After a difficult year marked by soaring inflation and repeated interest rate hikes, the economic horizon seemed to want to clear up a bit, according to Guy Cormier, President and Chief Executive Officer of Desjardins Group. But the recent setbacks experienced by some banks in the United States and Europe are once again fueling the climate of uncertainty that seemed to be dissipating.
“Last year, we predicted that the year would be marked by uncertainty, and then we went from event to event. There was the pandemic, then the war in Ukraine, the fight against inflation and now the financial markets are being hit by the setbacks of a few banks.
“I don’t know what the situation will be in three weeks. The monetary authorities had tightened interest rates, we saw that inflation was starting to fall, but now, after the Silicon Valley Bank (SVB), the First Republic Bank and Credit Suisse, will the central banks start again? to inject money to avoid a new crisis? asks Guy Cormier.
The CEO of Desjardins Group, however, is not at all concerned about a possible contagion of this crisis, which is fairly limited to the activities of the Quebec institution. The Canadian banking system is stronger, better regulated and better capitalized than in the United States.
Desjardins Group is also the best capitalized financial institution in North America.
“We have a capitalization ratio of 21%, it is 5 to 10% higher than other banks. We are a systemically important institution that manages prudently with a long-term perspective, without the short-term vagaries of the stock markets,” says Guy Cormier.
Over its 123-year history, Desjardins has built up reserves of $31 billion, made up of $26 billion of unrealized profits that have been accumulated, to which are added more than $5 billion that have been subscribed with savers. investors.
“Since 2016, our assets have increased from 257 to 407 billion, an increase of 150 billion, it’s still considerable”, underlines the CEO of Desjardins.
Desjardins Group also risks being less affected by a possible financial crisis because it has diversified its activities over the years.
“We derive 50% of our income from our financial activities with individuals and businesses, and 50% from our activities in life and group insurance and damage insurance. We are not in a single niche like SVB, which only lends to tech companies, ”explains Guy Cormier.
The institution has also diversified its operations on a geographic basis, today carrying out 60 to 65% of its activities in Quebec and 35 to 40% in the rest of Canada, mainly in the insurance and financing sectors. of companies.
“We also do a lot of stress testing to make sure we have prudent risk management. We experienced two big tests with the data leak episode in 2019 and that of the pandemic.
“Otherwise, we do it every year by simulating the advent of a big recession or the outbreak of a war, for example. Our simulations show us that we have a very high level of resilience,” says Guy Cormier.
It is for these reasons that Desjardins obtains among the best credit ratings in the industry in North America, believes the CEO.
While Desjardins Group is well equipped to deal with the turbulence generated by the context of high inflation and high interest rates, its president is concerned about the repercussions of this situation on the members and clients of the financial institution.
“The 400 basis point rise in interest rates has affected our customers who have variable rate mortgages. It is estimated that there are 60,000 to 70,000 holders of these variable rate mortgages whose monthly payment no longer covers the interest payable. We think that 15% of these customers could have problems,” assesses Guy Cormier.
This is why, since the fall, Desjardins has called each of these 60,000 variable rate mortgage holders to discuss the solutions available to them, such as increasing their monthly payment or reviewing the amortization. Already 50% of them have made a gesture.
“We want to support our members and clients to get through this period. It is believed that the Bank of Canada will take a break and stop raising rates. Rates started to rise a year ago and already we are seeing the effects on prices and on the activity of the real estate market, ”underlines the president.
The Desjardins Group’s chief economist maintained in his latest forecasts that rates should start falling at the end of 2023 or the beginning of 2024, reminds Guy Cormier, and that the risks of a slight recession have been postponed to the 3rd and 4th quarters of the year.
For its last fiscal year, Desjardins recorded a decline in its surplus earnings, which fell from $2.9 billion to $2.05 billion, a decline essentially attributable to the increase of nearly $600 million in damage insurance claims.
“People started driving again after the pandemic, there were more accidents and the cost of claims rose sharply, as did the number of vehicle thefts,” explains Guy Cormier.
For the current financial year, the CEO hopes that the return to normal expected for the end of the year will come true and says he is convinced that the liquidity crisis that some banks have just experienced remains a circumscribed and cyclical crisis which does not will not turn into a disaster like in 2008.
