,443,583 1,559,169 1,045,029Acceptances 148,900 440,900 594,300 410,100 450,300 316,100 464,300 548,030Obligations related tosecurities sold short 95,625 13,668 13,767 4,251 14,919 21,189 8,030 1,698Commitment under the repurchase agreements 275,704 58,462 — — 409,245 374,299 383,306 —Other 350,316 323,983 267,545 321,732 224,055 261,028 239,305 499,335Subordinated debenture 123,868 119,095 123,695 122,602 123,911 119,382 118,273 121,749Members’ equity 687,051 687,051 687,051 687,051 687,051 687,048 687,048 532,248
$ 14,770,346 $ 12,948,270 $ 12,284,136 $ 13,659,762 $ 13,518,334 $ 11,711,038 $ 11,437,628 $ 9,676,189
(Quarter)
STATEMENTSOF INCOME
Net interest income $ 28,030 $ 24,794 $ 26,582 $ 25,545 $ 19,939 $ 26,588 $ 23,953 $ 24,174Other income 6,326 18,070 12,672 16,697 12,191 3,851 11,193 8,467Provision for credit losses (3,084) (4,051) (4,030) (4,028) (6,400) (3,000) (3,986) (3,039)Non-interest expenses (16,263) (12,861) (12,838) (12,732) (12,949) (11,608) (11,561) (11,388)
Net income before otherpayments to the Desjardins network and income taxes 15,009 25,952 22,386 25,482 12,781 15,831 19,599 18,214Other payments to theDesjardins network (2,400) (8,784) (9,674) (9,072) (5,194) (719) (6,352) (5,041)
Net income beforeincome taxes 12,609 17,168 12,712 16,410 7,587 15,112 13,247 13,173Income taxes (3,267) (4,236) (3,234) (4,060) 450 (3,908) (2,906) (2,949)
NET INCOME $ 9,342 $ 12,932 $ 9,478 $ 12,350 $ 8,037 $ 11,204 $ 10,341 $ 10,224
1 Reclassified to conform to current year’s presentation.
T4 T31 T21 T11 T41 T31 T21 T11
2004 2003
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AUDIT COMMISSION’S ANNUAL REPORT
The role of the Audit Commission (the Commission) is to support the Board of Directors in its oversight function. Its mandate consists primarily of analyzing financial statements, their presentation and the quality of the accounting principles used, as well as the management of financialinformation risks, internal control systems, internal and external audit processes, the procedures applied to such audits and regulatory compliance management.
To this end, the Commission examines the annual and quarterly financial statements, related press releases, Management's Discussion and Analysis of Financial Condition and Results of Operations, the Annual Information Form and the prospectus. Furthermore, it reviews various reports, including reports on regulatory ratios, capitalization and the quarterly valuation of the off-balance sheet derivatives portfolio.
The Commission ensures that management has prepared and implemented an effective internal control system for financial information disclosure,protection of assets, fraud detection and regulatory compliance. It further makes sure that management has set up management systems for themain risks that could affect the financial results of the entity.
The external auditor reports directly to the Audit Commission. In order to discharge its responsibilities in this area, the Commission ensures andmaintains the independence of the external auditor by authorizing all non audit-related services, by recommending its appointment or continuance,by fixing and recommending its remuneration and by conducting an annual review of its performance. In addition, it supervises the work of theexternal auditor, examines its proposal, its mandate, its annual audit plan, its reports, its letter to management and management’s comments. The Group adopted a policy on the rules for awarding contracts for related services regarding (a) services that can or cannot be rendered by theexternal auditor, (b) the governance procedure to be followed before granting mandates, and (c) the responsibilities of the main stakeholders.Consequently, it receives a quarterly report on the contracts awarded to external auditors by Caisse Centrale and Desjardins Group.
With regard to relations with the Autorité des marchés financiers, the Commission reviews the inspection report issued by the agency, as well as the quarterly financial reports submitted to it.
The Commission ensures that the independence of the internal audit function of Desjardins Group is safeguarded. It examines the annual internalaudit plan for Caisse Centrale, as well as the responsibilities, return, objectivity and staffing of this team. It reviews the summary reports of theinternal audits performed and, where necessary, ensures their follow-up. For such purpose, it meets with the Head of internal audit of the Group to examine any major issues submitted to management.
The Commission meets privately with the external auditors, management, the Head of internal audit of the Group and the officials of the Autorité des marchés financiers. It submits a quarterly report to the Board of Directors and makes recommendations, if necessary.
Finally, in compliance with sound corporate governance practices, it annually assesses the effectiveness and efficiency with which it has performed the tasks set out in its charter.
The Commission is composed of five independent directors, all of whom having the expertise to read and interpret financials statements of financial institutions.
The members, namely Andrée Lafortune, FCA, Jacqueline Mondy, Jean-Guy Bureau, Marcel Lauzon and Pierre Leblanc, FCA, met four times during fiscal 2004.
ANDRÉE LAFORTUNE, FCAChair of the Audit Commission
Montreal (Quebec)February 21, 2005
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MANAGEMENT’S REPORT
Management is responsible for preparing the consolidated financial statements and related information appearing in the Annual Report and forensuring their reliability and accuracy. These consolidated financial statements have been prepared in accordance with Canadian generally acceptedaccounting principles. When required to make estimates, management did so to the best of its knowledge.
The accounting system of La Caisse centrale Desjardins (« Caisse centrale ») and related internal controls and procedures are designed to ensure the reliability of financial information and, to a reasonable degree, safeguard assets against loss or unauthorized use. These procedures includestandards in hiring and training employees, an organizational structure with clearly defined lines of responsibility, written and updated policies and procedures, planning and follow-up of projects, budget controls by cost centre and divisional performance accountability. The internal controlsystems are supplemented by regular independent reviews of Caisse centrale' major business segments. In addition, in the course of his duties, the Internal Auditor of the Group may confer at any time with the Board of Directors' Audit Commission. Composed entirely of directors who areneither officers nor employees of Caisse centrale, this Commission ensures that management has fulfilled its responsibilities with respect tofinancial information and the application of internal controls. During 2004, the Audit Commission met four times. In addition, the Board of Ethics,composed entirely of volunteer officers elected by the general meeting, ensures compliance with rules of professional conduct regarding, amongother matters, conflicts of interest and transactions with related parties. This Board met six times.
The Autorité des marchés financiers examines the affairs of Caisse centrale annually to ensure that the provisions of its constituent legislation,particularly with respect to the protection of depositors, are duly observed and that Caisse centrale is in sound financial condition.
The independent auditors appointed by the general meeting of members, PricewaterhouseCoopers LLP, have the responsibility of auditing theconsolidated financial statements in accordance with Canadian generally accepted auditing standards and of expressing their opinion. Their reportfollows. They may, at any time, confer with the Audit Commission on all matters concerning the nature and execution of their mandate, particularlywith respect to the accuracy of financial information provided by Caisse centrale and the reliability of its internal control systems.
ALBAN D’AMOURS JEAN-GUY LANGELIERChairman of the Board and President and Chief Operating OfficerChief Executive Officer
Montreal (Quebec)February 11, 2005
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C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T SC A I S S E C E N T R A L E 7 3
AUDITORS’ REPORT
To the Members of la Caisse centrale Desjardins,
We have audited the consolidated balance sheets of la Caisse centrale Desjardins as at December 31, 2004 and 2003 and the consolidated statements of income, members’ equity and cash flows for the years then ended. These financial statements are the responsibility of la Caisse centrale Desjardins management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of la Caisse centrale Desjardins as at December 31, 2004 and 2003 and the consolidated results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants
Montreal (Quebec)February 11, 2005
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CONSOLIDATED BALANCE SHEETS
As at December 31 (in thousands of dollars)
ASSETS
CASH AND DEPOSITS WITH BANK OF CANADA $ 124,307 $ 112,509
SECURITIES (notes 3 and 15)Investment account 2,194,596 3,209,294Trading account 648,607 409,245
2,843,203 3,618,539
LOANS (note 4) 10,186,723 8,122,178
OTHERAssets related to derivatives (note 12) 1,248,070 1,080,085Customers’ liability under acceptances 148,900 450,300Other assets (note 5) 219,143 134,723
1,616,113 1,665,108
$ 14,770,346 $ 13,518,334
LIABILITIES AND MEMBERS’ EQUITY
DEPOSITS (note 6)Payable on demand $ 1,055,131 $ 787,512Payable on a fixed date 10,187,223 9,334,350
11,242,354 10,121,862
OTHER Liabilities related to derivatives (note 12) 1,846,528 1,486,991Acceptances 148,900 450,300Obligations related to securities sold short 95,625 14,919Commitment under the repurchase agreements 275,704 409,245Other liabilities (note 7) 350,316 224,055
2,717,073 2,585,510
SUBORDINATED DEBENTURE (note 8) 123,868 123,911
MEMBERS’ EQUITY 687,051 687,051
$ 14,770,346 $ 13,518,334
The accompanying notes are an integral part of the consolidated financial statements.
On behalf of the Board,
ALBAN D’AMOURS MADELEINE LAPIERREChairman of the Board and Vice-Chair of the BoardChief Executive officer
2004 2003
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CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 (in thousands of dollars)
INTEREST INCOMELoans $ 264,359 $ 208,749Securities 118,165 136,194
382,524 344,943
INTEREST EXPENSEDeposits 270,799 243,647Subordinated debenture 6,774 6,642
277,573 250,289
NET INTEREST INCOME 104,951 94,654
OTHER INCOMEService charges on chequing and deposit accounts 12,326 10,805Foreign exchange revenue 21,403 14,559Trading activities 3,814 (5,542)Investment activities 4,854 1,280Fees on acceptances 6,289 10,164Credit fees 2,477 2,115Other 2,602 2,321
53,765 35,702
GROSS INCOME 158,716 130,356Provision for credit losses (note 4) 15,193 16,425
143,523 113,931
NON-INTEREST EXPENSESSalaries and benefits 26,391 22,354Premises, equipment and furniture, including depreciation 12,850 11,831Other 15,453 13,321
54,694 47,506
NET INCOME BEFORE OTHER PAYMENTS TO THE DESJARDINS NETWORK AND INCOME TAXES 88,829 66,425
Other payments to the Desjardins network 29,930 17,306
NET INCOME BEFORE INCOME TAXES 58,899 49,119Income taxes (note 10) 14,797 9,313
NET INCOME $ 44,102 $ 39,806
The accompanying notes are an integral part of the consolidated financial statements.
2004 2003
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CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY
For the years ended December 31 (in thousands of dollars)
CAPITAL STOCK (note 9)Balance at beginning of year $ 666,206 $ 511,403Issuance of Class A capital shares — 154,800Issuance of qualifying shares — 3
Balance at end of year $ 666,206 $ 666,206
RETAINED EARNINGSBalance at beginning of year $ — $ —Net income 44,102 39,806Remuneration of capital stock (56,534) (50,146)Recovery of income taxes related to the remuneration of capital stock (note 10) 12,432 10,340
Balance at end of year $ — $ —
GENERAL RESERVEBalance at beginning and end of year $ 20,845 $ 20,845
TOTAL MEMBERS’ EQUITY $ 687,051 $ 687,051
The accompanying notes are an integral part of the consolidated financial statements.
2004 2003
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 (in thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIESNet income $ 44,102 $ 39,806Adjustments to determine cash flows provided by operating activities:
Depreciation of fixed and intangible assets 2,656 2,848Provision for credit losses 15,193 16,425Gain on sale of investment account securities (6,483) (1,672)Increase in future income taxes (1,869) (6,412)Net increase in trading account securities (239,362) (231,191)(Increase) decrease in accrued interest receivable (32,257) 4,512Increase (decrease) in accrued interest payable 17,515 (22,491)(Decrease) increase in income taxes payable (728) 6,304(Increase) decrease in unrealized gains and amounts receivable on derivatives (167,985) 155,867Increase (decrease) in unrealized losses and amounts payable on derivatives 359,537 (124,359)Other items, net amount 14,434 27,113
4,753 (133,250)
CASH FLOWS FROM FINANCING ACTIVITIESNet increase in deposits 1,120,492 2,333,760Net increase in obligations related to securities sold short 80,706 6,023Net (decrease) increase in obligations under repurchase agreements (133,541) 409,245Issuance of capital shares — 154 800Remuneration of capital stock paid (9) (154,816)
1,067,648 2,749,012
CASH FLOWS FROM INVESTING ACTIVITIESNet decrease in investment account securities 1,021,181 482,439Net increase in loans (1,999,032) (3,042,424)Net increase in securities purchased under resale agreements (80,706) (8,697)Acquisition of fixed and intangible assets (10,466) (4,909)
(1,069,023) (2,573,591)
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,378 42,171Cash and cash equivalents at beginning of year 91,682 49,511
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 95,060 $ 91,682
REPRESENTED BY:Cash and deposits with Bank of Canada $ 124,307 $ 112,509Cheques and other items in transit (29,247) (20,827)
$ 95,060 $ 91,682
ADDITIONAL INFORMATIONInterest paid during the year $ 260,058 $ 266,138Income taxes paid (received) during the year 4,962 (919)
The accompanying notes are an integral part of the consolidated financial statements.
2004 2003
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2004 and 2003 (All tabular figures are in thousands of dollars, unless otherwise indicated)
1. INCORPORATION AND MANDATE
La Caisse centrale Desjardins du Québec (“Caisse centrale”), created on June 22, 1979, is a financial services cooperative governed by An Actrespecting the Mouvement Desjardins [2000, S.Q., c. 77] (the “Constituent Legislation”) and by An Act respecting financial services cooperatives(Quebec). Pursuant to its Constituent Legislation, Caisse centrale may also identify itself under the name of “Caisse centrale Desjardins.“
Caisse centrale is a cooperative institution which offers financial services to the Mouvement des caisses Desjardins, governments, public andparapublic sector institutions, and medium-sized and large businesses. It serves the needs of the Fédération des caisses Desjardins du Québec (the “Fédération”), its Desjardins caisses (the “member caisses”), and the other entities of the Mouvement des caisses Desjardins. Caisse centrale’mandate is to provide institutional funding for the Desjardins network and to act as financial agent, notably by supplying interbank exchange services,including clearing house settlements. Caisse centrale’ activities on the Canadian and international markets complement those of the other entities of the Mouvement des caisses Desjardins.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Caisse centrale are prepared in accordance to section 163 under An Act respecting financial servicescooperatives which requires that, unless otherwise specified by the Autorité des marchés financiers, consolidated financial statements be preparedunder Canadian generally accepted accounting principles. There is no significant difference between Canadian generally accepted accountingprinciples and the accounting rules prescribed by the Autorité des marchés financiers. The preparation of consolidated financial statements inconformity with these principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilitiesand the disclosure of contingent assets and liabilities at the consolidated balance sheet date as well as the recorded amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates. The significant accounting policies are summarized below.
CONSOLIDATION
The consolidated financial statements include the assets and liabilities and results of operations of Caisse centrale and those of its wholly-ownedAmerican subsidiaries, Desjardins Bank, N.A. and Desjardins Commercial Lending U.S.A. Corp., after elimination of intercompany transactions and balances.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, deposits with Bank of Canada and checks and other items in transit.
SECURITIES
Securities include investment account and trading account securities. Investment account securities are purchased with the primary intent of holding them until maturity or until market conditions are more favourable for other types of securities. Equity securities are stated at cost and debtsecurities at unamortized cost. Premiums and discounts are amortized over the terms of the related securities on a straight-line basis. Tradingaccount securities, which are purchased for resale over a short period of time, are stated at their fair value, which is determined based on quotedmarket prices. When the price of a security is not available, the fair value is estimated based on the quoted market price of similar securities.
Realized gains and losses on investment account securities, which are calculated using average cost, as well as write-downs to reflect a permanentimpairment in value are recorded in consolidated income under “Investment activities” in “Other income.” Moreover, realized and unrealized gainsand losses on trading account securities are recorded in consolidated income under “Trading activities” in “Other income.” Dividend and interestincome, including amortization of premiums and discounts on investment account securities, is recorded in consolidated income under “Interest income.”
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LOANS
Loans are stated net of the allowance for credit losses, unamortized discounts and loan fees. Where deemed appropriate, Caisse centrale obtainssecurity in the form of cash, securities, immovable property, accounts receivable, surety, inventories or other assets.
As intermediary for the Desjardins Group entities, Caisse centrale buys and sells mortgage, farm and other loans. These loans are accounted for at fair value and are included in “Loans purchased from Desjardins Group.”
Interest income is recorded on the accrual basis, except when the loan is considered impaired. A loan is considered impaired when: a) there is reasonto believe that a portion of the principal or interest cannot be collected, or b) the interest or principal is contractually 90 days in arrears, except whenthere is reasonable assurance of collecting the principal or interest. The loan is then classified as impaired and the interest, previously accrued butnot received on such a loan, is reversed to interest income from loans in the current year. No portion of cash received on a loan subsequent to itsclassification as impaired is recorded as income before any prior write-off has been recovered or any specific provision has been reversed and it isdeemed that the loan principal is fully collectible.
An impaired loan is recorded at its estimated realizable value, measured by discounting the expected future cash flows at the interest rate inherent inthe loan. When the amount or timing of future cash flows cannot be estimated with reasonable reliability, the loan is recorded at either the fair valueof the underlying security or the market price for the loan. Any change in the estimated realizable amount is presented as a charge or credit for loanimpairment through the allowance for credit losses. An impaired loan is once again recorded under the accrual method when the principal andinterest payments are current and there is no longer any reasonable doubt that the impaired loan will be recovered.
Fees related to loan origination and loan restructuring or renegotiating are considered as adjustments to loan yield and are deferred and amortizedto “Interest income” for the estimated term of such loans. In the likelihood that a loan will result, commitment and standby fees are also included in“Interest income” over the expected term. Otherwise, fees are recorded as “Other income” during the commitment or standby period. Loansyndication fees are presented under “Other income” when the syndication agreement is signed, unless the yield of any loan retained by Caissecentrale is less than that of other comparable lenders involved in the financing. In such cases, an appropriate portion of the fees is deferred andamortized to interest income over the term of the loan.
According to the changes to Section 3025 “Impaired Loan” of the Canadian Institute of Chartered Accountants (CICA) handbook, since May 1, 2003,foreclosed assets held for sale in settlement of an impaired loan are recorded at fair value less selling costs at the date of foreclosure. Foreclosedassets held for use in settlement of an impaired loan, to be held or applied, are measured at fair value at the date of foreclosure. Any excess ofcarrying value of the loan over the original estimated realizable value of the acquired assets is recorded as a debit in the allowance for credit losses.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at an amount considered sufficient to absorb the estimated losses related to the loan portfolio, off-balance sheet commitments, acceptances and derivative instruments. This allowance is increased by the provision for credit losses charged toconsolidated income and reduced by write-offs net of recoveries. This allowance comprises specific provisions and a general provision for creditlosses. Management conducts ongoing credit risk assessments and establishes specific provisions when impaired loans are identified.
Specific provisions are established on an individual basis for all identified impaired loans, reducing their carrying value to their estimated realizable value.
The general provision for credit losses reflects management’s estimate of probable portfolio losses that are not covered by specific provisions. The general provision for credit losses does not represent future losses nor replace specific provisions. It takes into account economic and marketconditions that affect the main lending activities, recent credit loss experience, and trends in credit quality and concentration. This provision alsoreflects model and estimation risks, which are reviewed and revised where conditions indicate the initial assumptions differ from actual results.
ACCEPTANCES AND CUSTOMERS’ LIABILITY UNDER ACCEPTANCES
Caisse centrale’ potential liability under acceptances is reported as a liability in the consolidated balance sheets. The recourse of Caisse centraleagainst the customer in the case of a call on commitments of this nature is reported as an offsetting asset of the same amount. Fees paid to Caissecentrale are recognized in consolidated income under “Fees on acceptances” in “Other income.”
OBLIGATIONS RELATED TO SECURITIES SOLD SHORT
Securities sold short as part of trading activities, which represent Caisse centrale’ obligation to deliver securities sold which were not owned at thetime of sale, are recorded as liabilities and are carried at fair value. Realized and unrealized gains and losses thereon are recorded in consolidatedincome under “Trading activities” in “Other income.”
ASSETS UNDER ADMINISTRATION
Caisse centrale manages liquidities on behalf of third parties. These assets under administration are not the property of Caisse centrale andtherefore are not reflected on the consolidated balance sheets. Management fees earned with respect to liquidity management services are recordedin “Other Income” in the consolidated statement of income.
DERIVATIVES
Caisse centrale uses derivatives for asset/liability management or trading purposes. The derivatives most frequently used are forward exchangecontracts, cross-currency and interest rate swaps, forward rate agreements and foreign currency, interest rate and stock index options. Allderivatives are recognized at fair value in the consolidated balance sheets. The estimated fair value of all derivatives is determined using pricingmodels which incorporate current market prices and the contractual prices of the underlying instruments, the time value of money, and yield curves.In the consolidated balance sheets, derivatives designated for trading purposes having a positive fair value are presented as assets, whereas thosethat have a negative fair value are presented as liabilities, under the captions “Assets related to derivatives” and “Liabilities related to derivatives,”respectively, under “Other.”
Derivatives held for asset/liability management purposes Derivatives held for asset/liability management purposes are used to manage the interest rate and foreign exchange risk exposure of consolidated balance sheet assets and liabilities, firm commitments and anticipated transactions.Certain derivatives qualify for hedge accounting.
a) Derivatives qualifying for hedge accounting To qualify for hedge accounting, a hedging relationship must be designated and documented at itsinception. The documentation should address, among others, the specific risk management strategy, the hedged asset, liability or cash flows andthe measure of the effectiveness of the hedging relationship. Therefore, each hedging relationship has to be documented and tested for efficiency,
individually and on a regular basis, in order to determine, with reasonable assurance, whether it has remained and will continue to be efficient. The derivative must be highly effective in offsetting changes in the fair value or cash flows of the hedged item that are attributable to the hedged risk exposure.
Unrealized gains or losses are deferred under “Other assets” or “Other liabilities” in “Other” and recognized in consolidated income in the sameperiod as the gains, losses, revenues or expenses associated with the hedged item.
A derivative ceases to be designated as a hedge in the following circumstances: the hedged item is sold or matures, the hedge ceases to be effectiveor Caisse centrale discontinues its designation of the hedging relationship. When a hedging relationship is discontinued, the difference between thefair value and the recognized value of the derivative is deferred under “Other assets” or “Other liabilities” on the consolidated balance sheet andrecognized in income over the expected remaining term of the hedging relationship being discontinued. When a hedged item is sold or maturesbefore the corresponding derivative matures, any realized or unrealized gain or loss on the derivative is recognized immediately in income under“Investment activities” in “Other income.”
b) Derivatives not qualifying for hedge accounting Realized and unrealized gains and losses on derivatives held for asset/liability managementpurposes that do not qualify for hedge accounting are recognized in consolidated income under “Trading activities” in “Other income.”
Derivatives held for trading purposes Derivatives held for trading purposes are mainly used in intermediation activities to meet the needs of theDesjardins network or its customers. The corresponding realized and unrealized gains and losses are recognized in consolidated income under“Trading activities” under “Other income.”
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SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Caisse centrale enters into short-term purchases and sales of securities with simultaneous agreements to sell and buy them back at a specifiedprice and on a specified date. These agreements are accounted for as collateralized lending and borrowing transactions and are recorded on theconsolidated balance sheets at the selling or repurchase price specified under the agreement. The difference between the specified selling price and the purchase price is recorded using the accrual method under “Interest income.” Conversely, the difference between the selling price and thespecified repurchase price is recorded under “Interest expense.”
FOREIGN CURRENCY TRANSLATION
Monetary items denominated in foreign currencies are translated at rates prevailing on the balance sheet date; income and expenses are translatedat the average rates prevailing during the year. Foreign exchange gains or losses arising from the translation or the settlement of a monetary itemdenominated in a foreign currency are recorded in income. Foreign exchange trading positions, including spot and forward contracts, are valued atprevailing market rates and the resulting gains and losses are included in "Other income.”
FIXED ASSETS
Fixed assets are recorded at cost, less accumulated depreciation and are depreciated over their estimated useful lives in accordance with thefollowing methods and annual rates:
INTANGIBLE ASSETS WITH FINITE USEFUL LIFE
Computer softwares are recorded at cost, less accumulated depreciation, and are depreciated over their probable useful life on a straight-line basis at a rate of 20%.
EMPLOYEE FUTURE BENEFITS
The employees of Caisse centrale participate in the Desjardins Group pension plans as part of a defined benefit multi-employer pension plan. Caisse centrale also provides life insurance coverage and health and dental care benefits to its eligible retired employees through the DesjardinsGroup multi-employer group insurance plan. Caisse centrale applies the recommendations regarding defined contribution plans since plan costs and funding of these plans are not allocated among the member entities of the Desjardins Group.
INCOME TAXES
Caisse centrale accounts for income taxes under the asset-liability method. Under this method, future tax assets and liabilities are calculated basedon existing differences between the carrying amount and the tax basis of assets and liabilities using enacted or substantially enacted tax laws andrates expected to apply at the date such differences reverse. Future tax assets and liabilities are included under “Other assets” or “Other liabilities,”as applicable.
The recovery of income taxes appearing in the consolidated statements of members’ equity under “Retained earnings” is related to the remunerationof capital stock, which is deductible for income tax purposes.
Office furniture and equipment Diminishing balance 20%Computer equipment Diminishing balance 30%Leasehold improvements Straight-line Term of the leases
Classes Depreciation methods Rates
RECENTLY ADOPTED ACCOUNTING STANDARDS
Generally accepted accounting principles On January 1, 2004, Caisse centrale adopted, on a prospective basis, the requirements of Section 1100,“Generally Accepted Accounting Principles,” issued by the Canadian Institute of Chartered Accountants (CICA). This section establishes standards for financial reporting in accordance with GAAP and provides guidance on sources to consult when selecting accounting policies and determiningappropriate disclosures, when a matter is not dealt with specifically in the primary sources of GAAP. This standard eliminates the application ofcertain practices that could be used in specific industries.
Further to the adoption of this section, net amounts receivable from financial institutions arising from the clearing and settlement system are nowpresented in assets while net amounts payable to financial institutions are included in liabilities. As at December 31, 2003, the net balance related to financial institutions was presented in assets. Moreover, certain other items in transit have been reclassified. The impact of these reclassificationson the consolidated financial statements was immaterial.
Hedging relationships On January 1, 2004, Caisse centrale adopted Accounting Guideline 13, “Hedging relationships,” (AcG-13) issued by the CICAand Emerging Issues Committee Abstract 128, “Accounting for Trading, Speculative or Non-Hedging Derivative Financial Instruments” (EIC-128). This accounting guideline addresses identification, designation, documentation and efficiency of hedging relationships and deals with the circums-tances leading to discontinuance of hedge accounting. Pursuant to EIC-128, any derivative instrument that does not qualify for hedge accountingshould be recognized as an asset or a liability on the balance sheet and measured at fair value, with changes in fair value recognized in income.
Caisse centrale has revised its existing hedging relationships and has discontinued the use of hedge accounting for those hedging relationship thatdid not meet all required conditions. Pursuant to transitional provisions of AcG-13, the difference between the fair value and the recognized value of derivative financial instruments of cancelled hedging relationships has been deferred and will be amortized over the life of such derivatives. The impact of the application of this accounting guideline on the results of the year is an income of $0.1 million, before taxes.
As part of the adoption of the accounting guideline on January 1, 2004, Caisse centrale revised its accounting policies to recognize all derivativefinancial instruments in the balance sheet at fair value, while previously only those used for trading purposes were accounted for in such manner.The balance sheet as at December 31, 2003, was therefore restated, in order to give effect to the transitional provisions of AcG-13 and to therecognition at fair value, increasing “Assets related to derivatives” and “Other liabilities” by $31,038,000 and “Liabilities related to derivatives” and “Other assets” by $54,017,000.
FUTURE EFFECT OF RECENT ACCOUNTING STANDARDS
Variable interest entities (VIE) In June 2003, the CICA issued Accounting Guideline 15 (revised in August 2004), “Consolidation of variable interestentities” (AcG-15), which applies to annual and interim periods beginning on or after November 1, 2004. A variable interest entity (VIE) is an entitywhose equity is not sufficient to permit it to finance its activities without additional subordinated financial support provided by a third party, or anentity whose equity holders do not have, as a group, the ability to make decisions, the obligation to absorb the expected losses or the right to receivethe expected residual returns, if any. In accordance with this standard, a VIE should be consolidated by its primary beneficiary, namely the enterprisethat absorbs a majority of the expected losses and/or has the possibility of receiving a majority of the expected residual returns. Caisse centrale does not expect to be the primary beneficiary of a VIE. Caisse centrale does not expect to be the primary beneficiary of a VIE nor that the applicationof this standard will have a material impact on its financial condition or its operating results.
COMPARATIVE FIGURES
Certain 2003 financial information has been reclassified to conform with the presentation adopted in 2004.
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Yields are calculated on year-end carrying values, adjusted for amortization of premiums and discounts.
Term-to-maturity classifications are based on the contractual maturity of the security. Securities with no maturity date are classified in the “Over 10 years” category.
Total investment account securities includes amounts denominated in foreign currencies of C$286,754,872 (2003: C$426,023,327), of whichC$184,627,062 is denominated in U.S. dollars (2003: C$275,239,235).
3. SECURITIES
INVESTMENT ACCOUNT SECURITIES
ISSUED OR GUARANTEED BY Canada $ 25,794 $ 35,206 $ 55,238 $ 30,000 $ — $ 146,238 $ 271,393
Yield 4.33% 5.02% 4.04% 2.55% 4.02% 4.66%Provinces and municipalities in Canada 259,641 292,605 512,638 228,039 — 1,292,923 1,374,567
Yield 5.53% 4.52% 4.01% 4.93% 4.60% 5.14%School boards or other governmententities in Canada — — — — — — 30,029
Yield 6.06%U.S. public administrations 4,311 57 7,940 — 8,365 20,673 28,999
Yield 2.08% 4.67% 3.19% 4.85% 3.63% 2.57%OTHER SECURITIESDebt securities of Canadian issuers
Banks and financial institutions 599,334 10,000 — — — 609,334 1,154,040Entities under common control 25,438 — — — — 25,438 27,728Financial asset-backed debt securities 69,422 5,000 — — — 74,422 193,907Other — — — — 9,150 9,150 99,720Yield 2.89% 2.65% 6.26% 2.93% 2.76%
Foreign banks 16,418 — — — — 16,418 28,911Yield 1.04% 1.04% 2.65%
TOTAL INVESTMENTACCOUNT SECURITIES $ 1,000,358 $ 342,868 $ 575,816 $ 258,039 $ 17,515 $ 2,194,596 $ 3,209,294
TRADING ACCOUNT SECURITIES
ISSUED OR GUARANTEED BYCanada $ — $ — $ 275,704 $ — $ — $ 275,704 $ 409,245
OTHER SECURITIESEquity securities — — — — 372,903 372,903 —
TOTAL TRADINGACCOUNT SECURITIES $ — $ — $ 275,704 $ — $ 372,903 $ 648,607 $ 409,245
TOTAL SECURITIES $ 1,000,358 $ 342,868 $ 851,520 $ 258,039 $ 390,418 $ 2,843,203 $ 3,618,539
MaturityLess than 1 1 to 3 Over 3 to 5 Over 5 to Over 10
year years years 10 years years Total Total2004 2003
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The following table shows unrealized gains and losses on securities.
INVESTMENT ACCOUNT SECURITIES
ISSUED OR GUARANTEED BYCanada $ 146,238 $ 2,208 $ — $ 148,446 $ 271,393 $ 4,898 $ — $ 276,291Provinces and municipalities in Canada 1,292,923 45,001 (36) 1,337,888 1,374,567 58,258 (606) 1,432,219School boards or other governmententities in Canada — — — — 30,029 418 — 30,447U.S. public administrations 20,673 132 (26) 20,779 28,999 123 (15) 29,107OTHER SECURITIESDebt securities of Canadian issuers
Banks and financial institutions 609,334 48 — 609,382 1,154,040 131 (35) 1,154,136Entities under common control 25,438 396 — 25,834 27,728 1,199 — 28,927Financial asset-backed debt securities 74,422 7 (6) 74,423 193,907 289 (5) 194,191Other 9,150 706 — 9,856 99,720 979 — 100,699
Foreign banks 16,418 — — 16,418 28,911 — (1) 28,910
TOTAL INVESTMENT ACCOUNT SECURITIES $ 2,194,596 $ 48,498 $ (68) $ 2,243,026 $ 3,209,294 $ 66,295 $ (662) $ 3,274,927
TRADING ACCOUNT SECURITIES
ISSUED OR GUARANTEED BYCanada $ 275,704 $ — $ — $ 275,704 $ 409,245 $ — $ — $ 409,245OTHER SECURITIESEquity securities 372,903 — — 372,903 — — — —
TOTAL TRADING ACCOUNT SECURITIES $ 648,607 $ — $ — $ 648,607 $ 409,245 $ — $ — $ 409,245
TOTAL SECURITIES $ 2,843,203 $ 48,498 $ (68) $ 2,891,633 $ 3,618,539 $ 66,295 $ (662) $ 3,684,172
Gross Gross Estimated Gross Gross EstimatedCarrying unrealized unrealized market Carrying unrealized unrealized market
value gains losses value value gains losses value2004 2003
The estimated market value of securities is based on the quoted market price, which may not necessarily be realized on sale. Where a quoted price is not readily available, the estimated fair value is determined using market prices of similar securities.
Interest rate sensitivity is the main cause of changes in the estimated market value of the investment account securities. The carrying value ofsecurities is not adjusted to reflect current increases or decreases in the estimated market value due to interest rate changes, as Caisse centrale’initial intention is to hold these securities to maturity or until market conditions are more favourable for other types of securities.
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4. LOANS
Securities purchased under resale agreements $ 95,625 $ 14,919Day, call and short-term loans to investment dealers and brokers 446,000 218,000Public and parapublic institutions 1,454,697 1,522,989Members
Fédération 5,443,248 3,719,748Other 43,863 —
Entities under common control 960,788 1,032,009Loans purchased from Desjardins Group 132 134,319Private sector 1,803,444 1,570,584
$ 10,247,797 $ 8,212,568Allowance for credit losses (61,074) (90,390)
TOTAL $ 10,186,723 $ 8,122,178
Gross impaired loans $ 19,850 $ 86,244Specific provisions (7,879) (46,555)
IMPAIRED LOANS NET OF SPECIFIC PROVISIONS $ 11,971 $ 39,689
2004 2003
5. OTHER ASSETS
Interest receivable $ 76,602 $ 44,345Future tax assets (note 10) 18,534 16,665Fixed assets, net of cumulative depreciation of $8,129 (2003: $6,021) 4,597 5,675Intangible assets with finite useful life, net of accumulated depreciation of $2,833 (2003 : $2,364) 13,285 4,397Other 106,125 63,641
TOTAL $ 219,143 $ 134,723
Balance at beginning of year $ 90,390 $ 78,922Provision for credit losses 15,193 16,425Write-offs (44,559) (7,712)Recoveries 50 2,755
BALANCE AT END OF YEAR $ 61,074 $ 90,390
CONSISTING OF:Specific provisions1 $ 7,879 $ 46,555General provision for credit losses 53,195 43,835
TOTAL $ 61,074 $ 90,3901 As at December 31, 2004 and 2003, the specific provisions included an amount of $0.3 million related to off-balance sheet commitments.
Allowance for credit losses 2004 2003
2004 2003
Total loans before the allowance for credit losses include loans for an amount of C$857,150,039 (2003: C$739,810,045) denominated in U.S. dollars.
The cumulative allowance for credit losses relates entirely to loans and commitments classified in the “Private sector” category.
The following table shows an analysis of the allowance for credit losses.
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6. DEPOSITS
Canada $ 1,159 $ 198,091 $ 199,250 $ 100,641Provinces 126,106 51,368 177,474 300,630Banks and financial institutions 11,748 786,981 798,729 932,164Member
Fédération 381,273 690,180 1,071,453 1,033,102Other 118,352 79,504 197,856 206,161
Entities under common control 121,771 449,751 571,522 706,753Other 294,722 7,931,348 8,226,070 6,842,411
TOTAL $ 1,055,131 $ 10,187,223 $ 11,242,354 $ 10,121,862
Payable Payable on on demand a fixed date Total Total
2004 2003
7. OTHER LIABILITIES
Interest payable $ 66,859 $ 49,344Remuneration of capital stock payable 123,347 66,822Cheques and other items in transit 29,247 20,827Income taxes payable 2,049 2,777Other 128,814 84,285
TOTAL $ 350,316 $ 224,055
2004 2003
Total deposits include deposits in foreign currencies in the amount of C$4,687,942,000 (2003: C$4,200,218,000), of which C$2,336,744,000 (2003:C$2,123,068,000) is denominated in U.S. dollars and C$2,085,561,000 (2003: C$1,377,886,000) is denominated in Euros.
8. SUBORDINATED DEBENTURE
The debenture, subordinated to the claims of depositors and certain other creditors:
March 18, 2013 5.5 % Nominal value of € 76,224,509; 5.5% interest payable annually $ 123,868 $ 123,911in euros until March 18, 2008; thereafter, interest payable quarterly at the rate of Euribor plus 1.40%.
Maturity Interest rate Terms 2004 2003
Caisse centrale may, with the prior approval of the Autorité des marchés financiers, redeem the subordinated debenture on March 18, 2008 or at any time in the event of an applicable tax amendment. Further, Caisse centrale entered into hedging transactions to eliminate foreign exchange exposure.
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9. CAPITAL STOCK
The capital stock of Caisse centrale is composed of an unlimited number of Class A capital shares, Class B capital shares and qualifying shares.
CLASS A CAPITAL SHARESThe following table presents changes in the number of outstanding shares and their total ascribed value during the year.
Capital shares at beginning of year 666,203 $ 666,203 511,403 $ 511,403Capital shares issued — — 154,800 154,800
CAPITAL SHARES AT END OF YEAR 666,203 $ 666,203 666,203 $ 666,203
2004 2003Number Amount Number Amount
Class A capital shares can only be issued to members and each have a par value of $1,000. The Board of Directors has the discretionary power todetermine the remuneration to be paid and the payment terms for these shares. They are transferable between members, with the approval of the Board of Directors, and their reimbursement, only possible in the event of the winding-up, insolvency or dissolution of Caisse centrale, issubordinated to the deposits and other debts of Caisse centrale. They are redeemable by Caisse centrale, in whole or in part, with the authorizationof the Autorité des marchés financiers. They are convertible by Caisse centrale, with the approval of the Board of Directors, into shares of otherclasses issued for this purpose.
CLASS B CAPITAL SHARESAs at December 31, 2004 and 2003, no Class B capital shares had been issued or were outstanding.
Class B capital shares can only be issued to members. The Board of Directors has the discretionary power to determine the remuneration to be paid and the payment terms for these shares. The remuneration and payment terms may differ from those for Class A capital shares. They aretransferable between members, with the approval of the Board of Directors, and their reimbursement, only possible in the event of the winding-up,insolvency or dissolution of Caisse centrale, is subordinated to the deposits and other debts of Caisse centrale. They are redeemable by Caissecentrale, in whole or in part, with the authorization of the Autorité des marchés financiers. They are convertible by Caisse centrale, with the approval of the Board of Directors, into shares of other classes issued for this purpose.
QUALIFYING SHARESThe following table presents changes in the number of outstanding qualifying shares and their total ascribed value during the year.
Qualifying shares can only be issued to members according to the conditions, terms and criteria provided for in the internal management by-laws ofCaisse centrale. Their issue price is set at $5.00 each and they are non-interest-bearing. They are redeemable by Caisse centrale only in the event ofthe withdrawal, exclusion, winding-up, insolvency or dissolution of a member. They are not transferable and their reimbursement, only possible in theevent of the winding-up, insolvency or dissolution of Caisse centrale, is subordinated to the deposits and other debts of Caisse centrale and to theholders of the other classes of shares.
Qualifying shares at beginning of year 600 $ 3 — $ —Qualifying shares issued and unpaid — — 600 3
QUALIFYING SHARES AT END OF YEAR 600 $ 3 600 $ 3
2004 2003Number Amount Number Amount
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10. INCOME TAXES
The income taxes as shown in the financial statements are detailed as follows:
CONSOLIDATED STATEMENTS OF INCOMECurrent income taxes $ 16,666 $ 15,725Future income taxes (1,869) (6,412)
$ 14,797 $ 9,313
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITYRecovery of income taxes related to the remuneration of capital stock $ 12,432 $ (10,340)
$ 2,365 $ (1,027)
2004 2003
The principal components of the future tax assets and liabilities are as follows:
FUTURE TAX ASSETSAllowance for credit losses $ 12,404 $ 14,269Deferred income 1,368 900Fees on loans 850 1,038Fixed and intangible assets 977 420Losses carried forward 2,593 —Other 506 401
$ 18,698 $ 17,028
FUTURE TAX LIABILITIESIssue expenses $ (152) $ (355)Other (12) (8)
$ (164) $ (363)
FUTURE TAX ASSETS (NET) $ 18,534 $ 16,665
2004 2003
The difference between the statutory income tax rate applicable to credit unions and the effective income tax rate is as follows:
Income taxes applicable to credit unions $ 12,946 21.98% $ 10,128 20.62%Increase from:• Large corporations tax 1,541 2.62 1,792 3.65• Others 310 0.52 30 0.06Future taxes from changes to income tax rates — — (2,637) (5.37)
Income taxes, as presented in the consolidated statement of income, and effective tax rate $ 14,797 25.12% $ 9,313 18.96%
2004 2003
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DERIVATIVES
Caisse centrale uses derivatives primarily for asset/liability management purposes as well as in intermediation activities conducted to meet theneeds of the Desjardins network or its customers (trading purposes).
Interest rate contracts include interest rate swaps, forward rate agreements and futures contracts. Interest rate swaps are transactions in which twoparties exchange interest flows on a specified notional principal amount for a predetermined period based on agreed-upon fixed and floating rates.Principal amounts are not exchanged. Forward rate agreements are forward transactions on interest rate, based on a notional principal amount,which call for a cash settlement at a future date for the difference between a contractual rate of interest and the market rate. Futures contractsrepresent a future commitment to purchase or deliver commodities or financial instruments on a future date at a specified price. Futures contractsare traded in predetermined amounts on regulated stock exchanges and are subject to daily cash margins.
11. OFF-BALANCE SHEET CREDIT INSTRUMENTS AND DERIVATIVES
In the normal course of business, Caisse centrale offers its customers various instruments to meet their needs for liquidity and protection againstdifferent risks, such as fluctuations in foreign exchange and interest rates. Caisse centrale uses some of these instruments to hedge its ownexposure to foreign exchange and interest rate risks and to earn trading income. All financial instruments are subject to regular credit standards,financial controls and other usual monitoring procedures that are normally applied.
OFF-BALANCE SHEET CREDIT INSTRUMENTS
The primary purpose of these instruments is to ensure that funds are available to a customer as required. Caisse centrale' policy with respect tocollateral security for these instruments is generally the same as for loans.
Guarantees and standby letters of credit, which represent irrevocable commitments that Caisse centrale will make payments in the event that acustomer cannot meet its obligations to third parties, carry the same credit risk as loans. Cash requirements under guarantees and standby lettersof credit are considerably less than the amount of the commitment because Caisse centrale does not generally expect the third party to draw fundsunder the agreement.
Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit.Caisse centrale is exposed to a potential credit risk in an amount equal to the total unused commitments. However, most commitments to extendcredit are contingent upon customers maintaining specific credit standards.
The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, since many ofthese commitments will expire or terminate without being funded.
The following table discloses the contractual amount and the risk-weighted balance, which is based on the rules of capital adequacy as prescribed bythe Bank for International Settlements (BIS).
Guarantees and standby letters of credit $ 314,877 $ 172,001 $ 186,337 $ 153,359Commitments to extend credit (original term to maturity)
over one year 1,631,747 612,148 1,491,115 509,719one year or less and conditionals 11,095,069 -- 12,767,003 --
Commitments to purchase assets 480,878 -- 34,119 --
TOTAL $ 13,522,571 $ 784,149 $ 14,478,574 $ 663,078
Risk- Risk-Contractual weighted Contractual weighted
amount balance amount balance2004 2003
Foreign exchange contracts include forward contracts and currency swaps. Foreign exchange forward contracts represent commitments to exchange two currencies at a specified future date based on a rate agreed upon by both parties at the inception of the contract.
Options are contractual agreements under which the seller grants the buyer the right, but not the obligation, to buy (call option) or sell (put option) by or at a set date a specified amount of a financial instrument at a predetermined price. The seller receives a premium from the buyer for this right.Caisse centrale enters into these contracts primarily to serve the needs of customers and to manage its own asset/liability exposure.
Currency swaps are transactions in which fixed interest payments on notional amounts denominated in different currencies are exchanged. Forcross-currency interest rate swaps, fixed and floating interest payments on notional amounts denominated in different currencies are exchanged.Caisse centrale uses currency swaps and cross-currency interest rate swaps to manage its own asset/liability exposure.
The credit risk exposure of derivatives corresponds to the risk of credit losses that can occur if a borrower or counterparty does not fully honour its contractual obligations to Caisse centrale and if the market conditions are such that replacing the transaction would result in a loss for Caissecentrale. Credit risk is managed within the authorization limits granted to counterparties and the netting programs entered into with significantcounterparties.
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C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T SC A I S S E C E N T R A L E 9 1
The following table summarizes the derivatives portfolio and related credit exposure of Caisse centrale.
• NOTIONAL AMOUNT The amount to which a rate or price is applied in order to calculate the exchange of cash flows.
• REPLACEMENT COST The cost of replacing, at estimated fair value, all contracts which have a positive market value. The amounts do not take into consideration contracts which permit offsetting of positions or any collateral which may be obtained.
• FUTURE CREDIT EXPOSURE The potential for future changes in value based upon a formula prescribed by the BIS.
• CREDIT RISK EQUIVALENT The total of replacement cost and future credit exposure excluding items prescribed by the BIS, namely the replacement cost of foreign exchange forward contracts with an original maturity of less than 14 days and derivative instruments negotiated through exchanges when they are subject to daily margin requirements.
• RISK-WEIGHTED BALANCE The credit risk equivalent weighted according to the creditworthiness of the counterparty, as prescribed by the BIS.
ASSET/LIABILITYMANAGEMENT PURPOSES
INTEREST RATE CONTRACTSInterest rate swap contracts $ 3,473,955 $ 30,361 $ 12,486 $ 42,847 $ 9,537 $ 25,713 $ 11,290
TOTAL INTEREST RATE CONTRACTS 3,473,955 30,361 12,486 42,847 9,537 25,713 11,290
FOREIGN EXCHANGE CONTRACTSCurrency swap contracts 4,146,954 246,908 160,841 407,749 93,472 185,108 101,133
TOTAL FOREIGNEXCHANGE CONTRACTS 4,146,954 246,908 160,841 407,749 93,472 185,108 101,133
TOTAL – ASSET/LIABILITYMANAGEMENT PURPOSES $ 7,620,909 $ 277,269 $ 173,327 $ 450,596 $ 103,009 $ 210,821 $ 112,423
TRADING PURPOSES
INTEREST RATE CONTRACTSInterest rate swap contracts $ 53,005,426 $ 571,922 $ 244,731 $ 816,653 $ 161,907 $ 582,269 $ 178,667Forward rate agreements 5,961,000 1,059 1,175 2,234 447 1,004 801Futures contracts 9,997,880 216 — — — 583 —Options purchased 1,035,000 3,243 — 3,243 648 1,483 297Options written 1,175,000 — — — — — —
TOTAL INTEREST RATE CONTRACTS 71,174,306 576,440 245,906 822,130 163,002 585,339 179,765
FOREIGN EXCHANGE CONTRACTSForward contracts 7,879,138 123,021 76,709 197,646 43,638 109,174 39,134Currency swap contracts 60,100 1,078 4,507 5,585 2,117 — —Options purchased 136,239 2,947 3,007 5,954 2,221 — —Options written 130,229 — — — — — —
TOTAL FOREIGNEXCHANGE CONTRACTS 8,205,706 127,046 84,223 209,185 47,976 109,174 39,134
OTHER CONTRACTSCredit swaps 754,195 287 47,152 47,439 15,938 — —Stock index options - purchased 2,062,717 267,028 150,980 418,008 141,995 174,751 112,962Stock index options - written 2,062,717 — — — — — —
TOTAL OTHER CONTRACTS 4,879,629 267,315 198,132 465,447 157,933 174,751 112,962
TOTAL – TRADING PURPOSES $ 84,259,641 $ 970,801 $ 528,261 $1,496,762 $ 368,911 $ 869,264 $ 331,861
TOTAL DERIVATIVES BEFORENETTING AGREEMENTS $ 91,880,550 $ 1,248,070 $ 701,588 $1,947,358 $ 471,920 $1,080,085 $ 444,284
Less impact of master netting agreements1 853,627 283,900 587,930 235,707
TOTAL DERIVATIVES $ 394,443 $ 188,020 $ 492,155 $ 208,5771 Without the intent of settling the contracts on a net basis or simultaneously.
Future Risk- Risk-Notional Replacement credit Credit risk weighted Replacement weightedamount cost exposure equivalent balance cost balance
2004 2003
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The following table presents the term to maturity of the notional amounts of the derivatives.
INTEREST RATE CONTRACTSInterest rate swap contracts $ 13,010,153 $ 21,306,057 $ 18,164,047 $ 3,999,124 $ 56,479,381 $ 43,002,878Forward rate agreements 5,726,000 235,000 — — 5,961,000 3,169,000Futures contracts 8,584,194 1,413,686 — — 9,997,880 3,486,217Options purchased 1,035,000 — — — 1,035,000 317,000Options written 1,175,000 — — — 1,175,000 317,000
TOTAL INTEREST RATE CONTRACTS 29,530,347 22,954,743 18,164,047 3,999,124 74,648,261 50,292,095
FOREIGN EXCHANGE CONTRACTSForward contracts 7,693,613 185,525 — — 7,879,138 6,537,311Currency swap contracts 1,375,121 385,313 2,310,690 135,930 4,207,054 4,170,048Options purchased 95,106 41,133 — — 136,239 —Options written 89,096 41,133 — — 130,229 —
TOTAL FOREIGN EXCHANGECONTRACTS 9,252,936 653,104 2,310,690 135,930 12,352,660 10,707,359
OTHER CONTRACTSCredit swaps 659,195 95,000 — — 754,195 —Stock index options - purchased 716,275 910,382 421,660 14,400 2,062,717 2,033,807Stock index options - written 716,275 910,382 421,660 14,400 2,062,717 2,033,807
TOTAL OTHER CONTRACTS 2,091,745 1,915,764 843,320 28,800 4,879,629 4,067,614
TOTAL OF DERIVATIVES $ 40,875,028 $ 25,523,611 $ 21,318,057 $ 4,163,854 $ 91,880,550 $ 65,067,068
Maturity1 year Over Over Over Notional National
and less 1 to 3 years 3 to 5 years 5 years amount amount2004 2003
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12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values are intended to approximate amounts at which these financial instruments could be exchanged in a current transactionbetween willing parties; however, many of the financial instruments lack an available trading market. Therefore, fair values are based on estimatesusing present value and other valuation techniques which are significantly affected by the assumptions used concerning the amount and timing ofestimated future cash flows and discount rates which reflect varying degrees of risk. In addition, the estimated fair values disclosed do not reflect the value of assets and liabilities that are not considered financial instruments, such as “fixed assets and and intangible assets with finite useful life.”Also, the values of other non-financial intangible assets and liabilities have been excluded. Given the use of subjective judgment in applying a largenumber of acceptable valuation and estimation techniques to calculate fair values, the fair value estimates cannot necessarily be compared to thoseof other financial institutions. The estimated fair values reflect market conditions at a specific date and, as such, may not be representative of futurefair values. They should also not be interpreted as being realizable in an immediate settlement of the instruments. Detailed information on theestimated fair value of on-balance sheet financial instruments and of the derivatives which are excluded from the table of on-balance sheet financialinstruments is presented on the following page.
ON-BALANCE SHEET FINANCIAL INSTRUMENTS (EXCLUDING DERIVATIVES)
ASSETSCash and deposits with Bank of Canada $ 124,307 $ 124,307 $ — $ 112,509 $ 112,509 $ —Securities 2,891,633 2,843,203 48,430 3,684,172 3,618,539 65,633Loans 10,225,878 10,186,723 39,155 8,171,930 8,122,178 49,752Customers’ liability under acceptances 148,900 148,900 — 450,300 450,300 —Other 76,602 76,602 — 44,345 44,345 —
LIABILITIESDeposits 11,291,147 11,242,354 (48,793) 10,184,177 10,121,862 (62,315)Acceptances 148,900 148,900 — 450,300 450,300 —Obligations related to securities sold short 95,625 95,625 — 14,919 14,919 —Subordinated debenture 134,578 123,868 (10,710) 135,707 123,911 (11,796)Other 497,206 497,206 — 549,015 549,015 —
Fair Carrying Fair Carryingvalue value Difference value value Difference
2004 2003
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DERIVATIVES1
ASSET/LIABILITYMANAGEMENT PURPOSES
INTEREST RATE CONTRACTSInterest rate swap contracts $ 30,361 $ 64,353 $ (33,992) $ 25,713 $ 66,795 $ (41,082)
TOTAL INTEREST RATE CONTRACTS 30,361 64,353 (33,992) 25,713 66,795 (41,082)
FOREIGN EXCHANGE CONTRACTSCurrency swap contracts1 246,908 695,030 (448,122) 185,108 445,940 (260,832)
TOTAL FOREIGN EXCHANGE CONTRACTS 246,908 695,030 (448,122) 185,108 445,940 (260,832)
TOTAL – ASSET/LIABILITYMANAGEMENT PURPOSES $ 277,269 $ 759,383 $ (482,114) $ 210,821 $ 512,735 $ (301,914)
TRADING PURPOSES
INTEREST RATE CONTRACTSInterest rate swap contracts $ 571,922 $ 637,197 $ (65,275) $ 582,269 $ 668,709 $ (86,440)Forward rate agreements 1,059 1,991 (932) 1,004 1,792 (788)Futures contracts 216 151 65 583 — 583Options purchased 3,243 — 3,243 1,483 — 1,483Options written — 3,619 (3,619) — 154 (154)
TOTAL INTEREST RATE CONTRACTS 576,440 642,958 (66,518) 585,339 670,655 (85,316)
FOREIGN EXCHANGE CONTRACTSForward contracts 123,021 158,594 (35,573) 109,174 128,850 (19,676)Currency swap contracts 1,078 884 194 — — —Options purchased 2,947 — 2,947 — — —Options written — 2,904 (2,904) — — —
TOTAL FOREIGN EXCHANGE CONTRACTS 127,046 162,382 (35,336) 109,174 128,850 (19,676)
OTHER CONTRACTSCredit swaps 287 14,777 (14,490) — — —Stock index options - purchased 267,028 — 267,028 174,751 — 174,751Stock index options - written — 267,028 (267,028) — 174,751 (174,751)
TOTAL OTHER CONTRACTS 267,315 281,805 (14,490) 174,751 174,751 —
TOTAL – TRADING PURPOSES $ 970,801 $ 1,087,145 $ (116,344) $ 869,264 $ 974,256 $ (104,992)
TOTAL DERIVATIVES BEFORENETTING AGREEMENTS $ 1,248,070 $ 1,846,528 $ (598,458) $ 1,080,085 $ 1,486,991 $ (406,906)
Less impact of master netting agreements2 853,627 853,627 — 587,930 587,930 —
TOTAL DERIVATIVES $ 394,443 $ 992,901 $ (598,458) $ 492,155 $ 899,061 $ (406,906)1 Including deposits, held under master netting agreements, of $22,273,000 reported in the positive values and of $555,593,000 reported in the negative values (2003 – deposits of $9,465,572
reported in the positive values and of $275,821,000 reported in the negative values). 2 Without the intent of settling the contracts on a net basis or simultaneously.
Positive Negative Net fair Positive Negative Net fairvalue value value value value value
2004 2003
The following table presents the derivatives recorded on the consolidated balance sheet:
Fair value of derivatives – asset/liability management purposes $ 277,269 $ 210,821 $ 759,383 $ 512,735Fair value of derivatives – trading purposes 970,801 869,264 1,087,145 974,256
Total $ 1,248,070 $ 1,080,085 $ 1,846,528 $ 1,486,991
Assets Liabilities2004 2003 2004 2003
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THE FOLLOWING METHODS AND ASSUMPTIONS WERE USED TO ESTIMATE THE FAIR VALUE OF THE ON-BALANCE SHEETFINANCIAL INSTRUMENTS:
• FINANCIAL INSTRUMENTS VALUED AT CARRYING VALUE Due to their short-term maturity, the carrying values of certain consolidated on-balance sheet financial instruments were assumed to approximate their fair values. These financial instruments include “Cash and deposits with Bank of Canada,” “Securities purchased under resale agreements,” “Commitment under the repurchase agreements,” “Obligations related to securities sold short,” “Customers’ liability under acceptances,” “Acceptances” and “Accrued interest.”
• SECURITIES The estimated market value of securities are presented in note 3 to the consolidated financial statements. It is determined based on their quoted market price and may not be realized upon sale. When the quoted price of a security is not available, the market value is estimated using quoted market prices of similar securities.
• LOANS The fair values of loans are estimated using a discounted cash flow calculation that uses market interest currently charged for similar new loans as at December 31 and expected amounts at maturity. For certain floating rate loans that revise frequently, estimated fair values are assumed to be equal to the carrying values.
• DEPOSITS The fair values of deposits at floating rates or with no stated maturity are assumed to be equal to their carrying values. The estimated fair values of fixed rate deposits are determined by discounting the contractual cash flows, using market interest rates currently offered for deposits of similar remaining maturities.
• SUBORDINATED DEBENTURE The fair value of the debenture is based on current rates offered to Caisse centrale for debt of the same remaining maturity.
THE FOLLOWING METHODS AND ASSUMPTIONS WERE USED TO ESTIMATE THE FAIR VALUE OF OFF-BALANCE SHEET CREDITINSTRUMENTS AND DERIVATIVES:
• OFF-BALANCE SHEET CREDIT INSTRUMENTS The commitments to extend credit are primarily floating rate and therefore do not expose Caisse centrale to interest rate risk.
• DERIVATIVES The fair values of exchange-traded derivatives are based on quoted market prices or dealer quotes. Fair values of non-exchange-traded or over-the-counter derivatives are generally calculated as a net present value, net of contractual cash flows, using prevailing market rates for instruments with similar characteristics and maturities.
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13. INTEREST RATE SENSITIVITY
The following table shows Caisse centrale’ position with regard to interest rate sensitivity as at December 31, 2004. This is the position at thatparticular date and could have subsequently changed, taking into account forecasted interest rates and customers’ preferences for products andmaturities.
Assets and liabilities recorded on the consolidated balance sheet and derivatives presented in the following table are reported in time frames based on the earlier of their contractual repricing date or maturity date. Certain on-balance sheet items, such as investments in equity securities and members’ equity, do not create an interest rate exposure to Caisse centrale. These items are reported in the non-interest sensitive column of the table.
ASSETSCash and deposits with Bank of Canada $ — $ 124 $ — $ — $ — $ — $ 0 $ 124Effective interest rate1 2.50%Securities- Investment account — 724 38 238 919 275 — 2,194
Effective interest rate1 2.88% 5.36% 5.42% 4.19% 4.71%- Trading account — — — — 276 — 373 649
Effective interest rate1 3.68%Loans 1,512 7,014 287 392 860 162 (40) 10,187
Effective interest rate1 4.57% 3.96% 5.44% 5.30% 5.12%Other -- (84 ) 19 (217 ) 531 24 1,343 1,616
TOTAL ASSETS $ 1,512 $ 7,778 $ 344 $ 413 $ 2,586 $ 461 $ 1,676 $ 14,770
LIABILITIES AND MEMBERS’ EQUITYDeposits $ 4,350 $ 4,440 $ 216 $ 542 $ 1,616 $ 78 $ — $ 11,242
Effective interest rate1 2.77% 3.66% 1.32% 4.50% 4.91%Obligations related to securities sold short — — — — 90 6 — 96
Effective interest rate1 2.89% 4.37%Subordinated debenture — — — — — 124 — 124
Effective interest rate1 5.50%Other — 990 (72) (264 ) 95 (34 ) 1,906 2,621Members’ equity — — — — — — 687 687
TOTAL LIABILITIES AND MEMBERS’ EQUITY $ 4,350 $ 5,430 $ 144 $ 278 $ 1,801 $ 174 $ 2,593 $ 14,770
Balance sheet gap $ (2,838 ) $ 2,348 $ 200 $ 135 $ 7 85 $ 287 $ (917) $ —Derivatives2 -- 3,356 (4,202) (386 ) 1,417 (185 ) — —
Total interest rate sensitivity gap $ (2,838 ) $ 5,704 $ (4,002) $ (251 ) $ 2,202 $ 102 $ (917) $ —
CUMULATIVE INTEREST RATESENSITIVITY GAP 2004 $ (2,838 ) $ 2,866 $ (1,136) $ (1,387 ) $ 815 $ 917 $ — $ —
2003Balance sheet gap $ (2,737 ) $ 2,470 $ 119 $ 215 $ 769 $ 266 $ (1,102) $ —Derivatives2 — 1,238 (948) (156 ) 44 (178 ) — —
Total interest rate sensitivity gap $ (2,737 ) $ 3,708 $ (829) $ 59 $ 813 $ 88 $ (1,102) $ —
CUMULATIVE INTEREST RATE SENSITIVITY GAP 2003 $ (2,737 ) $ 971 $ 142 $ 201 $ 1,014 $ 1,102 $ — $ —
1 The effective interest rates shown express the historical rates of the fixed rate instruments stated at unamortized cost and the current market rates of the instruments stated at fair value.2 Derivatives represent the net notional amounts of derivative financial instruments such as forward rate agreements and interest rate swaps, which are used to manage interest rate risk.
Over Over Over Non-Floating 0 to 3 3 to 6 6 to 12 1 to 5 Over 5 interest
(in millions of dollars) rate months months months years years sensitive Total
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14. CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk exist when a certain number of borrowers or counterparties involved in similar activities are located in the samegeographic area or present comparable economic characteristics. Their ability to meet contractual obligations can also be affected by changes in economic, political or other conditions. Management considers that the following concentrations are within acceptable limits.
BALANCE SHEETS ASSET
Of total loans as at December 31, 2004 and 2003, 98.3% and 98.6% respectively were made to borrowers from Canada, with the largest concentrationin Quebec (2004: 87.7%; 2003: 86.8%), and 6.8% to borrowers from Ontario (2003: 8.6%).
DERIVATIVES
The following table shows the breakdown of notional amounts of derivatives by geographic area, on the basis of the country of domicile of thecounterparties as at December 31.
Canada $ 70,082,814 76 $ 48,896,934 75International 21,797,736 24 16,170,134 25
TOTAL $ 91,880,550 100 $ 65,067,068 100
2004 % 2003 %
2005 2006 2007 2008 2009 2010 Totaland next
$ 1,460 $ 635 $ 155 $ 143 $ 138 $ 127 $ 2,658
Caisse centrale is also committed to pay an amount of $2,613,000 pursuant to a service contract in 2005.
The following table shows the breakdown of notional amounts of derivatives by industry segment as at December 31:
Banks $ 40,001,997 55 $ 9,284,393 75 $ 1,357,797 28 $ 50,644,187 $ 29,289,545Members
Fédération 22,093,167 30 487,257 4 1,976,521 41 24,556,945 21,878,825Other 299,200 — — — 71,462 1 370,662 391,720
Entities under common control 7,069,150 9 543,246 4 150,430 3 7,762,826 390,406Government 581,400 — 735,918 6 — — 1,317,318 1,214,330Private sector 4,603,347 6 1,301,846 11 1,323,419 27 7,228,612 11,902,242
TOTAL $ 74,648,261 100 $ 12,352,660 100 $ 4,879,629 100 $ 91,880,550 $ 65,067,068
15. CONTRACTUAL COMMITMENTS AND GUARANTEES
A) CONTRACTUAL COMMITMENTS As at December 31, 2004, future minimum commitments under long-term leases and service contracts are as follows:
Interest Foreignrate exchange Other
contracts % contracts % contracts % Total Total2004 2003
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B) PLEDGING OF ASSETS In the normal course of business, Caisse centrale pledges assets as security for liabilities incurred. As at December 31,2004, Caisse centrale deposited assets, principally in the form of securities, in the amount of $260,450,000 (2003: $249,000,000) for the purposes ofparticipating in clearing and payment systems and as security for contract settlements with derivative exchanges or other derivative counterparties.
C) TACTICAL INTEREST RATE TERM DEPOSIT In connection with the various sales campaigns for “Tactical interest rate term deposit” carried outby the caisses Desjardins, Fédération has deposited a portion of the amounts raised during each of the campaigns with Caisse centrale. In order toearn a return on the amounts under management, Caisse centrale invests in fixed income financial instruments (including Government of Canadabonds, derivative financial instrument contracts and other investment vehicles). The face value of these investments of Caisse centrale exceeds theamounts deposited by the Fédération. Caisse centrale deposits an amount equal to the positive returns it earns on these investments in theFédération’s account and recovers from the latter negative returns. However, the cumulative balance of a campaign account cannot become negativeas a result of recoveries by Caisse centrale. As at December 31, 2004, the face value of the Caisse centrale investments is de $837,290,000 (2003:$394,790,000)and the balance of the amounts deposited by the Fédération amounts to $39,969,000 (2003: $21,417,000).
D) GUARANTEES A guarantee is a contract or indemnification agreement that contingently requires Caisse centrale to make payments to theguaranteed party; as for instance, (i) based on changes in an interest rate, a foreign currency exchange rate, a security or commodity price, or a price or rate index, or the occurrence or non-occurrence of a specified event that is related to an asset, a liability or an equity security of theguaranteed party; (ii) based on another entity’s failure to perform under an obligating agreement or (iii) another entity’s failure to repay its debt when it becomes due and payable.
Caisse centrale has issued the following guarantees to third parties:
GUARANTEES AND STANDBY LETTERS OF CREDIT
Guarantees and standby letters of credit (including Publi-privilège securities) represent an irrevocable commitment by Caisse centrale to makepayments in the event that a customer cannot meet its obligations to third parties.
These instruments are generally collateralized in accordance with the same policy as the one that Caisse centrale has with respect to loans. The term of these products is not more than five years.
The cumulative allowance for credit losses covers all credit risks, including those related to guarantees and standby letters of credit.
OTHER INDEMNIFICATION AGREEMENTS
In the normal course of its operations, Caisse centrale enters into a number of agreements containing indemnification provisions such as thosenormally related to purchase agreements, service delivery agreements and lease agreements. Under these agreements, Caisse centrale may beliable for indemnifying the counterparty pursuant to amendments to statutes and regulations (including tax rules) or as a result of litigation. Theterm of the agreements varies from one contract to the next. Caisse centrale is not in a position to make a reasonable estimate of the maximumamount that it could be required to pay counterparties. Historically, payments made under these agreements have been negligible. No amounts have been recognized in the consolidated balance sheet with respect to these agreements.
DERIVATIVE PRODUCTS
Caisse centrale trades in credit swaps under which the counterparty is compensated for losses it incurs on a designated property (usually a loan or a bond) should a default or a predetermined triggering event occur. The maximum amount of the guarantee is equal to the notional amount of the swaps and totals $95,000,000 as at December 31, 2004.
OTHER GUARANTEES
Caisse centrale irrevocably guarantees, jointly and severally, the obligations of Desjardins Credit Union Inc. (DCU) until April 1, 2006 pursuant to anagreement between the Government of Ontario and DCU regarding the acquisition by the latter of certain assets of the Province of Ontario SavingsOffice. The agreement contains several conditions, including minimum standards regarding personnel and branch operations. Caisse centrale cannotreasonably estimate the maximum amount it may have to pay under this agreement. No amounts have been recognized in the consolidated balancesheet with respect to this agreement.
MAXIMUM POTENTIAL AMOUNT OF FUTURE PAYMENTS AS GUARANTEES
(in thousands of dollars)
Guarantees and standby letters of credit $ 219,877 $ 186,337 Credit swaps 95,000 —
TOTAL $ 314,877 $ 186,337
2004 2003
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ASSETSDay, call and short-term loans to investment dealers and brokers $ — $ — $ 446,000 $ — $ — $ 218,000Assets related to derivatives 62,154 20,821 23 41,997 54,292 477Customers’ liability under acceptances 164,800 — — 164,800 — —Other assets 26,904 2,779 3,438 10,584 2,863 4,274LIABILITIESLiabilities related to derivatives 694,872 73,106 8,065 607,311 106,498 1,402Acceptances — — 450,300 — — 450,300Other liabilities 126,988 9,470 1,613 70,423 6,649 1,348INCOMEInterest income 111,796 771 38,777 67,175 17,179 24,621Interest expense 41,435 7,014 11,693 42,716 5,561 14,702Other income (392,426) (36,627) 813 (136,206) 45,720 1,050Non-interest expenses 11,415 18 2,532 9,657 12 2,152
Entities under Entities underMembers common Members common
Fédération Other control Fédération Other control2004 2003
16. OTHER TRANSACTIONS WITH THE DESJARDINS GROUP
These transactions with members and entities under common control represent those not disclosed elsewhere in the consolidated financialstatements. Pursuant to its Constituent Legislation, the Fédération and its member caisses are members of Caisse centrale. Consequently,transactions with the Fédération for the benefit of its member caisses are concluded under more favourable conditions for the member caisses than those granted to unrelated third parties. These transactions are measured at the exchange amount, which is the amount of considerationestablished and agreed to by the related parties. Transactions concluded for the Fédération’s own financing needs and with the entities undercommon control of Caisse centrale are carried out under similar conditions to those negotiated with unrelated third parties. These transactions are in the normal course of business of Caisse centrale and are measured at the exchange amount, which approximates fair market value and is the amount of consideration established and agreed to by the related parties.
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17. EMPLOYEE FUTURE BENEFITS
Caisse centrale enrols all its employees 25 years of age or older in the multi-employer pension plan of the Desjardins Group. An actuarial valuation of the plan is performed at least once every three years. The most recent actuarial valuation, dated January 1, 2004, showed a statedsurplus of $44.5 million for funding purposes and a deficiency of $33.3 million for solvency purposes. To eliminate this deficiency, the employers of the Desjardins Group, as a whole, must make special annual payments of $7.6 million, of which Caisse centrale’s share is $99,000, from January 1, 2004 to December 31, 2008 or until an actuarial valuation shows that the Plan does not have a solvency deficiency.
From July 1, 2001, to December 27, 2003, a partial contribution holiday was granted to participants and employers, based on the accumulatedsurplus as at January 1, 2001. Full contribution has been reinstated since December 28, 2003.
The amount expensed as employer contributions with respect to the pension plan was $1,754,000 in 2004 (2003: $889,000).
Caisse centrale also provides life insurance coverage and health and dental care benefits to its eligible retired employees through the DesjardinsGroup multi-employer group insurance plan. This group plan is not funded. Employer contributions with respect to group insurance offered to retiredemployees charged to consolidated income totalled $86,000 in 2004 (2003: $27,000).
18. SEGMENTED INFORMATION
Caisse centrale conducts its activities in three segments. Each segment offers different services, uses separate strategies and is managed by asenior vice-president.
The accounting policies used by the segments are the same as those described in the significant accounting policies. Caisse centrale measures theperformance of these segments based on the gross income generated by each segment. Non-interest expenses are managed on a consolidated basisand are not allocated by segment.
The following table summarizes the consolidated financial results of Caisse centrale by business segment:
Net interest income $ 50,807 $ 39,347 $ 48,051 $ 50,085 $ 6,093 $ 5,222 $ 104,951 $ 94,654
Other income 16,803 20,044 31,225 11,047 5,737 4,611 53,765 35,702
Gross income $ 67,610 $ 59,391 $ 79,276 $ 61,132 $ 11,830 $ 9,833 $ 158,716 $ 130,356
Average assets1 $ 4,849,826 $ 5,121,434 $ 7,756,221 $ 5,461,687 $ 278,501 $ 108,764 $ 12,884,548 $ 10,691,8851 Assets are disclosed on an average basis, as this basis is the most relevant to a financial institution and is the measure examined by Caisse centrale' management.
Financing segment This segment offers a range of financial products and services and grants financing in the form of lines of credit and term loans to members and entities under common control, public and parapublic entities, and private sector clients.
Capital Market segment This segment manages Caisse centrale’ assets and liabilities, securities and derivatives portfolios, and the cash of the entire cooperative network.
Other “Other” combines the international sector and the unallocated income from centralized service units. This segment also includes theoperations of Desjardins Bank, N.A. and Desjardins Commercial Lending U.S.A. Corp., which are subsidiaries of Caisse centrale. Total gross income and total average assets of the subsidiaries totalled $6.2 million and $125.7 million in 2004 (2003 - $5.4 million and $85.1 million).
CapitalFinancing market Other Total
2004 2003 2004 2003 2004 2003 2004 2003
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CONSTITUTION, REGULATION AND CONTROL
CONSTITUTION
Caisse centrale du Québec was created on June 22, 1979 by an Act to amend the Act respecting La Confédération des caisses populaires etd'économie Desjardins du Québec (1979 S.Q., c. 46), replaced on June 22, 1989 by an Act respecting the Mouvement des caisses Desjardins (1989S.Q., c. 113), which was replaced on July 1, 2001 by the Act respecting the Mouvement Desjardins (2000 S.Q., c. 77). Caisse centrale du Québec mayalso be identified under the name “Caisse centrale.” Pursuant to its Constituent Legislation, Caisse centrale continues its existence as a financialservices cooperative and is therefore also governed by the Act respecting financial services cooperatives (Québec) as if it were a federation within the meaning of that Act.
Caisse centrale, through its holding company Desjardins FSB Holdings, Inc., incorporated under the laws of the State of Delaware, USA, holds theaggregate of the capital stock of Desjardins Federal Savings Bank, a savings and loan association incorporated under US federal law which has itsplace of business in Hallandale Beach, Florida, USA.
The qualifying shares with an issue price of $5.00 each are reimbursed only in the event of the winding-up, insolvency or dissolution of Caissecentrale and are redeemable only in the event of the withdrawal, exclusion, winding-up, insolvency or dissolution of the member. The capital shareswith a par value of $1,000 each are reimbursed only in the event of the winding-up, insolvency or dissolution of Caisse centrale and are redeemablewith the authorization of the Autorité des marchés financiers.
The shares of the capital stock of Caisse centrale are held primarily by the Fédération des caisses Desjardins du Québec, which,with its member caisses, is a full member of Caisse centrale under its Constituent Legislation, and by the three federations of caisses populaires in Ontario, Manitoba and New Brunswick, which are auxiliary members of Caisse centrale.
The general meeting of Caisse centrale comprises the members of the general meeting of the Fédération des caisses Desjardins du Québec, namely the delegates of the caisses and a representative from the Fédération des caisses Desjardins du Québec. Under the provisions of the Constituent Legislation, the Board of Directors of Caisse centrale must be composed of at least three quarters of the Board members of the Fédération des caisses Desjardins du Québec (other than its president), who shall account for over one half of the Board members of Caisse centrale. As at the date of this annual report, the members of the Board of Directors of the Fédération des caisses Desjardins du Québec constitute all of the members of the Board of Directors of Caisse centrale. For the duration of his mandate, the president of the Fédération des caisses Desjardins du Québec is the Chairman of the Board and the Chief Executive Officer of Caisse centrale.
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REGULATION AND CONTROL
The Autorité des marchés financiers is responsible for the annual inspection and supervision of Caisse centrale. The Act respecting financial servicescooperatives governs the control exercised by the Autorité des marchés financiers with regard to the management, transactions and solvency ofCaisse centrale and to conflicts of interest and self-dealings.
The Autorité des marchés financiers may make any examination and investigation he considers necessary or expedient into the internal affairs andactivities of Caisse centrale, and order any inquiry into any matter within his jurisdiction.
The Autorité des marchés financiers may request from Caisse centrale statements, statistics, reports and any other information he deemsappropriate to enable him to determine whether Caisse centrale complies with the Constituent Legislation and the applicable provisions of the Actrespecting financial services cooperatives. The Autorité des marchés financiers may, with respect to the financial statements and when deemedexpedient, prescribe accounting rules that contain specific requirements or different requirements than those under Canadian generally acceptedaccounting principles.
Since the Fédération des caisses Desjardins du Québec and its member caisses can elect the majority of its directors, Caisse centrale is deemed tobe controlled by the Fédération des caisses Desjardins du Québec within the meaning of the Act respecting financial services cooperatives. This Acttherefore confers the normative powers applicable to Caisse centrale, notably with respect to capitalization and investments, on the Fédération descaisses Desjardins du Québec.
Caisse centrale is required to maintain, for its operations, an adequate capital base to ensure sound and prudent management in accordance with the standards adopted by the Fédération des caisses Desjardins du Québec and approved by the Autorité des marchés financiers.
Caisse centrale appoints annually, as auditor, a firm of chartered accountants to conduct the audit of its accounting records and to report to the Autorité des marchés financiers as prescribed by the Constituent Legislation, the Act respecting financial services cooperatives and government regulations.
Caisse centrale establishes, in accordance with its Constituent Legislation, an Audit Commission composed of no less than three members from its Board of Directors, and a Board of Ethics consisting of no less than three members elected at the general meeting among its members. The Audit Commission reviews the financial statements of Caisse centrale and ensures that its operations are in compliance with the provisions of the applicable legislation and the orders and written instructions of the Autorité des marchés financiers. The Board of Ethics is responsible for adopting and implementing rules to protect Caisse centrale and its members with respect to self-dealings, disclosure requirements, privacy of information and conflicts of interest.
Caisse centrale is registered with the Régie de l’assurance-dépôts du Québec.
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CORPORATE GOVERNANCE
The corporate governance practices of Caisse centrale contribute to enhanced corporate oversight and management, and ensure the effectivenessand integrity of its operations. Caisse centrale deems it appropriate, for reasons of transparency toward its members, clients and other stakeholders,to provide an overview of its practices in its Annual Report.
HIGHLIGHTS
The main improvements made or major initiatives taken in 2004 regarding the Corporate Governance Program consisted of:• the adoption of a Code of Ethics and Professional Conduct;• the creation of a Risk Management Commission by the Board of Directors;• the implementation of projects for compliance with the requirements under enacted Bill 198 and its regulations;• the adoption of the Charter for the Audit Commission, including industry best practices;• the adoption of the Compliance Policy for Caisse centrale; and• the adoption of the Policy on the Appointment of Officers and Employees to External Positions.
CORPORATE GOVERNANCE POLICY OF CAISSE CENTRALE
The corporate governance policy of Caisse centrale, which is based on the policy adopted by the Fédération des caisses Desjardins du Québec,confirms Caisse centrale’s concurrence with the guidelines and other good corporate governance practices currently applied in the industry1.It describes what Caisse centrale must do in order to comply with the spirit of the guidelines. This nuance is important since the guidelines must be adapted to the specific circumstances of Desjardins Group.
APPLICATION OF CORPORATE GOVERNANCE GUIDELINES
MANDATE OF THE BOARD OF DIRECTORS
1. MANAGEMENT OF CAISSE CENTRALEThe Board of Directors assumes full responsibility for the administration of Caisse centrale. The Board of Directors exercises all the powers of Caisse centrale, except for those which it may delegate from time to time to its commissions and committees. The Board discharges the followingresponsibilities in particular:
(a) Culture of Integrity In light of Caisse centrale’s mission and the nature of its operations, the Board of Directors is responsible for ensuringcompliance with Desjardins’ five permanent values, namely “money at the service of human development, democratic action, personal commitment,integrity and rigour, and solidarity with the community.”
In this context, it is also responsible for overseeing compliance with the Desjardins Group Code of Ethics and Professional Conduct by members of management, employees and elected officers. A support structure for the activities of Caisse centrale’s Board of Ethics provides for awareness,training and advisory services relating to the Code, allowing sanctions to be imposed for any breach. It should be noted that on March 31, 2005, theBoard of Directors will adopt a policy to set up a confidential reporting procedure for acts contrary to regulatory frameworks and a policy to monitorcontracts other than audit contracts that may be awarded to external audit firms.
The Desjardins Group Code of Ethics and Professional Conduct applicable to Caisse centrale is available to the public on the www.desjardins.comsite. It encourages each and every person working at Caisse centrale to demonstrate ethical values of honesty, openness, social responsibility and altruism.
1 The Canadian Securities Administrators (CSA) now have the responsibility for issuing corporate governance guidelines.
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(b) Strategic Planning Process The Board of Directors has implemented an ongoing strategic planning process for Caisse centrale in compliance withthe vision and the strategic orientations of Desjardins Group. This process provides for the following steps:
• annual update of Caisse centrale’s strategic plan and business plan and ensuring their alignment with the Fédération des caisses Desjardins du Québec through the Desjardins Group Strategic Management Structure Committee;
• quarterly reporting to the Board of Directors of Caisse centrale on the progress of work to attain strategic objectives;
• regular follow-up of the plans by the Management Committee of Caisse centrale to enable the Board of Directors, among others, to correct any discrepancies observed.
Responsibility for implementing the various components of the ongoing strategic planning process lies with management, and the Board’s role in thisrespect is one of follow-up, oversight and control.
(c) Identification and Management of Major Risks The Board of Directors is responsible for identifying the main risks to the business and ensuringthat the required controls are in place to provide integrated risk management. In this respect, Caisse centrale can count upon the support of a SeniorVice-President, Integrated Risk Management, an Internal Credit Committee, an Assets/Liabilities Committee and a Risk Management Committee.The Board also set up a Risk Management Commission and ensured alignment with its Audit Commission, which remains responsible for risksassociated with the financial reporting process.
Caisse centrale contributes to the ongoing work of the Fédération to implement procedures for securing compliance with the integrated riskmanagement methods advocated by the New Basel Capital Accord.
(d) Succession Planning The Board of Directors oversees developments in the succession planning program and is assisted in this duty by the SeniorVice-President, Human Resources of Desjardins Group. Caisse centrale has launched initiatives to implement integrated human resources planningand a succession plan.
(e) Communication Policy The Board of Directors and the management of Caisse centrale favour open, transparent communications with theFédération des caisses Desjardins du Québec, caisses, subsidiaries of Desjardins Group, regulatory bodies and rating agencies. Caisse centraleensures the timely disclosure of important information. Particular attention is paid to quarterly and annual financial reporting. The content of pressreleases is submitted for approval to the Board of Directors upon recommendation of the Audit Commission. Requests for information and commentsreceived are quickly forwarded to management for review and response.
Through the Fédération des caisses Desjardins du Québec, Caisse centrale also has access to other channels such as the Ombudsman, thecomplaint settlement process in the caisse (Your Satisfaction Is Our Priority), the annual general meetings, the disclosure of quarterly financialresults of Caisse centrale and Desjardins Group, publications, the toll-free telephone line and the Web site (www.desjardins.com).
Caisse centrale also has contacts at rating agencies in conjunction with the Chief Financial Officer of Desjardins Group; it also communicates withthe various levels of government, assisted by the Vice-President, Government Relations of the Fédération.
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(f) Management Information System and Integrity of Control Systems The Board of Directors ensures the implementation of effective controlsystems (accounting, administrative and management) to safeguard the integrity of its operations and requires accountability from its managers. The Board of Directors is supported in this responsibility by the Internal Auditor of Desjardins Group.
The Board of Directors ensures that the Management Committee of Caisse centrale provides the Board and its commissions and committees withinformation that is reliable, timely, and adapted to the particular needs of the Board members so that they may take advantage of opportunities when they arise and assess the risks involved.
Board members receive a complete report on the financial and operating results of Caisse centrale on a quarterly basis. The Board of Directorsensures that appropriate policies and procedures are in place to facilitate the production and presentation of this information.
To effectively carry out its orientation and control duties, the Board of Directors of Caisse centrale meets regularly, according to a predeterminedschedule. In 2004, 10 Board meetings were held. Board members received the agenda, along with any appropriate documentation, in advance toensure productive discussions and facilitate the decision-making process.
In March 2004, the adoption of Multilateral Instrument 52-109 by the Canadian Securities Administrators confirmed their resolve to restore investorconfidence in capital markets. This Instrument requires chief executive officers and chief financial officers to certify the quality of financial reportingquarterly and annually. In fiscal 2004, Caisse centrale set up a Disclosure Committee to review all existing quarterly and annual disclosure activitiesso that the requested certificates could be signed.
The mandate of this committee is to:
• monitor the appropriate cutoff and reliability of annual and interim financial information;
• ensure that the financial information reported does not omit to state a material fact or does not contain any untrue statement of a material fact;
• verify that the financial information in annual and interim filings presents fairly the financial condition of Caisse centrale and the results of its operations and cash flows.
Caisse centrale is also actively pursuing the next phases that should lead to the certification of disclosure controls and procedures, as well as ofinternal control over financial reporting. In this regard, Caisse centrale is very involved in the task force led by the Fédération des caisses Desjardinsdu Québec, whose mandate is to ensure that Desjardins Group will be in a position to comply with the standards when they come into force.
2. COMPOSITION OF THE BOARD OF DIRECTORSThe Board of Directors of Caisse centrale is comprised of a majority of unrelated parties. In actual fact, the Directors of Caisse centrale are the same as those of the Fédération des caisses Desjardins du Québec, within the context of a single management structure.
The Vice-Presidents of the Abitibi-Témiscamingue-Nord et Ouest du Québec and of the Bas-Saint-Laurent-Gaspésie-Îles-de-la-Madeleine regionsalso attend meetings of the Board of Directors in their capacity as Managing Directors.
3. APPLYING THE DEFINITION OF UNRELATED PARTYThere are five related Directors on the Board of Directors; namely the Chairman of the Board and Chief Executive Officer of Desjardins Group and the four Caisse General Managers serving on the Board. The first is related because he is a member of Caisse centrale’s management and the fourothers, because they are employed by enterprises within the Group, namely by individual caisses. The Directors have no business or personalrelationships with members of the Management Committee of Caisse centrale, or interests which, in the opinion of the Board, could significantlyinterfere with their ability to act in the best interests of the Fédération des caisses Desjardins du Québec and Desjardins Group, or any interests,which, again in the opinion of the Board, could reasonably be perceived as such.
For guidance in these matters, the Board refers to the Code of Ethics, which governs the actions of its Directors.
See the list of Directors, in which they are identified as related or unrelated.
4. NOMINATION PROCEDUREGiven the cooperative structure of Caisse centrale, its Board of Directors is comprised of persons elected by the delegates of the member caisses of Caisse centrale who hold meetings in each region to directly elect 17 of the 22 members of the Board of Directors. Four other positions are filledby General Managers of the caisses at an election held at a general meeting of the representatives of Caisse centrale. The remaining position isreserved by law for the President and Chief Executive Officer of Desjardins Group. The Corporate Governance Commission does not have a role in the selection of Caisse centrale’s Directors.
The 17 unrelated Directors become Presidents of the Councils of Representatives2 . It is therefore up to the delegates of the caisses to choose, fromamong the interested candidates, the individuals best suited for the position of Director not only of Caisse centrale but also of the Fédération. At thetime of nominations, candidates are reminded of the responsibilities of a President of a Council of Representatives.
Since they act as caisse officers, as members of their Council of Representatives and finally as members of the Board of Directors of Caisse centraleand the Fédération, Caisse centrale has the benefit of Directors who are thoroughly familiar with the activities of Desjardins Group while beingindependent of management. Such in-depth knowledge of the activities of the organization is a significant advantage that results from thecooperative structure.
The electoral process for the Caisse Directors itself therefore ensures the independence of the members of the Board of Directors vis-à-vis theChairman of the Board and Chief Executive Officer of Caisse centrale, who has no say in their nomination.
Furthermore, the rules concerning the composition of the Board promote a certain stability and continuity for the corporate governance of Caissecentrale and Desjardins Group because the term of office of its members is three years and is renewable, and a third of the members leave officeannually. Consequently, Directors have the time to gain a deeper understanding of files and to make a valid contribution.
The composition of the Board of Directors is balanced not only by the presence of representatives from all the regions of Quebec, from group caissesand now from credit unions in Ontario, but also by the sum of the skills and experience that it contains (accountants, lawyers, notaries, managers,professional mediator, university professor of management, contractor, etc.).
5. ASSESSING THE EFFECTIVENESS OF THE VARIOUS BODIESThe Board of Directors, its commissions and its committees annually assess their performance based on objectives set by the Board at the beginningof the year. Opportunities for improvement and aspects requiring further examination, as determined by the assessment exercise, are included in an action plan recommended to the Board of Directors by the Corporate Governance Commission, which is in charge of monitoring this plan. TheAssessment Program for the various bodies making up Caisse centrale also provides for an individual self-assessment procedure followed by aseparate meeting with the Chairman of the Board, who is responsible for the assessment process, while the Corporate Governance Commissionensures its supervision.
2 The Councils of Representatives are democratic structures of the Fédération with the following decision-making responsibilities in each region: to adopt a regional business plan,
to grant sponsorships and donations, and to designate Desjardins representatives to external regional bodies.
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6. ORIENTATION AND PROFESSIONAL DEVELOPMENT PROGRAM FOR NEW DIRECTORSCaisse centrale ensures the Orientation and Professional Development Program of its Directors and develops training sessions based on theirspecific needs. All new Directors are provided with an orientation session, including, in particular, a meeting with certain members of managementand a reference manual containing all the information they need to carry out their duties. Every Director receives a document reiterating theexpectations and duties of his or her office. Meetings with specialists from Caisse centrale are also organized, when necessary, to impart to them amore complete picture of certain strategic projects.
As a follow-up to the assessment of the Board’s effectiveness in 2002, the members of Caisse centrale’s Credit and Investment Commission attendeda day of training in early 2004 with a view to enhancing their knowledge of investment operations.
Since 2004, the training program for members of the Board of Directors has been included in the programming of the activities of Institut coopératifDesjardins, the new cooperative training centre designed for elected Officers and Managers of Desjardins Group. The mission of this institute will bethree-pronged: the Desjardins Culture, Corporate Governance and Management at Desjardins, and Innovation Desjardins.
7. SIZE OF THE BOARD OF DIRECTORSThe Board of Directors is larger than recommended and generally found in the industry. As at December 31, 2004, the Board of Directors was madeup of 22 members.
The total number of Directors serving on the Board of Directors of Caisse centrale is due primarily to the broad ownership of Desjardins Group andthe democratic structure of this group of cooperative financial institutions. The composition of the Board of Directors ensures representation of allQuebec regions, as well as of Ontario, according to the regional mapping established by Desjardins Group. About 594 member caisses of theFédération des caisses Desjardins du Québec are the ultimate owners of Caisse centrale.
Efficient meeting management and sound discipline on the part of the Directors makes up for the rather large number of Directors. In addition,informal meetings between the Chairman of the Board and Chief Executive Officer and the Directors on the day before Board meetings increase theefficiency of the actual meetings.
8. COMPENSATION POLICYThe Board of Directors adopted a policy regarding the payment of compensation to its Directors, in compliance with Desjardins Group policy, whichtakes into account the responsibilities, risks and requirements inherent in their duties.
9. COMPOSITION OF COMMISSIONS AND COMMITTEESThe Board of Directors has created various commissions and committees, which are necessary for it to carry out its oversight and control duties andto streamline its procedures. All or most members of these commissions and committees are unrelated parties. Only the Chairman of the Board andChief Executive Officer of Caisse centrale is an ex-officio member of these commissions and committees, which meet regularly and whose Chairsreport to the Board of Directors.
The mandate of these commissions and committees are reviewed annually so that they properly support the Board of Directors in its duties oforientation, planning and oversight.
10. RESPONSIBILITY FOR CORPORATE GOVERNANCEThe Board of Directors has entrusted the Corporate Governance Commission with the responsibility of ensuring the application and development ofthe Corporate Governance Program. This Commission must report its observations and make recommendations to the Board of Directors.
11. LIMITS TO THE AUTHORITY OF THE MANAGEMENT COMMITTEEThe responsibilities of the Chairman of the Board and Chief Executive Officer of Caisse centrale are set out in the Corporate Governance by-law ofCaisse centrale. The responsibilities of the President and Chief Operating Officer are also defined in this by-law. The Board of Directors hasestablished a very clear division of responsibilities between the Board and the Management Committee. The annual objectives of the Chairman of theBoard and Chief Executive Officer are recommended to the Board of Directors by the Committee on the Overall Compensation of the President ofDesjardins Group and Chief Executive Officer. The objectives of the President and Chief Operating Officer are set by the Board of Directors within theparameters of the profit-sharing plan of Caisse centrale.
The degree to which these objectives are achieved is measured through an annual review process. With respect to the performance of the Chairmanof the Board and Chief Executive Officer, under the supervision of the above-mentioned committee, each Director participates anonymously in thereview process, without members of management being present, using a model prepared in advance by this committee.
12. THE BOARD’S INDEPENDENCE FROM THE MANAGEMENT COMMITTEEThe Board of Directors has created various structures and procedures to safeguard its independence from Caisse centrale’s management. These include:
(a) having only one member of management on the Board of Directors (i.e., the Chairman of the Board and Chief Executive Officer of Caisse centrale);
(b) the creation, at the General Meeting, of the position of Vice-Chair of the Board of Directors to assume the direction of Board meetings when theitems of business dealt with require the withdrawal of the Chairman of the Board and Chief Executive Officer. The Corporate Governance by-lawprovides that the Vice-Chair of the Board shall replace the Chairman of the Board if he cannot act;
(c) having the Directors meet informally the day before each Board meeting;
(d) having an unrelated Director chair the Audit Commission and the Credit and Investment Commission; and
(e) entrusting to the Corporate Governance Commission (of which only one member is a related party) the responsibility for:
(1) managing relations between the Board and the Management Committee of Caisse centrale; and
(2) ensuring that the Board fulfills its duties. In addition, the Chairman of the Board and Chief Executive Officer of Caisse centrale is in charge of setting or supervising the agenda for meetings of the Board and its commissions and committees.
Caisse centrale has a Board of Ethics that is independent of the Board of Directors, and whose members are elected at the General Meeting and areall independent of senior management.
Desjardins does not intend to separate the functions of Chairman of the Board and President and Chief Executive Officer of Caisse centrale in keepingwith the corporate governance orientations of Desjardins Group.
13. AUDIT COMMISSION – MANDATE AND COMPOSITIONThe Audit Commission is entirely made up of unrelated parties; two among them, including the Chair of the Commission, have accounting expertise.The roles and responsibilities of the Commission have been defined in such a way as to give its members a very clear understanding of their duties.The Audit Commission has all the powers and information it needs to fulfill its mandate. The Commission reviews all financial information andoversees the implementation of an effective control process and accountability. The Commission has direct communication channels with the internaland external auditors to discuss and review certain issues, if any. The Commission may, as needed, discuss these issues with them without theManagers responsible being present.
14. HIRING OUTSIDE ADVISORSA Director may engage the services of an outside Advisor at the expense of Caisse centrale. However, to ensure that such services are relevant, arequest must be submitted to the Corporate Governance Commission in this respect.
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COMMISSIONS OF THE BOARD OF DIRECTORS AND COMMITTEES OF CAISSE CENTRALE
Note: * means that the Director is unrelated.
EXECUTIVE COMMITTEE (7 DIRECTORS)
The Executive Committee of Caisse centrale met once in 2004. It supports the Board of Directors in its duties of orientation, planning and oversight bymaking recommendations on:
• the strategic and financial plan of Caisse centrale. In this respect, it examines the budgetary focus and priorities, analyzes the budget and conducts a quarterly follow-up;
• the proposed major transactions, after review thereof.
It follows up on the main strategic initiatives and high-benefit projects of Caisse centrale. It is also responsible for the following:
• approving any financial undertaking in excess of the limits established for management, in compliance with the policy;
• tracking the realization of the benefits of the projects authorized by the Board of Directors;
• ensuring follow-up of the out-of-court settlements of Caisse centrale;
• supervising the enforcement of the strategic communication policy.
MEMBERS:Alban D’Amours, Chairman of the Board of DirectorsMadeleine Lapierre, Vice-Chair of the Board of Directors*Pierre Tardif, Secretary of the Board of Directors*André Gagné*Olivier Lavoie*Richard SarrazinSylvie St-Pierre-Babin*
AUDIT COMMISSION (5 DIRECTORS)
The Audit Commission met four times in 2004. It supports the Board of Directors in its duties of orientation, planning and oversight by carrying outthe following mandate:
• it guarantees the protection of the independence of the Internal Audit Department and ensures that the latter fulfills its mandate;
• it examines the annual program of the activities of the Internal Audit Department of Desjardins Group and, if need be, makes a recommendation to the Board of Directors. It follows the conduct of the Audit Program and may, where necessary, request a special audit;
• it receives, and follows up upon, the reports on the activities of the Internal Audit Department;
• it examines the reports drawn up in order to monitor the financial results and the risks to which Caisse centrale is exposed and, when needed, makes recommendations to the Board of Directors;
• it reviews the press releases with respect to the financial results and makes recommendations to the Board of Directors;
• it studies the reports of the External Auditors and the letter to management and receives comments from management; it oversees the quality of their work;
• it makes a recommendation to the Board of Directors with respect to the selection of the External Auditor, and the External Auditor’s mandate and compensation. It ensures the independence of the External Auditors and reviews the special engagements entrusted to the External Auditors and the fees in connection therewith. Where a proposal is made to change the External Auditors, it reviews any matter connected therewith, including all disclosure requirements which must be observed in the notice of change of auditors, the information circular and the steps to be taken in order to ensure an orderly transition;
• it examines the reports to be filed with the governmental authorities, including the Autorité des marchés financiers;
• it monitors the efficiency of the internal control procedures, the integrated risk management systems, the accounting controls, procedures and methods;
• it ensures regulatory compliance of the transactions performed by Caisse centrale.
Upon request, it carries out any other duties entrusted by the Board of Directors and reports thereon.
The External Auditors attend the meetings of the Commission. The Senior Vice-President, Finance, Strategic Alliances and International, submits thequarterly financial results of Caisse centrale. The Commission meets annually with the External Auditors without the members of Management beingpresent.
MEMBERS:Andrée Lafortune, FCA, Chair*Jean-Guy Bureau*Raymond Gagné*Pierre Leblanc, FCA*Jacqueline Mondy*
CORPORATE GOVERNANCE COMMISSION (5 DIRECTORS)
The Corporate Governance Commission of Caisse centrale held five meetings in 2004. It supports the Board of Directors in its duties of orientation,planning and oversight by carrying out the following mandate:
• enforcing, supervising and updating the Corporate Governance Program and, in this respect, receiving the report of the Internal Auditor with respect to the implementation of the Corporate Governance Policy;
• ensuring that a tracking of the development of industry trends and practices is in place;
• reviewing the wording of the Corporate Governance disclosure in the annual report of Desjardins Group;
• supervising the Assessment Program with respect to the efficiency of the Board of Directors and proposing goals to the Board of Directors for the upcoming year;
• reviewing annually the role of the Board of Directors and its commissions and committees in light of the annual assessment of the performance of these bodies;
• assessing the overall quality and relevance of the information submitted to the Board of Directors, the commissions and the committees;
• recommending the orientation and professional development program for Board members;
• ensuring the availability of the Officers’ Reference Manual;
• following up on the compensation policy in respect of Officers and recommending amendments to the Board of Directors, where necessary;
• recommending to the Board of Directors the appointment of members of the various boards of directors of the subsidiaries, other than the Chairs of such boards;
• reviewing the relationship between Management and the Board of Directors;
• reporting and, if necessary, making recommendations to the Board of Directors.
MEMBERS:Alban D’Amours, Chairman of the Board of DirectorsAndré Gagné*André Lachapelle*Pierre Leblanc*Daniel Mercier*
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HUMAN RESOURCES COMMISSION (5 DIRECTORS)
The Human Resources Commission of Caisse centrale held five meetings in 2004. It supports the Board of Directors in its duties of orientation,planning and oversight, in particular by making recommendations on:
• the three-year human resources plan of Caisse centrale, including plans for the development of human resources and succession management;
• the implementation of the compensation policy of Caisse centrale, in keeping with the compensation policy of Desjardins Group adopted by the Fédération des caisses Desjardins du Québec;
• the overall compensation of the Executives of Caisse centrale in respect of whom the Commission conducts a follow-up, in keeping with the policies of Desjardins Group adopted by the Fédération des caisses Desjardins du Québec.
At the request of the Board of Directors, the Commission studies any matter regarding employer-employee relations and makes recommendations to the Board. It reviews, in particular, the results of the survey on satisfaction and motivation of the staff of Caisse centrale.
The Commission ensures that practices in the area of employer-employee relations are in line with management values, policies and guidelines, and reflect the internal equity and values of Desjardins Group.
The Commission also ensures tracking of the major trends in the performance of group insurance plans, of relations with unions, of theimplementation of salary recommendations, of the mentoring framework and of the annuity plan.
It ensures compliance with Desjardins Group Human Resources policies.
It reports to the Board of Directors.
MEMBERS:Alban D’Amours, Chairman of the Board of DirectorsMadeleine Lapierre, Vice-Chair of the Board of Directors*Pierre Tardif, Secretary of the Board of Directors*Raymond Gagné*Denis Paré*
CREDIT AND INVESTMENT COMMISSION (4 MEMBERS)
The Credit and Investment Commission met 15 times in 2004. It is responsible for determining the loans to be granted by Caisse centrale as well asits investments and borrowings and other financial commitments and, to this end, operates within the approval limits set out in the general policiesadopted from time to time by the Board of Directors.
The President and Chief Operating Officer of Caisse centrale as well as its Senior Executive Vice-President and its Senior Vice-President, IntegratedRisk Management, sit on the Commission as non-voting members.
MEMBERS:Madeleine Lapierre, Chair*Louise CharbonneauRichard SarrazinDaniel Lafontaine
RISK MANAGEMENT COMMISSION (4 MEMBERS)
The Risk Management Commission was established by the Board of Directors in November 2004 and the opening meeting for its members was heldin January 2005.
The role of this commission is to support the Board of Directors in identifying and monitoring the major risk exposures of Caisse centrale.
MEMBERS:André Lachapelle, Chair*Thomas Blais*Raymond Gagné*Pierre Tardif*
OBSERVER:Andrée Lafortune*, Chair of the Audit Commission, to ensure alignment of these two commissions.
BOARD OF ETHICS (3 MEMBERS)
The Board of Ethics met six times in 2004.
It is responsible for:
• adopting rules of professional conduct applicable to the officers and employees of Caisse centrale, submitting them to the Board of Directors for approval and enforcing them;
• supporting Caisse centrale in applying the rules of professional conduct;
• notifying the Board of Directors when the rules of professional conduct have been infringed;
• dealing with complaints about Caisse centrale from its members;
• reporting annually on its activities.
MEMBERS:Denis Rousseau, Chairman*Claude Leblond*Jacques Sansoucy*
MANAGEMENT COMMITTEE
The Management Committee of Caisse centrale is not a committee of the Board of Directors. It is comprised of the Chairman of the Board and ChiefExecutive Officer of Caisse centrale, the President and Chief Operating Officer of Caisse centrale, the Senior Executive Vice-President, the SeniorVice-President, Capital Markets, the Senior Vice-President, Finance, Strategic Alliances and International, the Senior Vice-President, Integrated RiskManagement, the Senior Vice-President, Financing and Banking Services, the Vice-President, Institutional Financing and Banking Services, theVice-President and General Manager, Desjardins International Service Centre, the Vice-President, Legal and Corporate Affairs and AssistantSecretary of the Board of Directors, and the Vice-President, Finance, Control and Operations.
ASSETS/LIABILITIES COMMITTEE
This subcommittee of the Management Committee is composed of the President and Chief Operating Officer of Caisse centrale, the Senior ExecutiveVice-President and the four Senior Vice-Presidents of Caisse centrale.
INTERNAL CREDIT COMMITTEE
This subcommittee of the Management Committee is comprised of the President and Chief Operating Officer of Caisse centrale, the Senior ExecutiveVice-President and the four Senior Vice-Presidents of Caisse centrale.
RISK MANAGEMENT COMMITTEE
This subcommittee of the Management Committee is made up of the President and Chief Operating Officer of Caisse centrale, the Senior ExecutiveVice-President, the Senior Vice-President, Capital Markets, the Senior Vice-President, Integrated Risk Management, the Senior Vice-President,Finance, Strategic Alliances and International, the Vice-President, Legal and Corporate Affairs and Assistant Secretary of the Board of Directors, and the Vice-President, Finance, Control and Operations.
DISCLOSURE COMMITTEE
This subcommittee of the Management Committee is comprised of the President and Chief Operating Officer of Caisse centrale, the Senior ExecutiveVice-President, the Senior Vice-President, Finance, Strategic Alliances and International, the Senior Vice-President, Capital Markets, the Senior Vice-President, Integrated Risk Management, the Vice-President, Legal and Corporate Affairs and the Vice-President, Finance, Control and Operations.
C A I S S E C E N T R A L EC O R P O R AT E G O V E R N A N C E 1 1 2
O T H E R I N F O R M AT I O NC A I S S E C E N T R A L E 1 1 3
Alban D’AmoursPresident and Chief Executive OfficerDesjardins Group and Presidentof the Board
Madeleine LapierreVice-Chair
of the BoardPresident
Council of RepresentativesRichelieu-Yamaska
Pierre TardifSecretary
of the BoardPresident
Council of RepresentativesRive-Sud de Montréal
Jacques BarilPresident
Council of RepresentativesEst de Montréal
Thomas BlaisPrésident
Council of Representativescaisses populaires de l’Ontario
Jean-Guy BureauPresident
Council of RepresentativesCaisses de groupes
Louise CharbonneauGeneral Caisse ManagerCouncil of RepresentativesEst de Montréal
Alain DumasGeneral Caisse Manager
Council of RepresentativesMauricie
André GagnéPresident
Council of RepresentativesQuébec-Est
Raymond GagnéPresident
Council of RepresentativesBas St-Laurent, Gaspésie etÎles-de-la-Madeleine
André LachapellePresident
Council of Representatives Lanaudière
Daniel LafontaineGeneral Caisse ManagerCouncil of Representatives Centre-du-Québec
Andrée LafortunePresident
Council of RepresentativesOuest de Montréal
Marcel LauzonPresident
Council of RepresentativesLaval-Laurentides
Olivier LavoiePresident
Council of RepresentativesSaguenay-Lac Saint-Jean, Charlevoix, Côte Nord
Pierre LeblancPresident
Council of RepresentativesMauricie
Daniel MercierPresident
Council of RepresentativesCentre-du-Québec
Jacqueline MondyPresident
Council of RepresentativesKamouraska, Chaudière, Appalaches
Denis ParéPresident
Council of RepresentativesEstrie
Clément SamsonPresident
Council of RepresentativesQuébec-Ouest, Rive-Sud
Richard SarrazinGeneral Caisse Manager
Council of RepresentativesQuébec-Ouest, Rive-Sud
Sylvie St-Pierre BabinPresident
Council of RepresentativesAbitibi-Témiscamingue, Nord et Ouest-du-Québec
•••
1 As at December 31, 2004
Norman GrantVice-President
Council of RepresentativesBas Saint-Laurent, Gaspésie et Îles-de-la-Madeleine
Benoît TurcotteVice-PresidentCouncil of RepresentativesAbitibi-Témiscamingue, Nord et Ouest-du-Québec
BOARD OF DIRECTORS 1
MANAGING DIRECTORS
Normand ColletPresident
Fédération des caisses populaires du Manitoba Inc.
Camille ThériaultPresident and Chief Executive Officer
Fédération des caisses populaires acadiennes Ltd
OBSERVERS
C A I S S E C E N T R A L EO T H E R I N F O R M AT I O N 1 1 4
Alban D’Amours * Chairman of the Board andChief Executive Officer
Jean-Guy Langelier * President andChief Operating Officer
André Bellefeuille * Senior Executive Vice-President
Jacques Descôteaux * Senior Vice-PresidentCapital Markets
Huu Trung Nguyen * Senior Vice-PresidentFinance, Strategic Alliances andInternational
Michel Paradis * Senior Vice-PresidentIntegrated Risk Management
Christian St-Arnaud * Senior Vice-PresidentFinancing and Banking Services
Philippe Béland * Vice-PresidentInstitutional Financing and Banking Services
Francine ChampouxVice-PresidentFinancing and Banking Services
Alain FrancoeurVice-PresidentFinancing and Banking Services
Gérald GagnonVice-PresidentCredit Risk Management
Sylvain GasconVice-PresidentFinancing and Banking Services
Pierre LamyVice-PresidentBusiness developmentCapital Market
Jacques Landry * Vice-President and General ManagerDesjardins International Service Centre
Gilles Lapierre * Vice-PresidentLegal and Corporate Affairs
Pierre MasséVice-PresidentFinancing and Banking Services
Pierre PelletierVice-PresidentFinancing and Banking Services
Diane Robert * Vice-PresidentFinance, Control and Operations
Bernard VenneVice-PresidentTreasury and InvestmentCapital Market
•••
* Member of the Management Committee
1 As at December 31, 2004
OFFICERS 1
Fédération des caisses Desjardins du Québec
Fédération des caisses populaires del’Ontario Inc.
Fédération des caisses populairesacadiennes Ltd
Fédération des caisses populaires du Manitoba Inc.
Desjardins Trust Inc.
Desjardins General Insurance Group
Desjardins Financial Security
MEMBERS
PricewaterhouseCoopers LLPMontreal, Quebec
AUDITOR
O T H E R I N F O R M AT I O NC A I S S E C E N T R A L E 1 1 5
Head Office1 Complexe DesjardinsSuite 2822Montreal, Quebec, CanadaH5B 1B3Telephone: (514) 281-7070Facsimile: (514) 281-7083Internet address:http://www.desjardins.com/ccd
Toronto Office375 Bay Street, Suite 300Toronto, Ontario, CanadaM5H 2V1Telephone: (416) 599-0381Facsimile: (416) 599-5172
BRANCHES OUTSIDE CANADA
Desjardins Bank N.A.
Hallandale Beach Branch1001 East Hallandale Beach Blvd.Hallandale Beach, Florida, USA33009-4429Telephone: (954) 454-1001Facsimile: (954) 457-7927
Pompano Beach Branch2741 East Atlantic Blvd.Pompano Beach, Florida, USA33062Telephone: (954) 785-7110Facsimile: (954) 785-2115
Desjardins Commercial Lending U.S.A. Corp.1001 East Hallandale Beach Blvd.Hallandale Beach, Florida, USA33009-4429Telephone: (954) 454-1001Facsimile: (954) 457-7927
AFFILIATE
B.P. Invest Consult GmbHPeregringasse 3A1090 Vienna, AustriaTelephone: (131) 340-7201Facsimile: (131) 340-7209
OTHER INFORMATION
Estrie1845 King Street West Suite 110Sherbrooke, QuebecJ1J 2E4Telephone: 1 800 481-3220 [230]Telephone: (819) 821-3220 [230]
Outaouais880 de la Carrière Blvd.Suite 100Gatineau, QuebecJ8Y 6T5Telephone : 1 877 441-1400 [455]Telephone : (819) 778-1400 [455]
Quebec City 5600 des Galeries Blvd.Suite 140Quebec City, QuebecG2K 2H6Telephone: 1 866 835-1881
Saint-Lambert2051 Victoria StreetSaint-Lambert, QuebecJ4S 1H1Telephone: (450) 672-4116
Saguenay/Lac St-Jean1700 Talbot Blvd. Suite 200Saguenay, QuebecG7H 7Z4Telephone: (418) 696-1712
REGIONAL OFFICES
Montreal300 Léo-Pariseau Street Suite 1810Montreal, QuebecH2W 2P4Telephone: 1 800 707-2305
Quebec City5600 des Galeries Blvd.Suite 140Quebec City, QuebecG2K 2H6Telephone: 1 866 634-5775
Trois-Rivières2000 des Récollets Blvd.P.O. Box 1000Trois-Rivières, QuebecG9A 5K3Telephone: (819) 374-3594 [202]
DESJARDINS INTERNATIONAL SERVICE CENTERS
C A I S S E C E N T R A L EF I N A N C I A L G L O S S A RY 1 1 6
Acceptance and Customers’ Liability under AcceptancesShort-term debt securities traded on the money market which Caisse centrale guarantees on behalf of a borrower and for which the borrower pays a stamping fee.
Asset under AdministrationAsset owned by certain members federations and managed by Caisse centrale. These assets are not the property of Caisse centraleand therefore are not reported in the consolidated balance sheet.
Basis PointUnit of measure equal to one one-hundredth of one percent.
Commitment to Extend CreditCredit facility available to customers either in the form of loans,acceptances and other on-balance sheet financing, or throughderivatives products such as guarantees and letters of credit.
Currency and Interest Rate SwapTransaction where two parties agree to exchange, over a specifiedperiod, currencies or interest flows, generally a fixed rate and afloating rate, based on a notional amount.
DerivativeA contract whose value is derived from interest rates, foreign exchangerates, or equity or commodity prices. Use of derivatives allows for the transfer, modification, or reduction of current or expected risks,including interest rate, foreign exchange and other market risks. Themost common types of derivatives include foreign exchange forwardcontracts, foreign currency and interest rate futures, forward rateagreements, and foreign currency and interest rate options. Derivativescan be traded either on organized exchanges or through over-the-counter agreements.
Foreign Exchange Forward ContractA commitment to buy or sell a specified amount of foreign currency on or before the maturity date at a set exchange rate.
Forward Rate AgreementA type of derivative which obliges two parties to make a cashsettlement at a future date for the difference between a contracted rate of interest and the current market rate, based on a notionalamount. Used as a hedge, a forward rate agreement protects againstfuture movements in market interest rates.
Guarantee and Standby Letter of CreditIrrevocable commitment that payments will be made in the event acustomer cannot meet its obligations to third parties.
HedgeA risk management technique used to insulate financial results frommarket, interest rate, or foreign currency exchange risk (exposure)arising from normal banking operations. The elimination or reductionof such exposures is accomplished by establishing offsetting positions.For example, assets denominated in foreign currencies can be offsetwith liabilities in the same currencies or through the use of foreignexchange hedging instruments such as futures, options, or foreignexchange contracts.
Interest Rate SensitivityEarning assets and interest-bearing liabilities which mature or aresubject to interest rate adjustments within a specified term or have an interest rate that floats in reference to a base interest rate.
LiquiditiesGenerally, assets in cash or in securities easily convertible to cash,such as Bank of Canada deposits and securities.
Mark-to-MarketValuation at market rates, as at the balance sheet date, of securities,loans, deposits, subordinated debentures and derivatives.
Net Interest IncomeThe difference between interest income earned on assets and theinterest expense related to liabilities. The ratio of net interest incometo average assets is called the “net interest margin.”
Notional AmountThe amount used as a reference point to calculate payments forfinancial instruments such as forward rate agreements or interest rate swaps. The amount is not exchanged.
Obligation Related to Securities Sold ShortTransaction in which the seller sells securities it does not own. The seller borrows the securities in order to deliver them to thepurchaser. At a later date, the seller buys identical securities in the market to replace the borrowed securities.
Return on Average AssetThe ratio of net income to average total assets during a year.
Risk WeightingThe process by which weighting factors are applied to the face value of certain assets in order to reflect a comparable risk level. Off-balance credit instruments and derivatives are also converted byadjusting the notional amounts to balance sheet (or credit) equivalentsand by applying appropriate risk weighting factors. Total risk-weighted assets constitute the denominator of the various capital ratios asprescribed by the Bank for International Settlements (BIS).
Stock Index OptionThe right (as opposed to obligation) to sell (put option) or buy (calloption) on or before a maturity date a specified amount of a stock index at a set price (exercise price).
Subordinated DebentureUnsecured liability issued by Caisse centrale whose repayment, in the event of liquidation, is subordinated to the claims of depositors and certain other creditors.
Trading AccountLiquidities used for arbitrage transactions on financial markets. The account is presented at market value on the balance sheet.
NOTE TO THE READERWe use the M and B symbols to designate millions and billions, respectively.
Thus, "$8M" should be read "eight million dollars" and "$17B" should be read "seventeen billion dollars".
VERSION FRANÇAISELa version française de ce rapport annuel peut être obtenue sur demande.
Elle est également disponible au www.desjardins.com/caissecentrale.
The Senior Vice-President, Finance, Strategic Alliances and International of Caisse centrale Desjardins is responsible
for the production of this Annual Report.
GRAPHIC DESIGN Lg2d PRODUCTION Groupe Produlith inc. PRINTING Groupe Produlith inc. PRINTED IN CANADA
www.desjardins.com/ccd
Commemorative $5 coin issued
by the Royal Canadian Mint in honour
of the 150th anniversary of the birth
of the founder of Desjardins Group,
Alphonse Desjardins.
