THE LARGEST COOPERATIVE FINANCIAL GROUP in CANADA Annual Report

THE LARGEST COOPERATIVE FINANCIAL GROUP IN CANADA Annual Report

2004 And proud of it.

www.desjardins.com 1 800 CAISSES

Commemorative $5 coin issued by the Royal Canadian Mint in honour of the 150th anniversary of the birth of our founder, Alphonse Desjardins.

Desjardins 2004 Annual Report THE LARGEST COOPERATIVE FINANCIAL GROUP IN CANADA

A FINANCIAL FORCE WITH $106.2 BILLION IN ASSETS HEAD OFFICE Fédération des caisses Desjardins du Québec A HUMAN FORCE OF OVER 5.5 MILLION MEMBERS AND CLIENTS, 100, avenue des Commandeurs Lévis (Québec) G6V 7N5 125,000 BUSINESS MEMBERS, 39,000 MOTIVATED EMPLOYEES Canada AND 7,660 DEDICATED ELECTED OFFICERS Telephone: (418) 835-8444

VERSION FRANÇAISE A HIGHLY ACCESSIBLE DISTRIBUTION NETWORK COMPRISING: La version française de ce Rapport annuel peut être obtenue sur demande.

• 1,483 points of service in Québec and Ontario: 572 caisses and This annual report was produced by the Corporate Executive Division of Desjardins Group (Communications and Public Affairs Division) and the Financial Executive Division of Desjardins Group 911 service centres (Control and Financial Disclosure Division), Fédération des caisses Desjardins du Québec.

• A combined total of 114 points of service in Manitoba and This annual report is made from paper containing recycled pulp.

New Brunswick, that is 40 affiliated caisses and 74 service centres Graphic Design lg2d Production la souris masquée • 55 Corporate Financial Centres in Québec and 3 in Ontario Photoengraving and Printing J.B. Deschamps

• 28 Desjardins Credit Union points of service in Ontario PRINTED IN CANADA

• Some 20 subsidiaries, many of which are active across the country

• Two Desjardins Bank service centres in Florida and Desjardins Commercial Lending, also in the United States

• A state-of-the-art virtual network

WE HAVE EVERY REASON TO BE PROUD! DESJARDINS 1 PROFILE DESJARDINS 2 CONTENTS

Belonging to over 5.5 million owner-members, both individuals and businesses, 3 DESJARDINS ORGANIZATION CHART Desjardins is not only the leading financial institution in Québec, it is also the 4 AREAS OF ACTIVITY largest cooperative financial group in Canada. A pioneer in the cross-pillar integration of financial services, Desjardins draws on the synergy of its caisses 5 HIGHLIGHTS and subsidiaries and the strength of its advisory force to constantly improve 8 MESSAGE FROM THE PRESIDENT AND CEO its service offering and provide members and clients with innovative financial products and services tailored to their needs. Because Desjardins makes a 12 BOARD OF DIRECTORS community commitment like no other financial institution, and because it is 14 REVIEW OF ACTIVITIES dedicated to balancing assets with values, Desjardins contributes to the economic and social well-being of the people and communities it serves. 15 Proud of our cooperative difference

With a vast distribution network consisting of caisses and their service centres, corporate financial centres, subsidiary branches, and electronic networks, Desjardins is the most accessible financial institution in Québec. Elsewhere in The “Proud of our cooperative difference” section is completed in the Desjardins Canada, Desjardins helps to strengthen the cooperative movement through 2004 Social Responsibility Report, which is available at www.desjardins.com or upon caisses populaires in Ontario, Manitoba and New Brunswick as well as through request at our offices. Desjardins Credit Union, its subsidiaries and its many partners. Thanks to Desjardins Bank in Florida, Desjardins is accessible to all members – individuals and businesses alike – that vacation or conduct business in the state of Florida. And, having made a commitment to help over 2.5 million people in twenty-some 18 Employees motivated by excellence, more satisfied members developing countries, Desjardins has earned an enviable reputation in matters of international cooperation. 24 Our integrated service offering ensures accessibility that is beyond compare

32 Desjardins & Co., putting all of Desjardins to work for your business Desjardins remains committed to the values of its founder, Alphonse Desjardins, 38 Canadian business development forging ahead and celebrated the 150th anniversary of his birth in 2004. Today, the movement that bears his name intends to be known as the best cooperative financial 44 Recognition to be proud of! institution in the world. To achieve this goal, Desjardins makes sure it delivers 45 FINANCIAL REVIEW sustainable overall performance, one that fulfills the needs of its members and clients as well as the highest industry standards in terms of management 149 CORPORATE GOVERNANCE practices and governance. DESJARDINS 1 PROFILE DESJARDINS 2 CONTENTS

AN INTEGRATED COOPERATIVE FINANCIAL GROUP

31,053 DCU MEMBERS FINANCIAL INTERMEDIATION INVESTMENT FUNDS & TRUST SERVICES IN ONTARIO 219,026 MEMBERS 5,364,497 MEMBERS IN NEW BRUNSWICK IN QUÉBEC AND ONTARIO AND MANITOBA This segment consists of the Desjardins caisse network and One of the largest investment fund manufacturers in Québec the network of affiliated caisses in Ontario, the organization ■ Québec leader in securities administration and custody ■

DESJARDINS 40 CAISSES IN that supports them (the Fédération des caisses Desjardins Private management services and group savings plans. CREDIT UNION 572 CAISSES POPULAIRES AND CAISSES D’ÉCONOMIE NEW BRUNSWICK IN QUÉBEC AND ONTARIO AND MANITOBA du Québec) and its business units: Desjardins Card Services, www.desjardinsfunds.com Desjardins Electronic Access and Payment Services, www.northwestfunds.com Desjardins Point-of-Sale Financing Services, and Desjardins www.desjardinsprivatemanagement.com DESJARDINS ONTARIO NEW BRUNSWICK AND TRUST FEDERATION MANITOBA FEDERATIONS Payroll and Human Resources Services. It also includes Caisse centrale Desjardins, Fonds de sécurité Desjardins SECURITIES – DESJARDINS SECURITIES ■ Full-service brokerage services for individuals and discount FÉDÉRATION and Capital Desjardins inc. Leading market shares in FONDS DE SÉCURITÉ ■ DESJARDINS DES CAISSES Québec in savings activities, in residential mortgage loans, brokerage services through its Disnat division Brokerage DESJARDINS in agricultural lending and in consumer lending ■ Pioneer services for businesses and institutions ■ 32 full-service DU QUÉBEC ■ ■ DÉVELOPPEMENT SOCIÉTÉ and leader in on-line solutions in Québec The most-visited branches in Québec and 4 in Ontario A branch in CAPITAL CAISSE CENTRALE FONDATION HISTORIQUE INTERNATIONAL DESJARDINS ALPHONSE- DESJARDINS DESJARDINS Vancouver tailored to the needs of institutional clients ■ DESJARDINS DESJARDINS financial services Web site in Québec and the third most-visited site in Canada ■ The largest credit card issuer in Québec Over 1,200 employees, including close to 300 investment ■ DESJARDINS (VISA Desjardins) ■ Also includes Desjardins Credit Union advisors More than $16 billion under administration. DESJARDINS COMMERCIAL BANK LENDING U.S.A., CORP as of January 1, 2005. ds.ca desjardins.com dsia.ca disnat.com DESJARDINS DESJARDINS DESJARDINS SOCIÉTÉ DESJARDINS DESJARDINS LIFE AND HEALTH INSURANCE – disnatdirect.com SECURITIES VENTURE GENERAL IMMOBILIÈRE FINANCIAL SECURITY ASSET MANAGEMENT CAPITAL INSURANCE GROUP PLACE DESJARDINS DISNAT DESJARDINS FINANCIAL SECURITY (DFS) Top life and health insurer in Québec and fourth in ASSET MANAGEMENT –

GESTION VALEURS DESJARDINS LP AND DESJARDINS CAPITAL RÉGIONAL THE PERSONAL CERTAS DIRECT DESJARDINS THE PERSONAL DESJARDINS REGIONAL SFL PLACE ■ DESJARDINS ASSET MANAGEMENT MOBILIÈRES SECURITIES ET COOPÉRATIF INSURANCE INSURANCE GENERAL GENERAL SIGMA ASSITEL GLOBAL ASSET FIERA CAPITAL (*) Canada for total direct premiums underwritten 5 million DEVELOPMENT MANAGEMENT DESJARDINS DESJARDINS INTERNATIONAL DESJARDINS (1) COMPANY (*) COMPANY (*) INSURANCE (*) INSURANCE (*) MANAGEMENT FUNDS clients ■ Extensive range of life and health insurance and $26 billion in assets under management, primarily retirement-savings products distributed through a variety representing the equity of subsidiaries and certain components OPTIFUNDS OPTIINSURANCE INVESTMENTS of networks, including Desjardins caisses in Québec and of Desjardins Group ■ Real estate and securities investment DFS’s affiliates (SFL Management and Sigma Assistel) ■ management, mortgage financing and business financing (1) Venture capital, public fund managed by Desjardins Venture Capital Ownership link Head office in Lévis and a presence in major Canadian ■ Development of investment and savings products ■ 30% January 1, 2005 Auxiliary members shareholder in Fiera Capital Management, a firm specialized Note: Chart does not reflect the legal ownership structure. (*) Shared ownership cities, including St. John’s, Halifax, Québec City, Montréal, Ottawa, Toronto, Winnipeg, Regina, Calgary and Vancouver. in institutional fund management ■ Offices in Québec City, desjardinsfinancialsecurity.com Montréal, Toronto and Vancouver. desjardinsassetmanagement.com OTHER INFORMATION GENERAL INSURANCE – DESJARDINS GENERAL INSURANCE GROUP VENTURE CAPITAL – As at December 31 One of the ten leading insurers in Canada with 1.6 million DESJARDINS VENTURE CAPITAL ■ Desjardins Group’s venture capital manager ■ Manages 2004 2003 in-force policies The leading insurer in Québec with 1 million Manitoba and Total Manitoba and Total insured, and second largest insurer in the Canadian group assets for seven Desjardins private funds (Desjardins Group(1) New Brunswick(2) Group Group(1) New Brunswick(2) Group insurance market under the banner of The Personal ■ Centres Venture Capital, L.P. and six Desjardins regional investment Number of employees 38,048 1,299 39,347 36,887 1,241 38,128 in Lévis, Montréal, Ottawa, Mississauga and Calgary, and funds) and for Capital régional et coopératif Desjardins, Number of members 5,364,497 219,026 5,583,523 5,336,744 217,865 5,554,609 agents throughout the Desjardins caisse network in Québec. whose authorized assets are projected to reach $1.4 billion Number of elected officers 7,210 450 7,660 7,681 446 8,127 desjardinsgeneralinsurance.com by 2011 ■ 16 business locations throughout Québec ■ Partner Number of member caisses 572 40 612 635 41 676 to over 170 Québec businesses and cooperatives, thereby Number of service centres 911 74 985 963 73 1,036 thepersonal.com Number of automated teller machines 2,799 123 2,922 2,816 123 2,939 certas.ca contributing to the protection of approximately 15,500 jobs. dcrdesjardins.com (1) Excluding the federations of Manitoba and New Brunswick. (2) Caisses and federations. ORGANIZATION CHART 3 DESJARDINS AREAS OF ACTIVITY 4 DESJARDINS

AN INTEGRATED COOPERATIVE FINANCIAL GROUP

DESJARDINS 5 HIGHLIGHTS

STRIKING RESULTS

OUR FINANCIAL PERFORMANCE HAS ENJOYED OUTSTANDING PROGRESS IN THE LAST FEW YEARS. FOR A FINANCIAL COOPERATIVE GROUP, THIS ESSENTIAL ALL AROUND PERFORMANCE, WHICH ALSO INCLUDES THE ENTIRE COOPERATIVE ASPECT, IS A CONDITION FOR DURABILITY AS WELL AS A PLEDGE OF EXCELLENT SERVICE TO OUR MEMBERS AND CLIENTS. THIS SUSTAINABLE OVERALL PERFORMANCE IS BUILT ON THE SATISFACTION OF MEMBERS AND CLIENTS, THE SATISFACTION AND MOTIVATION OF EMPLOYEES AND OFFICERS, AND PRODUCTIVITY. ONCE AGAIN THIS YEAR, OUR RESULTS PROVE THAT FINANCIAL PERFORMANCE AND COOPERATION GO HAND IN HAND.

• One billion dollars in combined surplus earnings before patronage allocations, up 28.5%

• Recorded provisions for patronage allocations of $372 million and payment of $52 million in sponsorships, donations and scholarships, making a total of $424 million returned to caisse members and communities for the 2004 financial year

• Return on equity of 15.8% compared to 13.7% in 2003

• Record net earnings for Desjardins General Insurance Group of $127 million since 2003, combined with a yield of 29.7%

• Excellent performance by Desjardins Financial Security with record net earnings of $130 million, an increase of 18.2%

• Record contribution by Caisse centrale Desjardins of $87 million, up 28% from 2003

• Trust services and investment funds posting net earnings of $26 million and return on equity of 23.5% compared to $12 million and 13.5% in 2003

• Increase in market share for Desjardins Venture Capital, from 11.2% in 2003 to 16.1% in 2004 10056_Mouv_5cAN 18/03/05 15:52 Page 6

HIGHLIGHTS 6 DESJARDINS

FINANCIAL POSITION – BALANCE SHEET AND OFF-BALANCE SHEET(1)

As at December 31 (in millions of dollars and as a percentage)

% change 2004-2003 2004 2003(2) 2002(2) Total assets 7.6 % 103,574 $ 96,270 $ 86,646 Average assets 9.2 99,878 91,452 84,252 Liquid assets 2.3 21,331 20,850 18,168 Loans 9.6 75,911 69,273 62,990 Deposits and subordinated debentures 7.1 78,576 73,373 65,795 Equity 12.4 7,160 6,372 5,839 Assets under administration 18.2 203,801 172,362 145,717 Assets under management 4.7 10,398 9,929 13,958 Tier 1 capital ratio (as per BIS standards) — 13.58 % 12.97 % 12.78 %

(1) Excluding caisses and federations in Manitoba and New Brunswick. (2) Data restated to reflect the presentation adopted in 2004.

OPERATING INCOME(1)

For the year ended December 31 (in millions of dollars and as a percentage)

% change 2004-2003 2004 2003(2) 2002(2) Total income 9.2 % $ 8,441 $ 7,731 $ 6,910 Provisions for credit losses 25.3 94 75 111 Non-interest expenses 5.4 6,840 6,489 5,525 Surplus earnings before patronage allocations to members 28.5 1,072 834 862 Patronage allocations to members (16.0) 372 443 492 Surplus earnings before patronage allocations to members per $100 of average assets — 1.07 % 0.91 % 1.02 % Return on equity — 15.8 % 13.7 % 15.5 %

(1) Excluding caisses and federations in Manitoba and New Brunswick. (2) Data restated to reflect the presentation adopted in 2004.

CREDIT RATINGS

The financial solidity of Desjardins Group as reflected in the excellent credit ratings of Caisse centrale Desjardins.

Short term Medium and long term Standard & Poor's A-1 + AA - Moody's P-1 Aa3 Dominion Bond Rating Service R-1M AA (low) 10056_Mouv_5cAN 18/03/05 15:52 Page 7

DESJARDINS 7 HIGHLIGHTS

SURPLUS EARNINGS BEFORE PATRONAGE ALLOCATIONS PATRONAGE ALLOCATIONS TO MEMBERS TO MEMBERS

1,200 20 600 100 91 15.8 18 86 1,000 500 79 15.5 16 80 13.7 800 14 400 492 443 862 60 1,072 12 372 600 834 300 10 40 400 8 200 6 200 100 20 4 0 2 0 0 2003 2003 2002 2004 2002 2004

In millions of $ In millions of $

Return on equity (%) Percentage of caisses paying out patronage allocations in Québec

TOTAL ASSETS OF RETURNED TO COMMUNITY DESJARDINS GROUP (in millions of $)

110 12 1,200 11.1 7.6 100 1,000 90 5.8 10

80 1,072 70 800 862

8 834

60 96.3 600 50 6 40 400 530 103.6 30 486 424 20 4

86.6 200 10 0 2 0 2003 2002 2004 2003 2002 2004

In billions of $ Surplus earnings before patronage allocations Growth (%) to members Portion of surplus earnings returned to community as patronage allocations, sponsorships, donations and scholarships 10056_Mouv_5cAN 18/03/05 15:53 Page 8

MESSAGE FROM THE PRESIDENT AND CEO 8 DESJARDINS

ALBAN D’AMOURS Desjardins Group President and Chief Executive Officer

For the first time in its history, Desjardins Group’s surplus of the favourable economic conditions of 2004, which again earnings exceeded the billion dollar threshold in 2004. With enjoyed robust activity in the residential mortgage market $1.1 billion in surplus earnings before patronage allocations, as well as low claims experience in the insurance segment. we recorded a 28.5% increase over 2003 and a 24.4% increase over 2002, two already outstanding years. All of the architects Thanks to the 2004 achievements of our entire team, the of Desjardins’ success deserve to celebrate these again- caisses expect to pay out $372 million in patronage allocations improved results, not to mention the exciting growth to members. The members themselves will decide, at a local opportunities ahead. level and at the annual general meeting of their financial services cooperative, how the surplus earnings are to Although the cooperative network’s solid performance, due be shared. As for amounts earmarked for sponsorships, notably to the caisse network’s financing activities and the donations, and bursaries, they stood at $52 million in 2004. record contribution of Caisse centrale Desjardins, has much to do with these impressive results, they might not have been AN INCREASINGLY INTEGRATED, possible without the very strong increase in earnings among EFFICIENT ORGANIZATIONAL STRUCTURE the subsidiary companies. Both the life and health insurance TO BENEFIT MEMBERS AND CLIENTS and general insurance segments generated record earnings Desjardins’ results of recent years have proven that the in 2004, increasing the Group’s overall results by $110 million. diversity of its expertise and its increasingly integrated service Trust and investment fund services saw their contribution offering to members and clients have been invaluable assets. to the Group’s earnings grow from $11 million in 2003 to This past year, the Group’s additional steps towards its strategic $24 million in 2004. Moreover, the previous year’s $51 million management have enabled it to continue progressing by loss in the venture capital segment was replaced in 2004 leveraging its strengths. by a $8 million profit, and the securities segment pulled its $4 million loss up to -$0.1 million. Thanks to the successes enjoyed since 2001 as well as a major consultation process aimed at gauging caisse expectations With its decentralized offer, the magnitude of its sales of its support organization, we used 2004 to redefine advisory force, the range and diversity of its distribution the Fédération’s service offering. The new offering puts more networks and the sound and judicious management of emphasis on providing the technical and strategic support interest rate risk, Desjardins was able to take full advantage that the caisses and their centres need to achieve their business purposes. 10056_Mouv_5cAN 18/03/05 15:53 Page 9

DESJARDINS 9 MESSAGE FROM THE PRESIDENT AND CEO

With the Fédération providing improved orchestration PROFOUND HUMAN EXPERTISE of the offerings of subsidiaries, and thanks to services The top private employer in Québec, Desjardins Group also being reorganized by key markets made up respectively ranks among the top 20 largest private employers in Canada. of individuals and businesses, we are arranging everything With a 39,000-person workforce across the country and a so that Desjardins’ members and clients have, at every phase far-reaching network of caisses, corporate financial centres, in their lives, access to superior quality services that are and specialized companies, Desjardins Group boasts a wealth tailored to the size, diversity, and complexity of their needs. of leading human expertise – leading expertise that we intend The redeployment of Desjardins Financial Corporation’s on sustaining. activities and those of Desjardins Trust into the Fédération was undertaken with this purpose in mind. To do so, the Group will be integrating an array of human resource training, mobilization, and mobility programs To stimulate business development throughout the Group, throughout Desjardins. Today’s business environment increase overall cohesion, optimize governance practices demands a highly-specialized labour force, and we are in terms of risk management, and create financial and therefore taking all measures necessary to ensure that operational synergies, we have furthermore created the entire Group constitutes a stimulating environment Group-wide strategic functions and implemented new for professional growth and career advancement. orientation and coordination mechanisms. In doing so, we are therefore targeting, by year-end 2006, to have In 2004, we also launched the Desjardins Cooperative Institute annual recurring increases in surplus earnings of at least (DCI), our “corporate university.” DCI’s programs are designed $100 million before income taxes. for persons who play key roles in the Group’s governance matters or in managing Group components. During short but Our increases in efficiency will notably support the Canada- stimulating and motivational sessions, these people are called wide expansion of Desjardins. In 2004, this expansion forged upon to share their skills, both their soft skills and their ahead; in Ontario, Desjardins Credit Union’s service offering Desjardins-specific know-how, which are the cornerstones was expanded; Caisse centrale Desjardins’ loans portfolio was of our identity as an integrated cooperative financial group. diversified geographically, and VISA Desjardins also grew its business volume in Canada. AN ORGANIZATION OF HIGH VALUES AND SOUND ASSETS As for specialized companies, Desjardins Securities continued Every initiative undertaken by Desjardins is aimed at fully its steadfast growth and is now among the 10 firms that satisfying the needs of members and clients and achieving perform the most transactions on the Toronto Stock Exchange. all caisse objectives. New market penetration for group insurance, both life and health as well as general insurance, was also achieved in Our organization’s enhanced efficiency and stronger financial Canada in 2004. position has allowed us to optimize the quality of advice provided to users and to give them, throughout Québec, The concerted efforts of all the Group’s components will access to all our financial services, including the professional continue in all of these areas. As in 2004, they will continue management of their assets. A greater margin of financial to be supported by a more sustained visibility campaign maneuverability has allowed us to devote the proper attention in coveted markets. By building on our financial strength, to members, offering each of them, in addition to tangible state-of-the-art technological expertise, and remarkable financial benefits, human, considerate service. In addition, manufacturing capacity, and by strengthening existing the cooperative, economic and financial education of partnerships with Ontario caisses populaires, the networks members as well as active contributions to the community of affiliated caisses in New Brunswick and Manitoba as and cooperative development, are other intrinsic aspects well as with the credit unions of Canada, Desjardins intends of the caisse initiative. “High values. Sound assets.” takes to continue developing an attractive alternative to the all these priorities to the forefront. traditional banking sector, an alternative that is advantageous to individuals, businesses, and communities throughout Canada. 10056_Mouv_5cAN 18/03/05 15:53 Page 10

MESSAGE FROM THE PRESIDENT AND CEO 10 DESJARDINS

The year 2004 saw the launch of new Desjardins Mutual Aid In addition, in 2005, the caisse officers and general managers Funds in several regions. The experiment of a microcredit will be consulted on their assessment of how the Fédération project intended to serve enterprises has yielded promising is addressing their concerns and on the Fédération’s channels results. 2005 has been proclaimed the “International Year by which it provides a support and consulting services with of Microcredit” by the United Nations, and accordingly, respect to orientations. These channels are based on the Desjardins Group and its partners are playing an active role in role vested in the councils of representatives, which we seek structuring a microcredit offering – to individuals and to optimize. businesses – that will potentially become available across Québec. And through its subsidiary, Développement The issue of oversight within the caisse will be an important international Desjardins, the Group is continuing its essential item on the agenda of the 2005 Congress of caisse officers. work in developing and emerging countries. In the business climate of recent years, in which the responsibilities and accountability of company directors In keeping with the theme of supporting people and their have been largely redefined and in which oversight and audit projects, all of Desjardins Group decided, at its 18th Congress, procedures have been tightened, we intend on better defining to focus on our youth. The Desjardins Youth Focus program the roles and responsibilities of elected caisse officers in was the result of this decision. 2004 was dedicated terms of oversight and ethics. At the same time, we will also to consultations and to defining the action plan for each define a structure that will be optimal for serving the caisse, the centre of which commercial practices towards interests of members and caisses. youths play a key role. Deployed more broadly in 2005, the various initiatives contained in this plan will particularly All of these initiatives will ensure, for years to come, an even aim at helping young members gain access to financial more effective governance system, that respects the independence, enter the job market, and become involved responsibilities of each person and that provides ample citizens in their communities. opportunity for participation and consultation.

COOPERATIVE GOVERNANCE: Because we want our practices to be consistent with our EMBEDDED IN OUR ORGANIZATION values, a new Code of Ethics and Professional Conduct was The achievement of the caisse’s goals and mission would adopted and circulated throughout the network in 2004. not be possible without a distinctive, cooperative-style This code will serve as a guide on how to conduct oneself governance system, one which calls upon the full involvement and on how to make decisions such that our actions reflect of member-owners and their representatives. In fact, these the high standards of integrity and excellence that we promote parties are the best guarantee that caisse services and at Desjardins. At the same time, the standards we have Desjardins’ orientations are aligned with the needs of adopted in connection with our quality approach are designed members and their communities. to make business relationships with Desjardins an experience that always measures up to the highest expectations. In 2004, caisses were provided with tools to enhance the democratic involvement of their member-owners, particularly A UNIFIED, UNSTOPPABLE FORCE with respect to consulting them on key issues such as the In all, some 7,660 officers, deeply committed to and driven medium-term orientations of their caisse, major changes to by the strongest of convictions, and some 39,000 dedicated its distribution network or its business hours and even its employees committed to growing their skills in order to community engagement plan. satisfy members and clients, are today working proudly in all of the Group’s components. I extend my sincerest gratitude to all of them, as it is through their efforts that 2004 yielded outstanding financial results as well as impressive achievements that augur well for a bright future. 10056_Mouv_5cAN 18/03/05 15:53 Page 11

DESJARDINS 11 MESSAGE FROM THE PRESIDENT AND CEO

ALBAN D’AMOURS Desjardins Group President and Chief Executive Officer

BERTRAND LAFERRIÈRE President and Chief Operating Officer Fédération des caisses Desjardins du Québec and Vice-Chair of the Desjardins Group Strategic Management Structure Committee

I also extend my appreciation to our Councils of Representatives PART OF DESJARDINS GROUP’S STRATEGIC and our Board of Directors for their unfaltering support and MANAGEMENT STRUCTURE, THE FÉDÉRATION loyalty to the Desjardins mission. I would particularly like ADMINISTERS THE INTEGRATION AND DELIVERY to thank Frances Carrier, André Jean, Paul-André Lavoie, André Shatskoff and Gilles Lepage, whose terms on the Board OF PRODUCTS AND SERVICES FROM THE VARIOUS of Directors ended in 2004. Daniel Lafontaine, Daniel Mercier, DESJARDINS COMPONENTS TO THE CAISSES. Norman Grant, Alain Dumas and Camille Thériault have already seized the torch from their hands and will carry it even further. We can be certain of one thing: By relying on the commitment I also wish to thank Luc Chabot who, after having successfully and solidarity of each and every architect of Desjardins’ launched the operations of Capital régional et coopératif success, and armed with the assistance of partners who Desjardins, assumed the management of Desjardins Venture share our general objectives, the largest financial cooperative Capital for eight months. I am convinced that his successor, group in Canada is seeing an exciting, promising future Louis L. Roquet, will successfully help venture capital and unfold before its eyes. development capital to assume a strong position in Desjardins’ integrated offering.

Today, 150 years after the birth of Alphonse Desjardins, we remain proud bearers of the heritage that he passed on to us. ALBAN D’AMOURS We emulate his ability to match innovation and care to Desjardins Group President strengthen the formidable network of cooperatives and and Chief Executive Officer companies for which we are now responsible, all while still raising its ability to effectively meet the ever-evolving needs of individuals and groups. 10056_Mouv_5cAN 18/03/05 15:53 Page 12

BOARD OF DIRECTORS 12 DESJARDINS

01 02 03 04

05 06 07 08 09

09 10 11 12

13 14 15 16

01 ALBAN D’AMOURS* 05 LOUISE CHARBONNEAU 09 NORMAN GRANT 13 MADELEINE LAPIERRE*/** Desjardins Group President Caisse General Manager, Vice-President of the President of the and Chief Executive Officer, Est de Montréal Council Bas-Saint-Laurent et Gaspésie— Richelieu-Yamaska Council Chairman of the Board of Representatives Îles-de-la-Madeleine of Representatives, End of term: 2008 End of term: 2006 Council of Representatives, Vice-Chair of the Board Managing Director End of term: April 2, 2005 (1) 02 JACQUES BARIL** 06 ALAIN DUMAS End of term: 2007 New director: Pierre Grenon President of the Est de Montréal Caisse General Manager, Council of Representatives Mauricie Council 10 ANDRÉ LACHAPELLE** 14 MARCEL LAUZON** End of term: 2008 of Representatives President of the Lanaudière President of the End of term: 2007 Council of Representatives Laval-Laurentides Council 03 THOMAS BLAIS** End of term: 2007 of Representatives President of the Caisses 07 ANDRÉ GAGNÉ*/** End of term: 2006 populaires de l’Ontario Council President of the Québec-Est 11 DANIEL LAFONTAINE of Representatives Council of Representatives Caisse General Manager, 15 OLIVIER LAVOIE*/** End of term: 2008 End of term: 2007 Centre-du-Québec Council President of the Saguenay— of Representaives Lac-Saint-Jean—Charlevoix 04 JEAN-GUY BUREAU** 08 RAYMOND GAGNÉ** End of term: 2008 —Côte-Nord Council President of the Group Caisses President of the of Representatives Council of Representatives Bas-Saint-Laurent et Gaspésie— 12 ANDRÉE LAFORTUNE** End of term: 2008 End of term: 2006 Îles-de-la-Madeleine Council President of the Ouest of Representatives de Montréal Council 16 PIERRE LEBLANC** End of term: 2007 of Representatives President of the Mauricie End of term: 2007 Council of Representatives End of term: 2008 10056_Mouv_5cAN 18/03/05 15:53 Page 13

DESJARDINS 13 BOARD OF DIRECTORS

17 18 19 20

21 22 23 24 25

17 DANIEL MERCIER** 20 CLÉMENT SAMSON** 23 PIERRE TARDIF*/** Also sitting as observers: President of the President of the Québec-Ouest President of the Rive-Sud Centre-du-Québec Council —Rive-Sud Council de Montréal Council of 25 NORMAND COLLET of Representatives of Representatives Representatives, Board Secretary President, Fédération des caisses End of term: 2006 End of term: 2006 End of term: 2007 populaires du Manitoba 24 BENOÎT TURCOTTE 18 JACQUELINE MONDY** 21 RICHARD SARRAZIN* Vice-President of the CAMILLE THÉRIAULT President of the Kamouraska Caisse General Manager, Abitibi-Témiscamingue—Nord President, Fédération des caisses —Chaudière-Appalaches Council Québec-Ouest—Rive-Sud et Ouest du Québec Council populaires Acadiennes of Representatives Council of Representatives of Representatives, End of term: April 2, 2005 End of term: 2007 New director: Michel Roy(1) Managing Director End of term: April 2, 2005 22 SYLVIE ST-PIERRE BABIN*/** New Managing Director: * Member of the Executive Committee 19 DENIS PARÉ** President of the Sylvie St-Pierre Babin(1) ** Unrelated director President of the Estrie Council Abitibi-Témiscamingue—Nord (1) From April 2, 2005 of Representatives et Ouest du Québec Council End of term: 2006 of Representatives End of term: April 2, 2005 New director: Benoît Turcotte(1)

The members of the Board of Directors of the Fédération des caisses Desjardins du Québec are also directors of Caisse centrale Desjardins, Desjardins Venture Capital and Capital Desjardins. The Board of Directors is made up of 22 members, including 21 who are elected by the Regional General Meeting, Group Caisses General Meeting or Fédération General Meeting. The following are members of the Board: the 17 presidents of the Council of Representatives from Québec and Ontario, the four caisse General Managers elected by the General Meeting and the President and Chief Executive Officer of Desjardins Group. For the Bas-Saint-Laurent et Gaspésie—Îles-de-la-Madeleine and Abitibi-Témiscamingue—Nord et Ouest du Québec regions, the Vice-President of the Council of Representatives, who is also a Managing Director, sits on the Boards but does not have the right to vote. Representatives of the New Brunswick and Manitoba federations sit on the Board as Observers. 10056_Mouv_5cAN 18/03/05 15:54 Page 14

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PROUD OF OUR COOPERATIVE DIFFERENCE

CONVINCED OF THE RELEVANCE OF THE COOPERATIVE FORMULA IN TODAY’S SOCIETY, WE ARE PROUDLY PROMOTING OUR DIFFERENCES MORE THAN EVER BEFORE. AS A TANGIBLE MANIFESTATION OF THAT COOPERATIVE DIFFERENCE, CAISSE MEMBERS AND THEIR COMMUNITIES HAVE ONCE AGAIN BENEFITED FROM OUR FINANCIAL PERFORMANCE. OUR CAISSES ANTICIPATE PAYING A TOTAL OF $372 MILLION IN PATRONAGE ALLOCATIONS TO MEMBERS. IT IS THE MEMBERS THEMSELVES WHO, AT THE ANNUAL GENERAL MEETING OF THEIR RESPECTIVE CAISSES (IN ALL REGIONS OF QUÉBEC), WILL DECIDE HOW SURPLUS EARNINGS ARE TO BE SHARED. IN ADDITION TO PATRONAGE ALLOCATIONS, MEMBERS ALSO DECIDE WHAT PORTION OF SURPLUS EARNINGS ARE TO BE PAID INTO THE COMMUNITY DEVELOPMENT FUND ESTABLISHED BY MANY CAISSES. THESE FUNDS ALLOW CAISSES AND THEIR MEMBERS TO SUPPORT CONSTRUCTIVE COMMUNITY PROJECTS. INCLUDING PATRONAGE ALLOCATIONS, THE AMOUNTS ASSIGNED TO COLLECTIVE PROJECTS UNDER COMMUNITY DEVELOPMENT FUNDS, SPONSORSHIPS, DONATIONS AND SCHOLARSHIPS, DESJARDINS REDISTRIBUTED $424 MILLION TO COMMUNITIES. THIS COMES TO 39.6% OF THE SURPLUS EARNINGS GENERATED IN 2004.

ALSO IN 2004, WE LAUNCHED SEVERAL INITIATIVES AS PART OF OUR ACTION PLAN AIMED AT REJUVENATING AND STRENGTHENING THE QUALITIES THAT DISTINGUISH US FROM OTHER FINANCIAL INSTITUTIONS, NOTABLY IN TERMS OF OUR COMMUNITY COMMITMENTS, OUR BUSINESS PRACTICES AND OUR DEMOCRATIC STRUCTURE. FOR EXAMPLE, TO GIVE MEMBERS GREATER INVOLVEMENT IN THE DECISIONS THAT INFLUENCE THE ORIENTATIONS OF THEIR CAISSES AND THEIR COMMUNITY COMMITMENTS, WE CREATED CONSULTATION MECHANISMS BY WHICH MEMBERS CAN PROVIDE INPUT, AND WE LAID THE GROUNDWORK FOR AN E-DEMOCRACY SYSTEM. TO STIMULATE THE ASSOCIATIONAL LIFE OF CAISSES, SEVERAL CAISSES ADDED ASSOCIATIONAL LIFE AGENTS TO THEIR STAFF. THE UNPRECEDENTED MOBILIZATION OF OFFICERS AT THE 2003 18TH CONGRESS ON DESJARDINS COOPERATIVE RENEWAL BECAME FIRMLY CEMENTED OVER THE COURSE OF LAST YEAR.

Our 2004 Social Responsibility Report, available at www.desjardins.com or upon request from any of our offices, details how our cooperative nature breathes vitality and prosperity into our communities. 10056_Mouv_5cAN 18/03/05 15:54 Page 16

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FOCUSING ON YOUTH Thanks to our Desjardins Youth Focus program, launched in March 2004, we have refocused our attention on today’s youth. Caisses throughout Québec have been revising their business practices, which are now better tailored to address the realities facing today’s youth. A new decision-making tool, which factors in the savings habits, work experience and social commitments of youths in their communities, will help caisses to fully achieve their cooperative mission as well as their objective to educate youths about credit-related matters. We have also committed to a series of initiatives designed to promote the social, professional and financial integration of youths. By way of the “Employment Bridge”, we will provide support to young workers and entrepreneurs, primarily in the regions. Via the “Knowledge and Information Bridge,” we will impart our vision of cooperation to today’s youth. And by way of the “Democracy Bridge,” we will help youths become active and involved citizens. All of these initiatives, which will span numerous years, are designed to create lasting benefits in their communities.

SOLIDARITY PRODUCT The Desjardins Mutual Assistance Funds offered by the caisses, in cooperation with seven budget consulting organizations, help persons in financial difficulty who do not have access to traditional credit by offering a variety of budget consulting services and, when necessary, by granting a “tide-over” loan. Pilot projects were carried out in six regions, and twelve new funds were created in six other regions in 2004. By year-end, more than 100 participating caisses had granted over $330,000 in loans and provided some 1,600 budget consulting sessions. Given the positive results of this initiative, every caisse will be encouraged to offer this “solidarity” product to its members. Desjardins microcredit for businesses allows entrepreneurs and very small businesses that are unable to obtain financing from traditional networks to secure credit and support for their business projects. Given the success of this program in Québec City East caisses in 2004, it was adopted in order to make it available in all caisses. 10056_Mouv_5cAN 18/03/05 15:54 Page 17

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SUSTAINABLE DEVELOPMENT As a forerunner in environmental protection matters, notably through the creation of the Desjardins Environment Fund at the end of the eighties, in 2004 we developed our Policy on Sustainable Development, which promotes balance among economic, social, ethical, and environmental issues. This policy is currently undergoing a review by Councils of Representatives for its scheduled 2006 adoption date. It will provide a framework to our components and will sensitize our officers, employees, members, suppliers, and partners to the importance of adopting behaviours that foster sustainable development.

STRONG REGIONS Through our presence in Canada and especially in Québec, we actively contribute to the economic lives of the regions, notably through our caisses and subsidiaries, which support a wide range of projects in their communities. Beyond our contributions as an employer and the spinoffs of our activities as a financial institution, our venture capital contributions serve as an important financial boost to the regions. In 2004, Desjardins Venture Capital made approximately $127 million in commitments to the regions of Québec, thereby helping sustain over 15,500 jobs. In addition, Desjardins became associated with the Québec government’s new regional economic intervention funds by investing $25 million in FIERS-PARTENAIRES, by helping to finance the creation of FIERS-RÉGIONAUX, and by offering free analysis and co-investments to high-yield projects in the region.

SHARING OUR KNOW-HOW INTERNATIONALLY In addition to taking part in the work of international cooperative organizations, sharing our know-how helps underprivileged populations in developing and emerging countries take action and carry out projects. Today, the institutions supported by Développement international Desjardins give 2.5 million people access to financial services.

Moreover, we decided to devote one million dollars to assisting the victims of the tsunami in Southeast Asia and Hurricane Jeanne in Haiti to rebuild the economies of these devastated regions. 10056_Mouv_5cAN 18/03/05 15:54 Page 18

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EMPLOYEES MOTIVATED BY EXCELLENCE, MORE SATISFIED MEMBERS

AS THE TOP PRIVATE EMPLOYER IN QUÉBEC AND ONE OF THE 20 LARGEST EMPLOYERS IN CANADA, WE BUILD ON THE COMMITMENT, EXPERTISE AND KNOWLEDGE OF OUR 39,000 EMPLOYEES TO BECOME THE LEADER IN QUALITY BUSINESS RELATIONSHIPS AND THE TOP FINANCIAL INSTITUTION WITH RESPECT TO SATISFYING MEMBER AND CLIENT NEEDS. THAT IS WHY WE CONTINUE TO EXECUTE OUR 2002-2005 HUMAN RESOURCES PLAN, WHICH POSITIONS US AS AN EMPLOYER OF CHOICE. SURVEYS CONDUCTED THROUGHOUT 2004 AMONG FÉDÉRATION AND CAISSE PERSONNEL CLEARLY SHOW THAT OUR PLAN HAS POSITIVELY AFFECTED EMPLOYEE MOTIVATION AND SATISFACTION, WHICH HAS RISEN 3% SINCE 2002. THE SAME RESULTS WERE SEEN IN OUR SUBSIDIARIES, DESJARDINS FINANCIAL SECURITY AND DESJARDINS ASSET MANAGEMENT, IN WHICH THE 2004 SURVEYS CONFIRMED HIGH EMPLOYEE SATISFACTION RATES, AND IN DESJARDINS GENERAL INSURANCE GROUP, WHICH RANKED AMONG THE 50 BEST EMPLOYERS IN CANADA IN THE GLOBE & MAIL’S REPORT ON BUSINESS MAGAZINE AND ACCORDING TO HEWITT ASSOCIATES.

AS PART OF THE STRENGTHENING OF MANAGEMENT, HUMAN RESOURCES MANAGEMENT BECAME A GROUP-WIDE STRATEGIC FUNCTION IN 2004. THE GROUP-WIDE APPROACH WILL PROVIDE A GLOBAL VISION OF HUMAN RESOURCES, HELP US TO BETTER COORDINATE OUR NEEDS. AT THE SAME TIME, THE FÉDÉRATION HAS FULLY REVISED ITS SERVICE OFFERING WITH RESPECT TO THE CAISSE NETWORK TO WHICH IT INTENDS TO ACT AS A TRUE CENTRE OF EXPERTISE. THIS INITIATIVE LED TO THE IMPLEMENTATION OF A NEW ORGANIZATIONAL STRUCTURE AND A COMPLETE REVISION OF FUNCTIONS AND COMPETENCY-BASED PROFILES.

Additional information in our 2004 Social Responsibility Report is available at www.desjardins.com or upon request from any of our offices. 10056_Mouv_5cAN 18/03/05 15:55 Page 20

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SKILLS DEVELOPMENT AND TRAINING More than 4% of total payroll was invested in training and the continued development of staff competencies in an effort to enhance their performance and better satisfy members’ needs. As such, close to 4,000 caisse employees benefited from programs offered by the training centres. The new e-learning system, deployed in 2004, renders training more accessible, while cutting down on travel costs. Moreover, employees of our life and health and general insurance subsidiaries, both of which offer continuing education programs, excel regularly in their professional exams.

QUALITY TRAIN PROGRAM At the end of 2004, 90% of caisses in Québec and Ontario and all the corporate financial centres were involved in our quality- service training and motivation program known as the Quality Train program. As at December 31, 4,659 officers, 1,569 general managers and directors, and 22,253 employees had participated in a motivational session, and 1,531 general managers and directors and 21,326 employees had participated in sessions on the foundations of excellence.

A TRUE “CORPORATE UNIVERSITY” – DESJARDINS COOPERATIVE INSTITUTE (DCI) DCI officially launched its operations in 2004. By promoting and sharing Desjardins’ values, vision, direction and strategies, DCI enables officers and managers from the various components to exchange ideas, build on their knowledge base and integrate Desjardins-specific practices in the areas of governance and management. The 16 sessions offered in the first program, Desjardins: Building the Future, held in 2004 in as many different locations, drew 794 participants, resulting in a 98% satisfaction rate. This program, in which more than 1,800 people registered, will continue until 2006, and the second program, Desjardins: Destination Excellence, will be launched in 2005. 10056_Mouv_5cAN 18/03/05 15:55 Page 21

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PROMOTING LIFE-WORK BALANCE The main goal of our Health and Well-Being program is to make employees accountable for their health, stimulate personal reflection and help them to adopt healthy living habits. During work hours, employees benefit from presentations on topics that they must address to improve their health, topics such as stress, physical activity and nutrition. In late 2004, the participation rate for this program was 75%, and the satisfaction rates were even higher. To assist our employees in this program, we provided many highly-appreciated resources, including free flu vaccines in the workplace, a smoking-cessation program, a physical activity awareness campaign and, as of January 1, 2005, reimbursements for physical activity-related costs. The continuous quest for life-work balance is also a priority for our subsidiaries, including Desjardins Financial Security and Desjardins Asset Management, where the Getting the Most Out of Your Job program helps employees reduce their stress level.

INCREASING FEMALE REPRESENTATION IN MANAGEMENT POSITIONS We have stepped up our efforts to achieve our objectives, through continuous identification of future prospects and through consultations designed to target the needs of our female workforce. As at December 31, 2004, 18.8% of our general manager positions in the caisses were held by women, while in the Fédération, women held 17.8% of management positions. In our subsidiaries, women hold 23% of senior management positions. Although certain programs and policies are in place, we are still aware of the work that remains to be done to ensure greater female representation at decision-making levels. 10056_Mouv_5cAN 18/03/05 15:55 Page 22

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RECRUITMENT AND SUCCESSION PLANNING Throughout 2004, various internal succession and prequalification programs helped the caisses satisfy their requirements to fill key positions. Development efforts in defining the role of General Manager (GM) gained momentum in 2004, particularly by the provincial-wide consultation tour about the GM’s role and the creation of discussion groups responsible for identifying their training and development needs. Increased visibility in the Québec’s university and college networks enabled us to exceed recruiting objectives by 29%, with no less than 371 recruits trained in the span of a year. Finally, the web recruitment microsite, which groups all the Group positions together, enabled approximately 31,500 individuals to apply through the Desjardins job bank.

SATISFACTION OF OUR MEMBERS AND CLIENTS In all of our components, our efforts to continuously improve, notably as part of our Human Resources Plan, significantly helped to enhance service quality, as the following achievements show.

INCREASE IN VERY SATISFIED INDIVIDUAL MEMBERS The proportion of very satisfied individual members made a dramatic leap by 4 points in barely 12 months. This rise clearly shows that our efforts designed to improve service quality, particularly in terms of employee professionalism, have been successful. The overall satisfaction index of corporate members improved significantly in 2004, with a 3-point increase in very satisfied members. These members mainly appreciate being able to do business with the same account manager at a location that suits them.

FINANCIAL SECURITY ADVISORS OF DESJARDINS FINANCIAL SECURITY enjoyed a very high satisfaction rate. Caisse members who met with one of the financial security advisors gave them a rating of 9.1 out of 10 for service quality, and 9.3 for ability. Furthermore, 96% of respondents said that they had formed a relationship based on trust with the financial security advisor.

OUR TELEMARKETING SERVICE made approximately 500,000 calls in 2004. 97% of the members contacted were satisfied with service quality. 10056_Mouv_5cAN 18/03/05 15:55 Page 23

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DESJARDINS GENERAL INSURANCE GROUP was a finalist in the Customer Service category of the Mercuriades 2004 competition. The group received a customer loyalty rating upon renewal of 96% as well as a satisfaction rating, following a claim, of 95% in Québec and 89% in the other Canadian provinces.

DESJARDINS SECURITIES, which notably obtained the highest scores for customer service, moved from fifth into second place in the annual ranking of Québec brokers, published in Finance et Investissement in May 2004.

DISNAT DIRECT TAKES FIRST PLACE among Canadian direct-access brokerage firms for a fourth consecutive half-year period according to Watchfire GomezPro, a firm specialized in on-line financial solutions. This first-place ranking among active investors stems, among other factors, from excellent customer service and timely execution of trades.

TELEPHONE ASSISTANCE SERVICES OFFERED BY SIGMA ASSISTEL, a subsidiary of Desjardins Financial Security, enjoyed a 20% rise in the number of calls in 2004. Today, the business serves more than 3.5 million Canadians. Regardless of the time, source or nature of requests, Sigma Assistel provides quick assistance and quality.

CAISSE CENTRALE ENJOYED A SATISFACTION RATE OF 98%, according to a survey carried out among business and institutional clients. This was also confirmed by an almost perfect retention rate of 99% in 2004.

INDIVIDUAL CUSTOMER SERVICE WITH DESJARDINS CARD SERVICES ranked first out of the five credit card centres and second out of all 36 centres (insurers, government services, cellular telephones, telephone banking services, transporters, financial services), according to Services Triad Inc., a firm specialized in call-centre case studies. 10056_Mouv_5cAN 18/03/05 15:55 Page 24

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OUR INTEGRATED SERVICE OFFERING ENSURES ACCESSIBILITY THAT IS BEYOND COMPARE

IN CONTINUING TO ADAPT OUR SERVICE OFFERING AND OUR PHYSICAL AND ELECTRONIC DISTRIBUTION NETWORKS TO THE CHANGING NEEDS OF OUR MEMBERS AND CLIENTS, IN 2004 WE CAME CLOSER TO ACHIEVING OUR GOAL OF BECOMING THE PRIMARY WEALTH MANAGEMENT PROVIDER FOR INDIVIDUALS, WHILE MAINTAINING THE ACCESSIBILITY OF ALL OUR PRODUCTS AND SERVICES. OUR ADVISORY TEAM IS THE LARGEST IN THE INDUSTRY IN QUÉBEC. IT INCLUDES MORE THAN 1,000 FINANCIAL PLANNERS WHO, WORKING CLOSELY WITH SPECIALISTS IN EACH OF THE DESJARDINS SUBSIDIARIES, HAVE AN OVERALL VISION OF ASSET MANAGEMENT. WE ALSO CONTINUE TO HAVE THE MOST ACCESSIBLE NETWORK IN QUÉBEC AND THIS NETWORK IS BECOMING MORE AND MORE ACCESSIBLE ELSEWHERE IN CANADA, ESPECIALLY IN ONTARIO. IN QUÉBEC, IT INCLUDES 548 CAISSES AND 870 SERVICE CENTRES, WHICH LARGELY EXCEEDS THE NUMBER OF BRANCHES OF ALL OUR BANKING COMPETITORS COMBINED. 10056_Mouv_5cAN 18/03/05 15:55 Page 26

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GREATER SYNERGY FOR ASSET MANAGEMENT Our efforts in the area of asset management have resulted in a substantial increase in our sales and our market share in this sector. Therefore, investment funds, indexed savings products and securities outstanding, as well as savings taken by Capital régional et coopératif Desjardins, have increased by $2.6 billion in one year to total $15.2 billion as at December 31, 2004, an increase of 21% over 2003. These promising results demonstrate an ever-growing synergy between the network of caisses and subsidiaries, both in terms of joint business development and the propensity towards cross-referrals.

INVESTMENT FUNDS AND TRUST SERVICES Redeploying Desjardins Trust activities to the Fédération starting January 1, 2005 is one of the means chosen to make the caisse network even more dynamic for asset management, in particular for investment funds and discretionary portfolio management services. This reorganization will provide greater synergy which will serve to strengthen the efforts made to improve our service offering and ensure a sound diversification of our members’ portfolios. To better meet their needs, the range of Desjardins Funds was overhauled in 2004 and our discretionary portfolio management services were enhanced through the addition of new asset allocation models and new private funds.

CAPITAL RÉGIONAL ET COOPÉRATIF DESJARDINS now has more than 111,000 shareholders, after only three years of existence. Once again in 2004, they were able to benefit from a sizable tax credit while supporting investments in companies and cooperatives throughout Québec. The securities issued in 2004 were sold in less than five days, thus demonstrating the profound commitment and the concurrence between the caisse network and members’ interest in this type of product. As at December 31, 2004, Capital régional et coopératif Desjardins’ share value stood unchanged at $10.25. 10056_Mouv_5cAN 18/03/05 15:55 Page 27

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A NEW INDEXED PRODUCT, PERSPECTIVES PLUS TERM SAVINGS, was an instant success. In less than one year, amounts outstanding reached $321 million. This secured capital product, which was developed by Desjardins Asset Management, includes asset categories – stocks, bonds, hedge funds, real estate, and catastrophe bonds – which are generally inaccessible to individuals.

SECURITIES More than 100 caisses participated in the TANDEM program, an initiative designed to foster business development by way of increased cooperation among caisse financial planners and Desjardins Securities investment advisors. Members have made very favourable comments regarding this new partnership, which should be extended to the entire network in 2005.

CAISSASSURANCE In February 2004, the number of life and health insurance contracts in effect reached 50,000. This symbolic level shows that caissassurance, which is based on a sales and advisory services approach on the part of close to 300 Desjardins Financial Security advisors who have been working in the caisses since 2000, truly meets a need to safeguard members’ assets. In fact, close to 40% of these contracts were drawn up for members who, up until that time, had no insurance.

GENERAL INSURANCE Desjardins General Insurance sold its one millionth policy due to a referral made by a caisse, which serves to illustrate the importance of cross-referrals. The caisse network referred more than 200,000 members to Desjardins General Insurance in 2004 – 6% more than in 2003. Where Desjardins General Insurance’s referrals to the caisse network are concerned, the objective was surpassed by 43%. To further maximize its service offering, Desjardins General Insurance continued to implement an automated call management system in the caisse network, thereby helping it to increase its operating capacity and to better serve its members. 10056_Mouv_5cAN 18/03/05 15:55 Page 28

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MORTGAGE FINANCING AND CONSUMER CREDIT We are maintaining our dominant position in Québec’s mortgage financing and consumer credit market. Where home mortgages are concerned, we have had one of our best performances in more than ten years. Our residential mortgage loans have increased by 12.6% (or $4.8 billion) annually to reach $43.2 billion as at December 31, 2004. As for new products, we launched the Desjardins Homebuyer Leverage Mortgage Plan which is of particular interest to young workers who lack the down payment required to purchase their first home. Personal loans, for their part, increased by 7.3%, to reach $13.4 billion as at December 31, 2004. Among other things, our point-of-sale financing activities in the housing, automobile and durable goods industries increased by $275 million to reach $3.5 billion in 2004. We also set ourselves apart in terms of consumer credit by launching two new products: the accord D RRSP loan in the caisses and the Investor STRATEGIC line of credit.

YOUNG CLIENTELE In keeping with our Youth Focus program, which is largely echoed in our Social Responsibility Report available on www.desjardins.com, we have taken various steps to appeal to young clients. Among other things, we have adapted our business practices to make it easier for young people to get credit and to assist them in carrying out their projects. We updated our procedures to avoid cash stoppage by adapting the authorized transit to the needs of each member while maintaining the highest security standards. We also revised our youth portals to better meet expectations in terms of financial information. Starting in 2005, products and services should be more accessible to young people due to more flexible financial analyses, and the broadening of borrowing objectives and eligible areas of study. 10056_Mouv_5cAN 18/03/05 15:55 Page 29

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ENGLISH-SPEAKING AND ALLOPHONE CLIENTS Our service centre on Montréal’s West Island, whose staff is able to serve members in six languages, is an indication of our desire to better serve the English-speaking and allophone communities. We have increased the portion of our advertising budget devoted to the English-speaking market and have carried out telemarketing campaigns. At the same time, all of our brochures are now available in English and recruiting bilingual staff and encouraging our employees to become fluent in English have become key priorities for us. We are also more present in various cultural communities by sponsoring events such as the Festivalissimo, Vues d’Afrique, the Festival du monde arabe, the Ukrainian Festival and the Vietnamese New Year and by placing advertisements in their main electronic and print media. Our brokerage corporation, Desjardins Securities, has launched a DisnatDirect direct access brokerage Web site in Chinese intended for the Chinese community.

TRANSFORMATION OF THE CAISSE NETWORK We have continued in our efforts to maximize the efficiency of our networks while remaining the most accessible financial institution. To ensure that we have consistent strategies, we have among other things grouped together all of our physical and electronic distribution networks serving individuals within the Fédération’s Consumer Market Group.

OPTIMIZATION OF BUSINESS HOURS An action plan to support the caisses in their optimization of business hours for counter services has been put in place. Depending on their market characteristics, members’ expectations and the priorities retained as part of the network transformation within their micro-market, the caisses can establish their own strategy to increase the level of member satisfaction. This action plan is starting to show results.

GROUP CAISSES continued with their reconfiguration. Nine caisses were merged together, bringing the number to 43 as at December 31, 2004. As a result, the average business volume of group caisses approximates the average volume for all the other caisses in the network combined. 10056_Mouv_5cAN 18/03/05 15:55 Page 30

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TRANSFORMATION OF THE ONTARIO NETWORK In 2004, the caisses populaires in Ontario began transforming their network by taking into account the many changes in consumption and commuting habits of their members. This network reconfiguration is aimed at making the caisses true centres for financial expertise and determining the best location and the appropriate service offering for each point of service.

THE ACQUISITION OF THE ASSETS OF FOUR BANK BRANCHES in Senneterre, Lebel-sur-Quévillon and Matagami, in Abitibi as well as Fermont in Northern Québec, shows the importance which Desjardins places on having accessible financial services and providing support to the community.

ELECTRONIC NETWORKS We are maintaining our leadership position with respect to the distribution of financial products and services on-line. This is seen in the fact that our members carried out more than 1.34 billion transactions using automated teller machines, point-of-sale terminals and AccèsD Internet and Telephone services in 2004. This represents an increase of 16.3% compared to 2003. Today, more than 89.8% of members’ transactions are carried out on-line.

www.desjardins.com continues to be the most visited financial Web site in Québec and the third most visited financial Web site in Canada. In April 2004, desjardins.com beat its own record with more than 3.7 million hits, an increase of 63% compared to the same period last year.

AccèsD TELEPHONE SERVICES/1 800 CAISSES Our service agents are now able to carry out transactions on-line for a much broader range of term savings products, including conventional savings (RRSP or other), indexed, redeemable, diversified, deposit, income, as well as Rate-raiser term savings.

AccèsD INTERNET Members who hold securities now have access to a new service to transfer funds between their caisse account and their brokerage account. In addition, information on Desjardins Financial Security products held by a member is accessible under the “Life and Health Insurance” tab. 10056_Mouv_5cAN 18/03/05 15:55 Page 31

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NEW WEB SITE Desjardins Bank launched its Web site www.desjardinsbank.com, which enables customers of our Florida subsidiary to perform transactions on-line.

AUTOMATED TELLER MACHINES A new generation of “talking” automated teller machines for the illiterate and the visually impaired was launched in 2004. In addition, the installation of automated teller machines in Desjardins Credit Union branches in Ontario increased service accessibility for new clients.

DEBIT CARDS The new Cross-border Direct Payment service enables members to use their access card for debit transactions directly with U.S. merchants. Members can also use this card to obtain a VISA Desjardins cash advance. In addition, we have put in place new measures to protect our 3.5 million card users against debit card cloning.

CREDIT CARDS Two new cards have been added to the array of VISA Desjardins Prestige products: the VISA Desjardins Modulo GOLD Card, which offers the lowest interest rate in the country, and the VISA Desjardins Platinum Card, intended for holders of large assets.

DESJARDINS, THE FIRST FINANCIAL INSTITUTION IN NORTH AMERICA TO OBTAIN COPC CERTIFICATION At the start of 2005, the customer contact centres of the Fédération's Regular, Convenience, Advisory and Access Services Division received the highly regarded COPC* certification. Thanks to 17 months of effort started in September 2003, the Division attained world-class standards for high-performance contact centres. By becoming one of only 50 COPC-certified contact centres, Desjardins has positioned itself as one of the leading contact centres in the world.

* Customer Operations Performance Center (COPC) is a system of performance management practices aimed at enhancing customer service, quality, and satisfaction while lowering costs. 10056_Mouv_5cAN 18/03/05 15:56 Page 32

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DESJARDINS & CO., PUTTING ALL OF DESJARDINS TO WORK FOR YOUR BUSINESS

OUR VISION OF BECOMING THE PREFERRED PARTNERS OF SMBs BECAME MORE OF A REALITY IN 2004. AS STATED IN THE DESJARDINS & CO. CAMPAIGN, DESJARDINS IS PUTTING ALL ITS EFFORTS INTO SERVING BUSINESSES AT EACH STAGE OF THEIR GROWTH.

THE NETWORK OF APPROXIMATELY 60 CORPORATE FINANCIAL CENTRES (CFCs) CONNECTED WITH THE DESJARDINS CAISSES, BRINGING TOGETHER SOME 1,200 ACCOUNT MANAGERS, HAS SPEARHEADED THIS PREFERRED-PARTNERS STRATEGY. OUR CFCs ARE BACKED BY TEAMS OF EXPERTS FROM THE FÉDÉRATION, SUBSIDIARIES AND BUSINESS UNITS, SO THAT WE CAN BETTER BUILD PARTNERSHIPS WITH ENTREPRENEURS AND GIVE THEM ACCESS TO ALL OF DESJARDINS’ CORPORATE SERVICES.

IN 2004, OUR RESULTS IN THIS EFFORT MET OUR HIGHEST AMBITIONS AND WERE EVIDENCED BY OUR RISING MARKET POSITION. SINCE 2001, DESJARDINS’ MARKET SHARE IN COMMERCIAL CREDIT ROSE FROM 21.7% TO 23.5%; IN FARM CREDIT, MARKET SHARE ROSE FROM 41.5% TO 42.4%. SUCH RESULTS ARE LARGELY ATTRIBUTABLE TO OUR FINANCING SUCCESSES WITH MEDIUM-SIZED BUSINESSES, AND THE GROWTH WAS ACHIEVED BY MAINTAINING AN EXCELLENT QUALITY OF RISK; OWING TO THIS FACT, THE CORPORATE MARKET GREATLY CONTRIBUTED TO DESJARDINS GROUP’S EXCELLENT PROFITABILITY. 10056_Mouv_5cAN 18/03/05 15:56 Page 34

REVIEW OF ACTIVITIES 34 DESJARDINS

MORE SMBs ARE CHOOSING DESJARDINS each year. In 2004, such was the case for D. Bertrand & Fils Inc., a food distribution business located in St. Nicolas, Québec, that employs over 400 employees and has annual sales of $150 million. In addition, the Saguenay’s Groupe Canmec stands as an impressive example of a successful business transfer. The financial arrangements proposed by Desjardins, which involved funds from several of its components and external partners, were retained by the buyers and the seller. This industrial manufacturer with over 500 employees has over $50 million in annual sales.

SMALL BUSINESSES AND SELF-EMPLOYED WORKERS have not been neglected in our business development strategies. We have repositioned and simplified our service offering such that it preserves our distinctive approach to these members, which is most representative of Desjardins’ cooperative nature. This new approach will be implemented gradually throughout 2005.

EXPERTISE Business development relies on the expertise of our personnel. Our account managers benefited from two major events related to motivation and resourcing; seminars tailored to human resources from the commercial and agriculture sectors were attended by more than 700 participants. Moreover, we sustained their interest throughout the year by organizing several workshops and seminars with prominent speakers from various industries.

OPERATIONAL EFFECTIVENESS The development and implementation of new systems aimed at businesses continued in 2004 in order to sustain operational efficiency and integrate the Basel Accord requirements in our business processes. For example, a new financing processes support application was deployed in most of the corporate financial centres. In an effort to save time and improve our sales processes, account managers will soon be equipped with a new sales and client relations management system following successful testing of this solution in 2004. 10056_Mouv_5cAN 18/03/05 15:56 Page 35

DESJARDINS 35 REVIEW OF ACTIVITIES

DESJARDINS & CO., our ad campaign, generated a high appreciation rate among our target clients, that is, a rate of 87%, which stands as a record in the industry. We used this new campaign as an opportunity to revamp all of our marketing materials and visibility and communications plans aimed at major markets and the regions.

SATISFACTION OF ENTREPRENEUR MEMBERS All of these efforts have translated into a 3-point increase in satisfaction among our members. We have distinguished ourselves through, most notably, the stability of our business relationship with members, our knowledge of their business segments and environments, and through the wide accessibility of our network.

CAISSE CENTRALE DESJARDINS made several new financial commitments with large companies. It maintained, and even improved, its preferred position among numerous banking syndicates, including the Cirque du Soleil, Gaz Métropolitain, Kruger and CGI Group.

With respect to the public and parapublic sectors, Caisse centrale (and Desjardins as a whole) draws great satisfaction from the progress made in 2004. First off, it assumed a more influential role as a coagent in a banking syndicate for the benefit of Hydro-Québec; it made major inroads with respect to banking services, with Hydro-Québec, as well as with the ministère des Finances du Québec. In addition, Caisse centrale substantially strengthened its position with public and parapublic organizations in terms of derivative products. And, thanks to the concerted efforts of several Desjardins components, it won a bid from the City of Montréal.

Furthermore, it grew its presence in the United States through the creation of Desjardins Commercial Lending. Through this new subsidiary, Desjardins can support medium-sized and large businesses active in the U.S. marketplace by allowing them to perform substantial financing transactions on both sides of the border. In fact, Desjardins Commercial Lending, which was created in mid-year, quickly took its place, enabling more than $230 million in new business. Desjardins Bank, for its part, continued expansion among small and medium-sized businesses thanks to its new commercial charter. 10056_Mouv_5cAN 18/03/05 15:56 Page 36

REVIEW OF ACTIVITIES 36 DESJARDINS

DESJARDINS SECURITIES demonstrated its expertise and ability to lead major share issuances in the financial markets by participating in the issuances of large corporations as a member of a syndicate, and, as the lead underwriter, in 16 financing activities for target corporations as part of their development strategy, notably in popular sectors like real estate, biopharmaceutical, and information technology. Desjardins Securities ranks first in Canada, according to the value of financings, as part of the Capital Pool Companies program, aimed at SMBs who want to carry out an accelerated initial public offering.

DESJARDINS VENTURE CAPITAL (DVC) serves as a leveraging tool for businesses and the regional economic development. This Desjardins entity has made approximately $127 million in commitments to 97 businesses and cooperatives throughout Québec by way of eight funds managed by Desjardins Venture Capital (DVC), notably Capital régional et coopératif Desjardins. This public fund, whose funding will reach $1.4 billion by 2011, will become increasingly strategic for Desjardins and will enable it to provide entrepreneurs with the expertise acquired by DVC in the past three decades. Mezzanine financing, which was developed jointly by DVC and the Fédération, has helped bridge the gap between DVC and the corporate financial centres. It is an innovative product aimed at SMBs that combines the characteristics of quasi-equity with term loans.

PUTTING ALL OF DESJARDINS TO WORK FOR YOUR BUSINESS The stronger synergies achieved among our components has helped strengthen our offering to entrepreneurs. We were able to deploy several new products in corporate financial centres, including a new group RRSP as well as Desjardins Business Leasing for manufacturing SMBs, which is offered in collaboration with GE Capital.

TO BENEFIT AGRICULTURAL ENTERPRISES, a farm transfers offering was launched in corporate financial centres as part of an integrated approach by Desjardins Financial Security (DFS) and the Fédération. Besides credit insurance and group savings and insurance, this offering provides entrepreneurs with access, via DFS’s financial security advisors, to advisory services and a full range of coverages to satisfy all their needs. 10056_Mouv_5cAN 18/03/05 15:56 Page 37

DESJARDINS 37 REVIEW OF ACTIVITIES

INTERNATIONAL SERVICES In terms of electronic transactions, international fund transfers and inter-currency transfers have become possible thanks to AccèsD Affaires. And thanks to the Desjardins Bank’s U.S. Merchant Services, Canadian businesses operating in the United States can now accept credit card payments from U.S. clients. These new services bolster an already vast array of international services offered by Caisse centrale Desjardins. The latter services also enjoyed appreciable growth in 2004, especially in terms of foreign exchange, whose transaction volume among corporate members jumped more than 70%.

ACCÈSD AFFAIRES Some 83,000 business members carried out no less than 18.5 million electronic transactions in 2004.

GROUP INSURANCE AND GENERAL INSURANCE Having enjoyed sharp growth since 2001, the insurance sector for groups and businesses of Desjardins Financial Security broke the billion-dollar threshold with respect to premiums in force in February 2004. Thanks to new business and a customer loyalty score of 94%, the general insurance segment of Desjardins General Insurance Group's businesses enjoyed growth of 12% in 2004.

DESJARDINS PAYROLL AND HUMAN RESOURCE SERVICES concluded new agreements with Hart stores, the City of Blainville, Alstom Canada, Teknion and Manac Inc. As of December 31, 2004, 355,000 employees from 15,000 corporate clients are now paid using our services.

DESJARDINS POINT-OF-SALE FINANCING has secured more prominent presence among durable goods merchants through the signing of new agreements with Aliments M & M, Groupe Dumoulin Audiotronic, Leon’s Furniture Limited in Ontario and Sutton Group. 10056_Mouv_5cAN 18/03/05 15:56 Page 38

REVIEW OF ACTIVITIES 38 DESJARDINS 10056_Mouv_5cAN 18/03/05 16:01 Page 39

DESJARDINS 39 REVIEW OF ACTIVITIES

CANADIAN BUSINESS DEVELOPMENT FORGING AHEAD

BUSINESS DEVELOPMENT IN CANADA STANDS AS ONE OF OUR TOP STRATEGIC ORIENTATIONS, BOTH FROM THE STANDPOINT OF DIVERSIFYING OUR REVENUE SOURCES AND TOWARDS HELPING STRENGTHEN THE FINANCIAL SERVICES COOPERATIVE MOVEMENT IN CANADA. AS THE LARGEST COOPERATIVE FINANCIAL GROUP IN THE COUNTRY, WE CONTINUOUSLY EXPAND OUR PRESENCE VIA OUR SUBSIDIARIES, OUR AFFILIATED CAISSES SERVING THE FRENCH-SPEAKING COMMUNITIES OF ONTARIO, MANITOBA AND NEW BRUNSWICK, DESJARDINS CREDIT UNION IN ONTARIO, AND OUR ALLIANCES WITH PARTNERS, AT THE FOREFRONT OF WHICH ARE THE CREDIT UNIONS. OUR LIFE AND HEALTH INSURANCE SUBSIDIARY ALREADY RANKS FOURTH IN CANADA; OUR GENERAL INSURANCE COMPANY RANKS AMONG THE TOP TEN LARGEST, AND OUR BROKERAGE FIRM IS AMONG THE TEN FIRMS THAT PERFORM THE MOST TRANSACTIONS ON THE TORONTO STOCK EXCHANGE. WE ALSO MADE SIGNIFICANT HEADWAY IN PENETRATING THE CANADIAN BANKING SYNDICATE, ASSET MANAGEMENT AND INVESTMENT FUNDS SEGMENTS. OVERALL, WE HAVE APPROXIMATELY 3,800 EMPLOYEES OUTSIDE OF QUÉBEC, AND 19% OF OUR BUSINESS VOLUME IS GENERATED IN THE OTHER CANADIAN PROVINCES. 10056_Mouv_5cAN 18/03/05 16:01 Page 40

REVIEW OF ACTIVITIES 40 DESJARDINS

TO BETTER COORDINATE OUR DEVELOPMENT on the Canadian market and leverage the growth potential that it presents to a cooperative financial group such as ours, we created, in 2004, the Strategic Planning and Canadian Business Development of Desjardins Group Executive Division within the Fédération des caisses Desjardins du Québec. Overseeing the strategic management of all Group operations outside Québec, the Executive Division will notably establish an overall strategy based on the leveraging of the strengths of all Desjardins components, namely, growth, distribution development and the creation of partnerships, alliances and acquisitions.

THE DESJARDINS BRAND: BETTER KNOWN IN ONTARIO By late 2004, awareness of the Desjardins brand in Ontario had jumped by 7 points, reflecting the major efforts deployed throughout the year to enhance our reputation and position us as the largest financial cooperative group in Canada. Channeling our energies into large-scale public relations and sponsorship events, the Group was associated with Canada’s Tennis Masters Series, the Desjardins Vanier Cup, the prestigious Picasso and Ceramics exhibition held in Toronto, and “L’écho d’un peuple”, a show that explores four centuries of French history in North America and Ontario. In October 2004, we also announced our association with the Toronto Symphony Orchestra with our commitment to sponsor the Light Classics Concert series for the next two years.

THE 24 CAISSES POPULAIRES IN ONTARIO, which became full members of Desjardins by way of a renewed, stronger partnership in 2003, was able to accelerate business development and better satisfy the needs of French-speaking communities. In addition, the workforce of the Caisses populaires de l'Ontario Executive Division enhanced their skills, and through a regional office opened in Sudbury in January, it can now offer support services equal to those elsewhere in the network to caisses in the Sudbury and Northern regions. 10056_Mouv_5cAN 18/03/05 16:01 Page 41

DESJARDINS 41 REVIEW OF ACTIVITIES

DESJARDINS CREDIT UNION (DCU) A major credit union in Ontario, with assets of almost $2 billion, DCU made great strides in business development and in preparing to progressively offer its 75,000 members and clients an array of products and services comparable to those available in the Québec and Ontario caisses, beginning in 2005. Introducing bilingualism and implementing the computer platforms and business solutions required to offer Desjardins products and services in its 28 points of service, as well as providing relevant training to all employees, are among the year’s main achievements in this network. This large-scale operation was a first for the Fédération, which is responsible for supporting DCU in its development and paves the way for future partnerships with other credit unions. This initiative confirms Desjardins’ ability to provide services in English in the Ontario market. At the same time as these changes, DCU has already introduced several Desjardins products and expanded its distribution network by installing automated tellers while concluding business agreements with various Desjardins components.

CONTINUED GROWTH FOR OUR SUBSIDIARY, DESJARDINS FINANCIAL SECURITY Solid growth in premiums was recorded in group insurance. Insurance premiums for groups and businesses in provinces other than Québec now represent more than 30% of aggregate premiums for this segment, while the sales volume posted in the other provinces is now approaching that of Québec’s, confirming a sustained penetration of the Canadian market. Furthermore, the deployment of loan insurance in the Desjardins Credit Union network enabled the subsidiary to secure second place in credit insurance in Canada. Group retirement savings also rose significantly, with more than $100 million in sales to businesses in Ontario and British Columbia, including a new agreement for managing the group retirement savings plan of over $30 million in assets for a Japanese multinational. Its distribution capacity in insurance sold to individuals on a personal basis was strengthened by the opening of five new SFL Management and LFS Laurentian Financial Services financial centres in St. John’s (Labrador-Newfoundland), Forest Hill and York Mills (Ontario), Calgary North (Alberta) and Surrey (British Columbia). 10056_Mouv_5cAN 18/03/05 16:01 Page 42

REVIEW OF ACTIVITIES 42 DESJARDINS

DESJARDINS GENERAL INSURANCE GROUP successfully completed the cross-Canada initiative to standardize its business processes and systems in 2004. This large-scale project, spread out over three years and requiring the equivalent of 70,000 person days, earned it three distinctions, namely, the Octas award in the Business Processes Transformation category, an Octas award of excellence and the Silver Award of Excellence of the Canadian Information Productivity Awards, in the Organizational Transformation category. Its Canada-wide “The Personal” banner in group P&C insurance enjoyed sharp growth of 22% outside Québec, driving it into second place in the Canadian market. In addition to the renewal of all the expiring agreements, fifteen-some others were concluded, in particular with Transcontinental, Merck Frosst, the Fédération des caisses populaires de l’Ontario, the Alberta Union of Provincial Employees (AUPE), Kraft and the Desjardins Credit Union.

SUBSTANTIAL PENETRATION OF THE BANKING SYNDICATE MARKET IN CANADA Caisse centrale Desjardins, which was involved in nine Canada-wide banking syndicates and three projects in which it is the lone financial institution for a total of $270 million, made substantial inroads in Canada’s banking syndicate markets. This amount alone represents 24% of new business for Caisse centrale in this industry.

DESJARDINS ASSET MANAGEMENT worked closely with the Caisses populaires de l’Ontario Executive Division to file a financing offer with Ontario French-language school boards. The availability of long-term funds from Desjardins Financial Security has enabled Desjardins Asset Management to meet the needs expressed by these institutions and to be mandated for long-term financing of several tens of millions of dollars.

INTEGRATION OF NORTHWEST FUNDS Acquired in 2003, Northwest Funds integrated Maestral Funds to build on the reputation enjoyed by the Northwest brand across Canada and enable better business development in intermediary networks, the Desjardins caisse network and institutional clients. The new family of Northwest Funds continues to grow and now comprises 13 funds. 10056_Mouv_5cAN 18/03/05 16:01 Page 43

DESJARDINS 43 REVIEW OF ACTIVITIES

ACCELERATED DEVELOPMENT OF DESJARDINS SECURITIES, whose Ontario workforce now comprises almost 200 employees in their Toronto, North York, Ottawa, Peterborough and Thunder Bay locations. Transactional revenues generated outside Québec are on an upswing for our brokerage firm, that is, 25% of revenues in 2004 compared to 17% in 2003. Transactional revenues achieved by institutional sectors total more than 70% of clients outside Québec, including 15% in the United States and Europe.

VISA DESJARDINS HAS BECOME THE EXCLUSIVE PROVIDER of credit cards for the 300,000 members of Coast Capital Savings, namely, the second largest credit union in Canada in terms of assets, and concluded an agreement with Westminster Savings, another major credit union in British Columbia, to replace affinity cards issued under the Community VISA banner with VISA Desjardins cards. 10056_Mouv_5cAN 18/03/05 16:01 Page 44

REVIEW OF ACTIVITIES 44 DESJARDINS

RECOGNITION TO BE PROUD OF!

BESIDES BEING A LEGITIMATE SOURCE OF PRIDE TO ALL OUR EMPLOYEES AND OFFICERS, THE HONOURS AND AWARDS BESTOWED ON DESJARDINS BY EXTERNAL ORGANIZATIONS ARE TESTIMONY TO THE HIGH STANDARDS THAT WE HAVE SET FOR OURSELVES. IN ADDITION TO THE CUSTOMER SERVICE ACHIEVEMENTS MENTIONED ON PAGES 22 AND 23, WE RECEIVED THE FOLLOWING AWARDS IN 2004:

• The “This is not...” campaign garnered two Silver Certificates of Excellence at the 2004 CASSIES (Canadian Advertising Success Stories), which were held simultaneously in Montréal and Toronto. The CASSIES is a national contest that is based on the real results of advertising campaigns. Its purpose is to demonstrate that advertising is a serious and sound investment.

• The “With d•plan, I can stay on budget” campaign won a Flèche d’or and the “Automatisation migration” campaign was awarded a certificate of merit at the 14th annual Gala des Flèches d’or, the most prestigious direct marketing competition in Québec. The two winning campaigns promoted, respectively, the Desjardins d•plan for students, intended for 18-24-year-olds, and Desjardins automated solutions for targeted members.

• Desjardins General Insurance Group won three distinctions for the success of its Canada-wide organizational transformation: 1) an Octas award in the Business Processes Transformation category, 2) the Octas of excellence and 3) a Silver Award of Excellence in the Organizational Transformation category at the Canadian Information Productivity Awards.

• Desjardins Financial Security walked away with the Best of Show award from the Insurance and Financial Communicators Association (IFCA) in the “In-House Employee Communications” category as well as two North American awards of excellence.

• Opération Métamorphose, which was designed to publicise the new Desjardins Funds offer within the caisse network, earned an Équinoxe award from the Société des relationnistes du Québec in a category for in-house public relations programs.

• According to the Secor Commerce Internet index, www.desjardins.com was the top performer among 25 Québec sites, followed by the Desjardins Financial Security (DFS) site, which took second place. DESJARDINS GROUP 45 FINANCIAL REVIEW

46 MANAGEMENT’S DISCUSSION AND ANALYSIS

General Overview of Desjardins Group 46 Overview 52 Financial results 55 Critical accounting policies 56 Changes in accounting policies 57 Business conditions

Review of Business Segments 58 Financial intermediation 67 Insurance, trust services and asset management 76 Securities, venture capital and other

Review of Combined Financial Statements 80 Total income 85 Non-interest expenses 88 Credit quality 90 Balance sheet management 96 Capital management 99 Off-balance sheet items 101 Risk management

105 COMBINED FINANCIAL STATEMENTS OF DESJARDINS GROUP

143 ADDITIONAL INFORMATION

143 Five-year statistical review of Desjardins Group

145 Principal quarterly information of Desjardins Group

146 Principal statistics by business segment

148 Principal financial results of the caisses and federations of Manitoba and New Brunswick

149 CORPORATE GOVERNANCE

159 GLOSSARY OF FINANCIAL TERMS

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS This Annual Report may contain forward-looking statements concerning Desjardins Group’s activities and strategies. By their very nature, such statements involve risks and uncertainties, and it is therefore possible that the predictions of forecasts made may not materialize because of a number of factors. Legislative and regulatory developments, changes in the economic environment, technological changes and the effects of increased competition in a market open to globalization are only some of the important factors which could cause actual results to differ from the forward- looking statements made in this report.

Management’s Discussion and Analysis is dated February 22, 2005. Management’s Discussion and Analysis should be read alongside Desjardins Group’s Combined Financial Statements. Additional information about Desjardins Group’s activities and its components are available on the SEDAR Web site at www.sedar.com. MANAGEMENT’S DISCUSSION AND ANALYSIS 46 DESJARDINS GROUP

GENERAL OVERVIEW OF DESJARDINS GROUP

OVERVIEW OF DESJARDINS GROUP MARKET TRENDS AND CHARACTERISTICS The main market trends and characteristics observed by Desjardins Group’s management DESCRIPTION OF DESJARDINS GROUP Desjardins Group is a are as follows: cooperative financial institution that belongs to its member-owners. It is the largest financial institution in Québec and the sixth largest • More intense competition arising from a greater presence of foreign in Canada in terms of total assets. Desjardins Group is composed of banks in the Canadian market. a network of caisses and corporate financial centres (CFCs) in Québec • Stricter regulations issued by the Canadian Securities and Ontario as well as subsidiaries, several of which operate across Administrators as well as regulatory and standard-setting the country. With close to 5.4 million members and clients, both organizations in the field of accounting. individuals and businesses, Desjardins Group provides a complete line • Increased marketing pressure exerted on preferred clients of financial products and services. On account of its cooperative nature, by competitors. Desjardins Group distributes a material share of its surplus earnings to • Greater negotiating power falling into the hands of client groups, members. Overall, the Group has over 38,000 employees, 7,210 elected who can choose financial institutions and products from a multitude officers, 572 caisses, 911 service centres and some 2,800 automated of options available in the market. teller machines. • The main ways to stand out from other financial institutions is through the Group’s cooperative difference and by the quality of its personnel. Desjardins Group is active in the following business segments: DESCRIPTION OF THE INDUSTRY The banking services industry Financial intermediation in Canada, which consists mainly of the six large banks and Desjardins Insurance, trust services and asset management Group, is very concentrated. Competition is fierce, and it is also being Securities, venture capital and other driven by the presence of foreign providers of banking services. Non-financial players are elbowing into the market, along with players specialized in the design and distribution of specific products (single A detailed analysis of the business segments is presented on pages products) that allow them to benefit from substantial competitive 58 to 79. advantages. Banks focus on shareholder satisfaction, leading them to aim for large profits and high returns and exercise very strict control Desjardins Group is mainly governed by a provincial statute, the over their cost structures; they organize around very profitable Act respecting financial services cooperatives, whereas Canadian banks clienteles and activities. operate under a federal charter. In addition to complying with the above- mentioned Act, Desjardins also complies with bank regulations to the Non-banking financial institutions are increasingly integrated fullest extent possible, even if its cooperative nature does not require and specialized in wealth management, and their activities include it to comply with such legislation. It has also agreed to comply, on a life and health insurance, investment funds and asset management. voluntary basis, with the regulatory requirements set out by the Basel The financial services distribution model is undergoing profound Committee on Banking Supervision of the Bank for International change, and manufacturers are adopting multidistribution models. Settlements (BIS). Desjardins Group complies with requirements for reporting issuers and, in this regard, complies with regulations set out by the Autorité des marchés financiers and the Canadian Securities Administrators.

OUR STRENGTHS • Desjardins Group provides members with many advantages stemming from its cooperative structure, including participation in decision-making and results and the Group’s commitment to community development. • Desjardins Group also provides its members and clients with an integrated service offering of exceptional accessibility, both physically and virtually, that is attuned to their changing needs. • Desjardins has been a leading organization in Québec’s economy for over 100 years, holding significant market shares in savings and financing activities and boasting a regional presence throughout Québec. • The Group has a relatively low risk profile in terms of its credit exposure; this is due to its diverse client base. The result has been excellent credit ratings from rating agencies. • Desjardins Group is the largest cooperative financial group in Canada, with recognized expertise and an acknowledged reputation among a growing number of partners both within and outside Québec. • The Group has a significant capacity for synergies among its caisses and subsidiaries that was reinforced in 2004 by the implementation of a strategic management structure for the entire Group. • Opportunities have resulted from the Act respecting the distribution of financial products and services (Act 188), which allows life and health insurance to be sold directly in the caisses. DESJARDINS GROUP 47 MANAGEMENT’S DISCUSSION AND ANALYSIS

Table 1 DESJARDINS GROUP(1)

Selected data for the year ended December 31 (in millions of dollars and as a percentage)

2004 2003 2002 OPERATING RESULTS Total income $ 8,441 $ 7,731 $ 6,910 Provisions for credit losses 94 75 111 Non-interest expenses 6,840 6,489 5,525 SURPLUS EARNINGS AFTER INCOME TAXES AND BEFORE PATRONAGE ALLOCATIONS TO MEMBERS 1,072 834 862 Patronage allocations to members 372 443 492 Surplus earnings after income taxes and before patronage allocations per $100 of average assets $ 1.07 $ 0.91 $ 1.02 Average assets 99,878 91,452 84,252

KEY RATIOS Productivity ratio – financial intermediation segment 66.10 % 67.90 % 65.10 % Return on equity 15.80 13.70 15.50 Tier 1 capital ratio – BIS(2) 13.58 12.97 12.78

(1) Excluding the caisses and federations in Manitoba and New Brunswick. (2) Bank for International Settlements.

PRESENTATION OF FINANCIAL INFORMATION Desjardins Insurance, trust services and asset management Group’s activities are in three main business segments: This segment includes the activities of Desjardins Financial Security in life and health insurance, Desjardins General Insurance Group in Financial intermediation general insurance, Desjardins Trust for trust services and investment This segment consists mainly of the caisse network, the Fédération funds and Desjardins Asset Management for the management des caisses Desjardins du Québec, Caisse centrale Desjardins, the Fonds of the assets of Desjardins Group subsidiaries. de sécurité Desjardins, Capital Desjardins inc. and, finally, the Ontario federation and caisses, included since January 1, 2004. Securities, venture capital and other This segment consists primarily of Desjardins Securities, active in As of January 1, 2005, Desjardins Credit Union (DCU) will be added securities brokerage, and Desjardins Venture Capital, which makes to this segment as we apply a new accounting standard on the venture capital investments. consolidation of variable interest entities (AcG-15), because Desjardins Group provides DCU with financial support.

Table 2 CONTRIBUTION TO SURPLUS EARNINGS BY BUSINESS SEGMENT

For the year ended December 31 (in millions of dollars and as a percentage)

2004 2003 2002 Financial intermediation $ 763 71.2 % $ 713 85.5 % $ 780 90.5 % Insurance, trust services and asset management(1) 303 28.3 171 20.5 131 15.2 Securities, venture capital and other 6 0.5 (50) (6.0) (49) (5.7) Surplus earnings after income taxes and before patronage allocations to members $ 1,072 100.0 % $ 834 100.0 % $ 862 100.0 %

(1) This result differs from the results specific to each subsidiary, as it includes consolidation adjustments.

Management makes assessments of the financial performance Desjardins Group’s overall productivity ratio is based exclusively of Desjardins Group and its business segments based primarily on on results from the financial intermediation segment. This ratio takes surplus earnings before patronage allocations to members and into consideration the share of income resulting from caisse investments contribution to the Group’s combined surplus earnings. The Group’s in subsidiaries. In addition, Management uses certain ratios that are Combined Financial Statements are prepared in accordance with expressed as percentages of average assets, mainly the ratio of surplus Canadian generally accepted accounting principles. All amounts earnings before patronage allocations to members. given in the Management’s Discussion and Analysis are in Canadian dollars, unless otherwise indicated. MANAGEMENT’S DISCUSSION AND ANALYSIS 48 DESJARDINS GROUP

Since a partnership agreement with the Fédération des caisses In addition, Desjardins Financial Corporation was successfully populaires de l’Ontario came into force on January 1, 2004, the results integrated into the Fédération des caisses Desjardins du Québec, of this federation and of its member caisses are included in results a move proposed in the action plan. The activities of Desjardins for the Group. As a result, figures for previous years have been Financial Corporation, which oversaw the insurance, trust services and restated in order to conform to the method of presentation used asset management segment, will now be limited to holding for fiscal 2004. share capital in its subsidiaries.

Other figures from prior years have been restated to conform The plan also foresees the redeployment of Desjardins Trust. As to the method of presentation adopted for 2004. a result, the Trust’s manufacturing activities and activities related to the distribution of investment funds have been transferred to the No extraordinary or unusual items had an impact on results for 2002, Fédération, while trust-related activities have been maintained in 2003 or 2004. No business acquisitions were completed during these a trust company attached to the Fédération. This redeployment occurred periods, with the exception of the acquisition in 2003 of all the common over the last few months of 2004, and the new structure became shares of Northwest Asset Management Inc. and its subsidiary, operational as of January 1, 2005. We will begin reporting results Northwest Mutual Funds Inc., which manages mutual fund investments. under this structure in the first quarter of 2005. On August 25, 2004, This transaction was recorded using the purchase method. Desjardins Trust also redeemed all Series 1 preferred shares after having received the appropriate authorization from the Autorité The Combined Financial Statements for 2004 include the heading des marchés financiers. “Discontinued operations and operations held for sale” described in Note 26. Operations held for sale in 2004 and operations This plan is based on the objective of satisfying the needs of members discontinued in 2003 did not have a significant impact on the and clients, and it will foster a more coherent approach among the Combined Financial Statements. various components of Desjardins Group. It will also lead to substantial financial gains by focusing attention on business development efforts Transactions with related parties are discussed in Note 28 and optimizing the use of financial resources; i.e., enhanced risk of the Combined Financial Statements. management, integrated treasury activities and an optimal allocation of capital. We expect the plan to generate additional surplus earnings RESTRUCTURING Fiscal 2004 saw the implementation of a before income taxes of at least $100 million per year by the end far-reaching action plan intended to reinforce the strategic management of 2006. This would be a recurring amount beginning in 2007. structure of Desjardins Group, drive business development, reposition the activities of certain subsidiaries within the Fédération des caisses Finally, it should be understood that this action plan is based on Desjardins du Québec and optimize the use of Desjardins Group’s creating certain synergies between Desjardins Group components financial resources. More specifically, on May 12, 2004, the Board and identifies these synergies as key assets to be exploited of Directors of the Fédération des caisses Desjardins du Québec in the Group’s future development. approved an action plan, the main objectives of which were to develop business and optimize processes and procedures throughout the FINANCIAL GOVERNANCE Since the first quarter of 2004, Group, including a repositioning of certain activities of subsidiaries Desjardins Group, Caisse centrale Desjardins and Desjardins Capital within the Fédération. This restructuring is discussed in Note 27 all qualify as reporting issuers, so they must comply with new to the Combined Financial Statements. regulations concerning financial disclosure arising from Act 198. Current regulations issued by the Canadian Securities Administrators In the second half of 2004, significant changes were made in concern continuous disclosure obligations (NI 51-102), auditor the organizational structure of Desjardins Group, including the oversight (NI 52-108), certification of disclosure (MI 52-109) and establishment of the Desjardins Group Strategic Management audit committees (MI 52-110). Structure Committee and the creation of six strategic functions: Senior Executive Vice-President and Chief Financial Officer of In response to the new requirements and based on industry best Desjardins Group; Senior Vice-President and Chief, Integrated Risk practices, different quarterly and annual mechanisms were implemented Management of Desjardins Group; Senior Vice-President, Strategic in 2004 in all the Group’s components. An implementation plan was Planning and Canadian Business Development of Desjardins Group; coordinated across the entire Group. The main accomplishments under Senior Executive Vice-President of Desjardins Group; President and the plan were the implementation of a process used in the review Chief Operating Officer of Caisse centrale Desjardins and Chief of quarterly financial reports by external auditors, the integration of the Treasury of Desjardins Group; and Senior Vice-President, of new rules with respect to the Management’s Discussion and Analysis Human Resources of Desjardins Group. and the annual information form, documentation of the process used to close financial statements, the creation of a disclosure committee, This new structure has also confirmed the following Group functions: and a review of charters and membership on commissions and the Secretariat General, the Internal Audit Division and the Desjardins audit committees. It is worth mentioning that, as a result of the Bureau for Financial Monitoring and Enforcement. new regulations, the Audit and Inspection Commission has taken on new responsibilities, mainly concerning the independence of In 2004 the Board of Directors also renewed the mandate of the our external auditors and the disclosure of financial information. Assets/Liabilities Committee. The Committee lends support to the activities of the Desjardins Group Strategic Management Structure Committee in its responsibilities of ensuring that the Group occupies a targeted position and develops appropriate strategies for managing interest rate risk and its capital, while falling within approved risk management parameters. DESJARDINS GROUP 49 MANAGEMENT’S DISCUSSION AND ANALYSIS

Desjardins Group’s Chief Executive Officer and Chief Financial Officer STRATEGY have implemented a sub-certification process conducted by the executives in each component. This has consolidated the process Drawing on the strength of its cooperative difference, its network of communicating information, reinforced the need for effective of subsidiaries and its financial balance, Desjardins Group’s goal procedures and controls for communicating information and provided is to be known as the best financial institution, both in terms support to the culture of Desjardins Group, which gives great value of its capacity to meet the needs of its members and clients to timely communication of precise information to the public and to and for its business development through an offer of accessible, its members. This stage in our transformation also gives the Group’s effective and complete services. Chief Executive Officer and Chief Financial Officer the information and assurance they need to certify that, based on all available information and to the best of their knowledge, the interim and annual filings do The following strategic orientations, developed for 2003-2005, not contain any untrue statement of a material fact or omit to state a were maintained in 2004. They help us attain our vision: material fact required to be stated. It also confirms that the Combined Financial Statements and the Management’s Discussion and Analysis • To realize the potential of our cooperative difference through fairly present, in all material respects, Desjardins Group’s financial the participation of members and through our commitment condition, results of operations and cash flows. to community development and to our commercial and management practices; In the first quarter of 2005, Desjardins Group will complete certain • To become the leader in quality business relationships by applying required activities with respect to a review of rules governing how a distinctive, personalized approach, by offering integrated advisory mandates are granted to external auditors and rules concerning how products and services and by continuing to develop a highly qualified the external auditors recruit members of their staff. Objectives for 2005 advisory team whose main priority is the satisfaction of our also foresee continuing to analyze financial disclosure requirements. members and clients; In conclusion, Desjardins Group’s Chief Executive Officer and Chief • To ensure profitable business development outside Québec Financial Officer, as well as the Audit and Inspection Committee, in order to grow revenues, diversify market risk and expand are closely monitoring the plan for implementing financial governance our range of services; activities and how it is being implemented, and they are intervening on • To ensure continued business development in Québec and become a regular basis in order to effect any improvements that may be required. the market leader in personal wealth management; • To be recognized as the preferred partner of SMBs by having FACTORS LIKELY TO INFLUENCE FUTURE RESULTS Many the best offer of integrated services and to be known as a proactive factors, several of which are beyond our control, could arise and partner of large corporations; have a material impact on our financial results and consequently • To remain the most accessible financial institution and maximize cause Desjardins Group’s actual results to differ from those performance and synergies between physical and virtual expected. It is therefore important to specify that the uncertain distribution networks; nature of these factors could result in the predictions made by these • To maintain a healthy return, maximize productivity and optimize forward-looking statements not to materialize. This is explained the level of development capital in order to hone our competitive in “Caution concerning forward-looking statements” on page 45. edge and ensure Desjardins Group’s longevity.

Certain factors are economic in nature or subject to regulation. As part of the Desjardins Youth Focus program, announced in early 2004, These include interest rates, the inflation rate, foreign exchange rates, several initiatives are already fostering business development among stock indexes, monetary and tax policies, consumer spending, the a younger clientele. Others will be forthcoming in 2005. demand for credit, individual savings patterns, the unemployment rate, commercial exchanges between Québec and the United States, A review of the process for establishing and validating Desjardins and changes to laws and regulations. Group’s financial and strategic plans for 2006-2008 will be conducted with the participation of all the various Group components. The Risk factors also come into play, including credit risk, liquidity Fédération des caisses Desjardins du Québec will be responsible risk, market risk, operational risk and insurance risk. These factors for the business plan for the entire Group. are discussed in the section entitled “Risk Management” on pages 101 to 104. Desjardins Group has implemented strategies to manage these risks.

It is important to note that the above lists of factors that are likely to influence future results are not exhaustive. MANAGEMENT’S DISCUSSION AND ANALYSIS 50 DESJARDINS GROUP

FOLLOW-UP ON THE MAIN FINANCIAL OBJECTIVES SET OUT IN THE MANAGEMENT’S DISCUSSION AND ANALYSIS FOR 2003

2004 financial objectives 2004 results Other medium-term objective Surplus earnings after income taxes and Development outside of Québec. before patronage allocations to members: Objective met, to surpass $0.90 per $100 of average assets $1.07 In 2004, we created an executive division responsible for strategic planning and Canada-wide development within the Fédération. Pay 35% of surplus earnings after income Objective met, Development outside Québec took the form of extending the taxes as patronage allocations to members 35% service offer of Desjardins Group’s various components and by seizing certain opportunities for partnerships, including: Specific financial objective in the medium term Market share for the enterprise line Growing, • A partnership agreement with the Fédération des caisses of business: from 23% in 2003 to 25% 23.5% as at populaires de l’Ontario in effect since January 1, 2004, which by the end of 2006 December 31, 2004 added over $2 billion in assets in 2004, distributed among the 24 Ontario caisses. • Desjardins Credit Union, an Ontario credit union with close to Steady progress is being made toward attaining other medium-term $2 billion in assets, made great strides in 2004 in order to objectives announced in management’s analysis of 2003. gradually introduce new products and services in 2005 that will meet the needs of some 75,000 members and clients. The new range of products and services will be comparable to what is Other medium-term objective currently available in Québec and will have a positive impact Become the leading wealth management institution for on business development activities. individuals in Québec by maximizing synergies between the • In 2004 we established a new commercial loans subsidiary in caisses and subsidiaries. the United States, Desjardins Commercial Lending U.S.A. Corp. • Caisse centrale Desjardins made significant inroads into In 2004 and according to the restructuring plan, Desjardins Trust the Canadian banking syndicate market. investment fund manufacturing and distribution activities have • A partnership was developed with credit unions in British been redeployed within the Fédération. This initiative took effect Columbia. Desjardins is providing its expertise in the design January 1, 2005 and will foster closer working relationships and sale of index-based savings products and coverage with the caisse network and create additional synergies in the of products sold. professional management of assets. • Desjardins Group continued to make headway penetrating the Canadian market for group and corporate life and health • A renewed range of products was offered by Desjardins Trust insurance in the other Canadian provinces, with current in 2004. This included the introduction of 13 new funds and premium volumes reaching 30% of the total in this sector. modified existing funds. Northwest Mutual Funds was acquired • The Personal, the Desjardins General Insurance Group’s in 2003 and was integrated into the Maestral line of funds. banner for general group insurance sold across Canada, • Research and development continued on savings products had undeniable success, posting a 23% increase in business that would foster rapid adaptation to the types of changes volumes outside Québec. This gave The Personal the and trends characteristic of the financial services industry. number 2 position in the Canadian market. For example, we created Perspectives Plus, a new index-based • Accelerated development of Desjardins Securities, which term savings product. reported that 25% of its transaction-based revenues are now • Appreciable growth was registered in 2004 in our share of generated outside Québec (as compared to 17% in 2003). the Québec wealth management market, with increases of: - 0.7% in on-balance sheet personal savings (44.6%), - 0.8% in investment funds (8.1%), - 0.9% in securities brokerage (10.5%), - 0.8% in corporate venture capital funds (7.6%). DESJARDINS GROUP 51 MANAGEMENT’S DISCUSSION AND ANALYSIS

OUTLOOK Network accessibility Desjardins Group intends to remain the most Action plan – Restructuring to achieve additional savings With its far- accessible financial institution in Québec while optimizing the reaching restructuring plan, Desjardins Group wants to generate performance and synergies of its distribution networks. With this at least $100 million in additional surplus earnings before income in mind, the Group is pursuing a transformation of its physical caisse taxes by the end of 2006. These additional funds would be recurring network, which should include between 450 and 500 caisses in Québec as of fiscal 2007. The action plan was announced in May 2004, with by the end of 2005. These caisses will operate at least 1,000 points business development and the optimization of practices across the of service where members have access to employees and the largest Group as its main objectives. automated teller network in Québec.

Objective of a healthy profitability Desjardins Group aims to maintain Growing the enterprise line of business Desjardins Group will continue healthy profitability by setting an objective of surplus earnings before to develop its enterprise line of business in order to expand its portfolio patronage allocations to members surpassing $0.90 per $100 of of commercial and industrial loans, grow its market share and generate average assets. This level of performance will yield a profitability additional revenues. The objective is to move market share from considered adequate and reassuring and is within the 12% to 15% the 23% reported for 2003 to 25% by the end of 2006. range for return on equity that the Group identified as necessary to continue pursuing business development objectives; amply fulfill Leader in personal wealth management Desjardins Group has set its mission to members, clients and the community; and consolidate itself the objective of becoming the Québec leader in personal wealth sufficient capital. The objective has been maintained despite a management by optimizing synergies between caisses, the Fédération predicted drop in return experienced in 2005 that resulted in part and subsidiaries. from weak growth in net interest income and an increase in operating expenses of approximately 10%, a result of our rapid growth and Expansion across Canada Desjardins Group is also expanding into development strategy. new markets through profitable business development outside Québec that will enable it to apply its cooperative approach; maximize Cooperative difference Desjardins Group aims to assert its cooperative opportunities for communities to take charge of their financial affairs; difference, in part through its commitment to pay patronage allocations and grow revenues, diversify risk and expand the scope of services to members in 2005 and 2006 of approximately 35% of surplus offered. Desjardins Group currently conducts close to 19% of its earnings after income taxes. business in other Canadian provinces and plans to raise this figure to at least 25% over the next few years. Electronic commerce solutions Desjardins Group’s virtual distribution network is very effective, and members’ use of the complete range of personalized electronic services is growing rapidly. The Group plans to play a leading role in the industry by drawing on its innovative electronic services and paying careful attention to the costs associated with developing the network. MANAGEMENT’S DISCUSSION AND ANALYSIS 52 DESJARDINS GROUP

FINANCIAL RESULTS OF DESJARDINS GROUP For example (and this is more thoroughly described below), Desjardins Financial Security, which offers life and health insurance, SOLID PERFORMANCE OF DESJARDINS GROUP posted record net earnings of $130 million for 2004, an increase 2004 fourth quarter results For the fourth quarter ended of $20 million or 18.2% from figures posted for 2003. Furthermore, December 31, 2004, Desjardins Group announced combined surplus Desjardins General Insurance Group grew earnings by $81 million earnings before patronage allocations of $206 million, an increase to $127 million for 2004. Similarly, Desjardins Venture Capital made of $38 million or 22.6% compared to the corresponding period of 2003. a marked improvement to results in 2004, reporting $8 million Most of this gain is explained by the significant contribution made in earnings as compared to a $51 million loss posted last year. by Desjardins Group subsidiaries, where profits for the fourth quarter grew $58 million as compared to the same period of 2003. In this respect, it is worth mentioning the very substantial increase in SURPLUS EARNINGS BEFORE PATRONAGE ALLOCATIONS profitability at Desjardins General Insurance Group, which registered PATRONAGE ALLOCATIONS TO MEMBERS a $23 million increase in earnings that was due in part to a very (in millions of $) (in millions of $) favourable loss experience and tight control over operating costs during a period of continued growth. In addition, it should be noted 1,200 600 that results for the last quarter of 2003 had been affected by a difficult environment faced by the venture capital subsidiary, which mirrored

900 1,072 450 industry trends and posted a loss of $27 million. 492 443 862 834

Total income for the fourth quarter of 2004 stood at $2,145 million. 600 300 372 Representing an increase of 2.4% from the same period of 2003, 602 total income was relatively unchanged. 272 495 300 150

Provisions for credit losses, which are charged to income, came 145 to $22 million, up $12 million from the amount posted for the same 0 0 quarter of 2003. 2001 2001 2004 2004 2000 2002 2003 Non-interest expenses for the fourth quarter of 2004 stood at 2000 2002 2003 $1,819 million, as compared to $1,913 for the same period of 2003. Figures for the last quarter of 2003 were affected by substantial investments made to improve employee remuneration throughout These excellent results enabled Desjardins Group to record patronage the organization. allocations to member-owners of $372 million for 2004, compared to $443 million for 2003. Despite higher reported surplus earnings, Finally, return on equity in the fourth quarter of 2004 was 11.5%, patronage allocations were down for 2004; this is explained by the as compared to 10.6% for 2003. The productivity ratio stood at 72.3%, caisses’ will to increase capitalization in order to meet new international an improvement of 130 basis points over the ratio posted a year standards and, as a result, more surplus earnings were retained. earlier, 73.6%. In fact, it was strong growth of close to $6 billion in the financing activities of the caisses that forced them to set aside larger amounts A summary of results for the last eight quarters is provided on as reserves, a move required to maintain an adequate level of page 145 of this report. capitalization and ensure Desjardins Group’s longevity.

2004 results Desjardins Group reports excellent financial performance Over the last three years, Desjardins Group nevertheless returned for fiscal 2004, with surplus earnings before patronage allocations $1.3 billion to its member-owners, an impressive amount by any to members of $1,072 million, an increase of $238 million or 28.5% measure and eloquent testimony to its cooperative difference. This from the results posted for 2003. This remarkable profitability is distribution represents 35% of surplus earnings before patronage explained in part by enviable performance on the part of the financial allocations for the three-year period. In addition, an amount of intermediation segment, which posted $50 million of growth or a $52 million, or $9 million more than last year, was returned to the 7% increase over results for 2003. Excellent performance in financing community in the form of sponsorships, donations and bursaries. activities, particularly in residential mortgage financing, combined with the ability to maintain high quality credit, made a significant contribution to the segment’s business development. Subsidiaries also experienced an unprecedented $188 million increase in earnings. DESJARDINS GROUP 53 MANAGEMENT’S DISCUSSION AND ANALYSIS

Return on equity stood at 15.8% for 2004, compared to 13.7% for 2003. In 2002, Desjardins Group began working on the implementation This level of return provides enough financial leeway for investments of integrated risk management throughout the Group, in compliance in selected development projects and allows the Group to continue with expectations and requirements under the new Basel Accord. This looking for profitable development opportunities in Québec and across work continued in 2004. The goal is to effect continuous improvements the country. in our capacity to assess the risks of a financial group by closely linking capital requirements with the institution’s specific risks. In terms of capitalization, Desjardins Group prefers maintaining sufficient capital in order to ensure a high degree of security against Desjardins Group’s total income stood at $8,441 million, an increase the risks faced by Desjardins Group in the normal course of operations. of $710 million or 9.2% as compared to 2003. Other income, which Moreover, the quality of this capital, of which 79.3% is in reserves as stood at $4,953 million, rose $673 million or 15.7% as compared at December 31, 2004 (as compared to 77.2% as at December 31, 2003), to 2003. Over one third of this change is attributable to the increase the Group can boast a Tier 1 capital ratio of 13.58%, one of the best in net premiums, which reflects the excellent growth witnessed in in the industry. In March 2004, Desjardins Group, through its subsidiary insurance subsidiaries. In addition, the application of the new guideline Capital Desjardins, completed a public issue to Canadian investors on hedging relationships (AcG-13) since January 1, 2004 drove up other of senior bonds valued at $450 million. This was the first issuance income by $102 million, including an unrealized gain of $30 million completed under a short form prospectus, a method under which arising from changes in the fair value of derivatives that were not senior bonds of up to $2 billion can be issued over a period not to designated in hedging relationships and interest of $72 million on exceed 25 months. This transaction gave Desjardins Group the capital these derivatives (formerly presented in interest income). Net interest needed to solidify its capitalization in a context of accelerated growth income for 2004 was $3,488 million, up $37 million or 1.1% over 2003, in its activities. despite the fact that $72 million in interest income on derivatives was not included. The increase in net interest income resulted from sustained growth in business volumes and prudent and effective RETURN ON EQUITY TIER 1 CAPITAL RATIO (BIS) management of interest rate risk. (%) (%) Expenditures on provisions for credit losses in 2004 stood at 20 16 $94 million, which was $19 million or 25.3% more than the expense for 2003 and the result of growth in business volume. Desjardins Group 16 nevertheless had a loan portfolio of excellent quality in 2004. This 12 expense represents 0.13% of the average gross loan portfolio in 2004, 13.58 15.8 12.97 15.5 12.95 12.78 as compared with 0.11% in 2003. 12 12.26 13.7 8

11.8 Non-interest expenses stood at $6,840 million, up $351 million or 5.4%

8 10.5 from 2003, a result that was largely due to expenses related to claims, 4 benefits, annuities and changes in insurance provisions and that was 4 a direct result of growth in insurance business. Increases to salaries and employee benefits were largely due to salary adjustments that 0 0 were made last year but were not effective at the beginning of 2003; from the annual indexation of salaries; from additional employees 2001 2001 2004 2000 2002 2003 2004 2000 2002 2003 added to some components of the financial intermediation segment; from the recording of costs associated with employee profit sharing plans; and from costs related to computer services management It is worth noting that Desjardins Group made a strategic choice partnerships, a direct result of increased business volume. in deciding to maintain a level of Tier 1 capital that was higher than that held by the banks. MANAGEMENT’S DISCUSSION AND ANALYSIS 54 DESJARDINS GROUP

The productivity ratio is calculated using results from the financial Contribution to surplus earnings by business segment The following intermediation segment and taking into consideration its share of paragraphs provide a summary of the financial performance of each the $309 million in earnings from caisse investments in subsidiaries. business segment. Detailed financial analyses are presented in The productivity ratio for 2004 was 66.1%, or an improvement of subsequent sections. 180 basis points over the rate of 67.9% posted for 2003. Despite 9.1% growth in the segment’s non-interest expenses, total income The financial intermediation segment, consisting primarily of the including the earnings of subsidiaries grew 12.2%, the highest rate Québec and Ontario caisse networks, recorded surplus earnings of in relative terms. This growth was mainly due to the $188 million $763 million in 2004, an increase of $50 million or 7% as compared contribution made by subsidiaries to caisse results, a contribution to 2003. This performance was aided by total income growth of that added 300 basis points to the segment’s productivity ratio. $276 million or 7.5% as a result of increased net interest income, Note that a lower ratio indicates that it costs less to generate a product of greater business volumes, particularly in residential a dollar of revenue. mortgage lending, combined with prudent and effective management of interest rate risk and growth experienced in various other revenue categories. Higher profitability was nevertheless tempered by a PRODUCTIVITY RATIO TOTAL ASSETS OF $236 million or 9.1% increase in non-interest expenses, mainly (%) DESJARDINS GROUP expenses tied to employee compensation. Results for 2004 also (in billions of $) include an expenditure on provisions for credit losses of $111 million, which compares with $82 million posted for 2003. The financial 80 110 intermediation segment boasts a loan portfolio of very good quality.

100 The solid profitability figures posted by the insurance, trust services 75 74.4 104 and asset management segment made a significant contribution 90 96 to Desjardins Group’s overall financial performance. Net income for this segment totalled $303 million in 2004, a considerable jump 70 68.4 67.9 87 80 of $132 million or 77.2% from the segment’s results for 2003. The 65.1 66.1 82 segment contributed 28.3% of Desjardins Group’s combined income 65 78 70 for 2004, a significant increase from the 20.5% posted for 2003. This impressive accomplishment can be traced to the excellent performance of its insurance subsidiaries, particularly general 60 60 insurance, and was driven by rising premiums, improved claims experience, lower operating costs and more investment income. 2001 2001 2004 2004 2000 2002 2003 2000 2002 2003

The securities, venture capital and other segment posted net income of $6 million for 2004 compared to a $50 million deficit recorded As at December 31, 2004, Desjardins Group’s total assets stood in 2003. This significant turnaround was mainly attributable to at $103.6 billion, up $7.3 billion or 7.6% as compared to a year earlier. subsidiaries operating in the venture capital segment, which recorded Sustained growth in business volumes played a major role, particularly $8 million in net earnings for 2004 as compared to a net loss of financing activities like residential mortgage lending. Desjardins Group $51 million for 2003. This improvement is mainly explained by increases profited from the exceptional expansion witnessed in new home in the value of investments held in companies operating in traditional construction in 2004 and a home resale market that remained sectors of the economy. Desjardins Securities, for its part, is actively very active. pursuing a development plan that is clearly paying off, since revenues are up 33% compared to 2003. Despite faltering markets in the last As at December 31, 2004, all the assets under Desjardins Group’s nine months of 2004, Desjardins Securities was able to post only a control as trustee or administrator stood at $203.8 billion, up slight loss of $0.1 million for 2004, a clear improvement over the net $31.4 billion or 18.2% over 2003, aided by the generally favourable loss of $4 million recorded in 2003. performance of securities markets in 2004. Assets under management came to $10.4 billion at the end of 2004, compared to $9.9 billion a year earlier. This represents an increase of $500 million or 5%. DESJARDINS GROUP 55 MANAGEMENT’S DISCUSSION AND ANALYSIS

CRITICAL ACCOUNTING POLICIES POLICY AND RELATED LIABILITIES The process of assessing policy liabilities requires the use of many estimates that have an impact Knowledge of Desjardins Group’s accounting policies is essential on Desjardins Group’s combined financial results. Management must to understand and interpret the results reported in the Combined make assumptions with respect to mortality and morbidity, policy Financial Statements as at December 31, 2004. The principal accounting lapse rates, projected income from future investments and operating policies are described in Note 1 on pages 112 to 117. Some of these expense forecasts. policies are of particular importance to Desjardins Group’s financial position and operating results since they require Management to The process of determining policy liabilities necessarily involves risks make assumptions and estimates that may involve uncertainties. of adverse deviation from best estimates that vary in relation to the The following paragraphs summarize the accounting policies. length of the estimation period and the potential volatility of each component. Due to these uncertainties, best estimate assumptions CUMULATIVE PROVISION FOR CREDIT LOSSES The cumulative are adjusted by margins for adverse deviation, which increase policy provision for credit losses reflects Management’s best estimate of liabilities and reduce the amount of gross income that would otherwise potential losses related to the loan portfolio and stemming from be recognized at inception of the policies. on-balance sheet and off-balance sheet items, given its assessment of economic conditions. This item is made up of specific provisions The valuation of actuarial liabilities is reviewed annually by actuaries and a general provision. As regards the loan portfolio, credit risk who assess the evolution of assumptions made by the Canadian is assessed regularly and specific provisions are determined on a Institute of Actuaries. loan-by-loan basis for all loans considered impaired. In addition, a general provision is taken in order to reflect Management’s best EMPLOYEE FUTURE BENEFIT PLANS Desjardins Group offers estimate of probable losses within the portion of the loan portfolio its employees a multi-employer defined benefit pension plan. It also not yet classified as impaired. The general provision is established offers its retired employees the option of taking out certain forms of using a statistical model based on changes in loans by category. insurance coverage, also offered as part of a multi-employer defined Furthermore, an additional amount is taken into account to reflect benefit plan. The process of calculating accrued benefit obligations the impact of economic and other factors. and net expenses with respect to the various plans requires actuarial calculations and assumptions. The principal assumptions concern Certain factors may influence Management’s assumptions and mortality rates, the discount rate, the rate of payroll growth, the estimates concerning the cumulative provision for credit losses, long-term yield of the fair value of the plans’ assets and rising health including the inherent risk of loan portfolio, the amount and date of care costs. The calculation of the fair value of the plans’ assets is forecasted payments, forecasted loss rates, and economic conditions. based on market-related values. Variances between the actual future Any significant changes in these factors may modify the amount actuarial results and those contained in the various assumptions currently reported as the cumulative provision for credit losses. may have an impact on the net liability relating to retirement benefits and other future benefits. For a detailed analysis of the methods used by Desjardins Group to manage credit risk, please refer to page 102 of the Management’s GOODWILL AND INTANGIBLE ASSETS Intangible assets with an Discussion and Analysis. indefinite useful life as well as goodwill items disclosed in Desjardins Group’s combined balance sheet are not amortized, but are subject FAIR VALUE OF FINANCIAL INSTRUMENTS Desjardins Group to an impairment test at least once a year. This test involves comparing records in the balance sheet, at fair value, trading portfolio items the fair values and book values of goodwill for each operating unit. and derivative financial instruments. Resulting gains and losses are Fair values are determined by using discounted cash flows or net recorded as described in Note 1 to the Combined Financial Statements. realizable values, whichever is appropriate. These methods require management to make assumptions that may affect the fair value Fair values of financial instruments are determined on the basis of of the financial results. quoted market prices. When market prices are unavailable, the Group determines the fair values using either the market price of similar INCOME TAXES ON SURPLUS EARNINGS The process of financial instruments or discounted cash flows, at market interest calculating income taxes on surplus earnings is based on the rates, which are applied to the forecasted amounts until the maturity anticipated tax treatment of transactions recorded in the combined date. Variances between the assumptions made and the actual results income statement and in the combined statement of changes in equity. may result in different fair values and financial results. To determine the current and future portions of this item, assumptions must be made concerning the tax laws governing Desjardins Group As regards over-the-counter derivative instruments, Desjardins in addition to the dates on which asset and liability entries related Group calculates the fair value using pricing models that incorporate to future taxes will be reversed. If Desjardins Group’s interpretation current market prices and contractual prices of the underlying differs from that of the tax authorities or if the reversal dates do not instruments, the time value of money, and yield curves. The methods, correspond with the forecasted dates, the provision for income taxes models and assumptions used to set prices and to assess derivative may increase or decrease in subsequent years. instruments are subjective and may result in different fair values and financial results. MANAGEMENT’S DISCUSSION AND ANALYSIS 56 DESJARDINS GROUP

CHANGES IN ACCOUNTING POLICIES Impairment of long-lived assets On January 1, 2004, Desjardins Group prospectively adopted the requirements of CICA Handbook NEW ACCOUNTING STANDARDS ADOPTED IN 2004 Section 3063 entitled “Impairment of Long-Lived Assets”. This Section Generally accepted accounting principles (GAAP) On January 1, 2004, establishes the standards for the recognition, measurement and Desjardins Group adopted the requirements of Section 1100 of the CICA disclosure of the impairment of long-lived assets and replaces Handbook, “Generally Accepted Accounting Principles”, on a prospective the provisions concerning the depreciations previously contained basis. Section 1100 establishes standards for financial reporting in Section 3061 “Property, Plant, and Equipment”. Under this new in accordance with generally accepted accounting principles (GAAP). standard, an impairment loss must be recognized for an asset held It also specifies the sources that should be consulted when selecting for use when the carrying value exceeds the total undiscounted cash accounting policies or when determining which information to disclose flows that will likely result from the use and eventual disposal of in instances where a topic has not explicitly been addressed in GAAP’s the asset. The amount of the loss to be recognized corresponds to primary sources. The application of this standard eliminates certain the excess of the carrying value over the fair value. The application practices that could have been applied in a specific industry. The only of this new standard did not have a significant impact on Desjardins impact for Desjardins Group stems from a change in the presentation Group’s Combined Financial Statements. with respect to the clearing settlement, under which the amounts are exchanged between financial institutions. The net amounts receivable Disposal of long-lived assets and discontinued operations Desjardins from financial institutions resulting from the clearing settlement system Group adopted the new accounting standard entitled “Disposal of are now recorded in assets, whereas the net amounts payable to financial Long-Lived Assets and Discontinued Operations”, presented in Section institutions are recorded in liabilities. As at December 31, 2003, the 3475 of the CICA Handbook, with respect to the disposal of assets after net balance for all of the financial institutions was presented in assets. May 1, 2003. Under the standard, long-lived assets classified as held Furthermore, certain other notes in transit were reclassified. for sale must be measured at the lower of their carrying amount or The impact of these reclassifications on the Combined Financial fair value less cost to sell. The fair value is determined on the basis Statements was negligible. of prices for similar assets. These assets are now classified as “Other assets – Other” in the combined balance sheet. There was no impact Hedging relationships On January 1, 2004, Desjardins Group on Desjardins Group’s Combined Financial Statements for the year adopted the CICA Handbook Accounting Guideline entitled “Hedging ended December 31, 2004. Relationships” (AcG-13) and abstract 128 of the Emerging Issues Committee (EIC-128) entitled “Accounting for Trading, Speculative FUTURE ACCOUNTING CHANGES or Non-hedging Derivative Financial Instruments”. This Accounting Variable interest entities On January 1, 2005, Desjardins Group will Guideline focuses on the identification, designation, documentation adopt the CICA Handbook Accounting Guideline entitled “Consolidation and effectiveness of hedging relationships and indicates the situations of Variable Interest Entities” (AcG-15). A variable interest entity (VIE) in which hedge accounting should no longer be used. Under EIC-128, refers to an entity whose equity investment is not sufficient to permit derivative financial instruments that do not qualify for hedge accounting the entity to finance its activities without additional subordinated must be assessed at fair value and be recorded on the balance sheet financial support from a third party. Under this Guideline, a VIE must as assets or liabilities, and changes in fair value must be recorded be consolidated by its primary beneficiary, that is, the entity that under income. assumes the majority of the expected losses and/or the possibility of receiving the principal residual returns. In this context, Desjardins In accordance with the adoption of AcG-13 on January 1, 2004, Group must consolidate, as at January 1, 2005, a trust in which a Desjardins Group reviewed its accounting policies to ensure that subsidiary of the Desjardins Group holds an interest of $54 million, all derivative financial instruments are recorded at fair value on representing 90% of the units. The result of applying this new Guideline the balance sheet, whereas beforehand, only those held for trading will be an increase in assets and liabilities of $374 million. In addition, purposes were recorded as such. Owing to this fact, the balance sheet the Group must consolidate an Ontario financial cooperative, namely, as at December 31, 2003 has been restated, the effect being that Desjardins Credit Union Inc., to which it provides financial support. “Derivative-related assets” and “Other liabilities – Other” rose by The consolidation of this variable interest entity as at January 1, 2005 $81 million and “Derivative-related liabilities” and “Other assets – will result in an increase in assets of $1,879 million and in liabilities Other” decreased by $375 million. As such, the positive and negative of $1,898 million, as well as a decline in undistributed surplus fair values, as well as resulting deferred gains and losses, are presented earnings of $19 million. as assets and liabilities. In addition, at this same date, the Group assessed its current hedging relationships and ceased to apply Liabilities and equity On January 1, 2005, Desjardins Group will hedge accounting to those that did not fully qualify. The impact adopt the new accounting standard with respect to classification of this Accounting Guideline on combined income for the year of financial instruments in liabilities or in equity. The amendments was an increase of $30 million before taxes. require that contractual obligations that can be settled through the issuer’s choice to issue a variable quantity of equity instruments belonging to the issuer be presented as a liability and not as equity. These new requirements will not have an impact on Desjardins Group’s Combined Financial Statements.

Please refer to Note 2 to Desjardins Group’s Combined Financial Statements for further information on these future changes. DESJARDINS GROUP 57 MANAGEMENT’S DISCUSSION AND ANALYSIS

BUSINESS CONDITIONS Canada continued its expansion, though the situation deteriorated somewhat, owing to the appreciation of the Canadian dollar and Growth in the global economy was nearly 5% in 2004, its best the slowdown in the U.S. economy. Exporting businesses were hurt, performance in almost 30 years. The year began with a strong reducing the contribution of foreign trade to economic growth. However, recovery that gradually tapered off to more moderate growth. The real GDP progressed by nearly 2.5% in 2004, an improvement on climate of uncertainty that prevailed around the world was exacerbated the 2% posted the previous year. The faltering Canadian economy, by the steep rise in the price of oil, which dampened economic activity in conjunction with the appreciating currency, prompted the Bank as the months passed. Europe and Japan were particularly hard hit of Canada to put the monetary tightening on hold as of December. by the higher price of “black gold” and by the appreciation of their Thus, the discount rate closed the year at 2.75%. currencies against the U.S. dollar, undercutting their growth. The expansionary trend persisted in North America, leading the central The industrial sector, which was already contending with stiff banks of Canada and the United States to begin a process of monetary competition from emerging countries, pursued its adjustments. tightening in the second half of the year. Investments in state-of-the-art equipment received a boost with the appreciation of the loonie, which reduced the costs of materials On financial markets, significant fluctuations in the world’s principal imported from the United States. Job creation was restrained, currencies were the focus of attention. The value of the U.S. dollar as Canadian manufacturers remained prudent and limited hiring. fell substantially against the other main currencies as a result of the The strength of other sectors compensated somewhat, however, ballooning of budgetary and trade deficits in the U.S. Canada’s enviable and the unemployment rate fell to nearly 7% in 2004. position in this respect, notably with the surpluses posted in the federal budget and foreign trade, contributed to the appreciation of the loonie. Improvements in the labour market and low interest rates made it It rose from 77 cents U.S. at the beginning of 2004 to 85 cents U.S. by possible for households to function as a pillar of economic growth. the end of November, reaching its highest level since 1992. Subsequently Consumer spending remained strong, while residential construction it lost a little momentum, closing the year at 83.2 cents U.S. experienced its best period since the late 1980s. Businesses also contributed to the growth in real GDP by investing. Oil prices also shook financial markets. Driven by supply concerns attributable to geopolitical tensions and strong demand resulting OUTLOOK FOR 2005 from robust growth in the global economy, they rose precipitously. The expansion of the North American economy will persist in 2005. In October they surpassed the threshold of $55 U.S. per barrel(1) Preliminary indicators suggest that growth could be slow early before falling back to approximately $43 U.S. by the end of the year. in the year, then pick up over time. Under these conditions, the pause This rise in the price of crude put a damper on expectations for economic in the monetary tightening will continue in Canada, but increases to growth and, by extension, corporate profits. The overall effect was the leading rates are still expected during 2005. Inflation will remain a cooling of the ardour of stock market investors. Nonetheless, under control, and the economy will approach its full productive U.S. and Canadian markets made considerable advances, with a 9% capacity. In Canada, Québec, and Ontario, this will translate into appreciation in the S&P 500 and 12.5% in the S&P/TSX. real GDP growth similar to, or slightly above, last year’s.

(1) WTI oil price at New York.

CANADIAN DOLLAR PRIME RATE UNEMPLOYMENT RATE GDP GROWTH ($ CAN/$ US) (%) (%) (%)

0.80 8 12 8

10 0.76 6 6 8 0.72 4 6 4 0.68 4 2 2 0.64 2

0.60 0 0 0 1999 2000 2001 2002 2003 2004 1999 2001 2002 2003 2004 2000 1999 2002 2003 1999 2002 2003 2000 2001 2004 2000 2001 2004

Canada Canada

Québec Québec

Ontario Ontario MANAGEMENT’S DISCUSSION AND ANALYSIS 58 DESJARDINS GROUP

REVIEW OF BUSINESS SEGMENTS

FINANCIAL INTERMEDIATION The financial intermediation segment also has links to activities that extend beyond these two provinces, in particular the 40 caisses DESCRIPTION OF THE SEGMENT The financial intermediation and the federations of Manitoba and New Brunswick, which are segment includes financing, savings recruitment, credit card and auxiliary members of the Fédération des caisses Desjardins du central fund activities. It provides both retail and wholesale services. Québec, but are governed by laws and regulations that are specific A broad range of financial services is offered to members and clients. to the jurisdiction in which they operate and are not included with the financial results of the financial intermediation segment. As the This segment therefore primarily serves the Québec market, with financial agent and as the treasurer for Desjardins Group, Caisse a decentralized network of 548 caisses and 55 corporate financial centres centrale Desjardins conducts transactions on national and covering all regions of the province. It is supported by a federation that international levels. dispenses specialized services and rounds out the services provided to members and clients. In addition, when the partnership agreement DESCRIPTION OF THE INDUSTRY The high level of concentration between Desjardins Group and the caisse network in Ontario took of the banking services industry in Canada has resulted in market effect on January 1, 2004, a total of 24 caisses and 3 corporate financial saturation, so that any one player’s increase in market share must centres in Ontario were added to the physical network. The financial reflect another’s loss. Our competitors expend a great deal of energy results of these caisses and of the Fédération des caisses populaires cornering those business segments that they deem the most lucrative, de l’Ontario are now an integral part of the results of the financial in particular wealth management, in their quest to maximize profits intermediation segment. and satisfy their shareholders.

2004 ACHIEVEMENTS • $50 million or 7% increase in surplus earnings before patronage allocations. • The financial intermediation segment has assets totalling $87.4 billion; the 8% increase was aided by the strongest growth in financing activities in more than 10 years-mainly in the housing sector. • A market leader with a confirmed 39% Québec market share in the residential mortgage sector, 42.4% in the agricultural loans sector, and 44.6% in personal on-balance sheet savings recruitment. • Active development of the wealth management market by launching a new line of Desjardins funds and creating a new indexed savings product; substantial growth of Québec market share for wealth management in 2004. • Participation in the development of all regions of Québec with the creation of corporate financial centres so as to meet needs specific to businesses. • Major penetration on the part of Caisse centrale Desjardins through the banking syndicates market in Canada and creation of a commercial loans subsidiary to allow Desjardins Group to assist large and medium-sized corporations with their U.S. activity-related financing transactions. • Accelerated development of the enterprise line of business, resulting in a substantial 0.5% increase in the rate of penetration in Québec, bringing this rate to 23.5%. • Substantial improvement in the international service offering, in particular for on-line transactions. • Access and electronic payment services-AccèsD services, card services, point-of-sale financing services for the housing, automobile and durable goods industries-enjoyed a substantial increase in the number of transactions and in business volume. • Substantial investments to implement the 2002-2005 Human Resources Plan. • A concerted effort on the part of the caisses, the Fédération, Caisse centrale Desjardins and other subsidiaries to maintain the most comprehensive service offering in the industry for our members and clients. • Overall rate of satisfaction on the rise, both for individuals and for businesses. DESJARDINS GROUP 59 MANAGEMENT’S DISCUSSION AND ANALYSIS

STRATEGY OUTLOOK Ensure a solid and sustainable performance to consolidate our cooperative difference with a view to helping the caisses sustain The financial intermediation segment is a dynamic financial payments of patronage allocations to members in the order of 35% services cooperative renowned for its unique relationship with of surplus earnings after taxes for 2005 and 2006. its members and community, for products that are adapted to their needs, and for its integrated network. This segment is Desjardins Group seeks to remain the most accessible financial a financial centre of excellence providing its members with access institution in Québec, while maximizing the performance and synergies to the whole spectrum of products offered by Desjardins Group. of its distribution networks. This is the rationale for transforming the caisses’ physical network, which should include between 450 and 500 caisses in Québec by the end of 2005. These caisses will then The following strategic orientations, developed for 2003-2005, operate no less than 1,000 points of service in which members will were maintained in 2004. They will help bring our vision to fruition: have access to personnel. It should also be mentioned that Desjardins has the largest number of automated teller machines in Québec and • Strategy for businesses: Desjardins Group will take steps to assume plans to increase this number in Ontario to improve service accessibility a position commensurate with its economic weight in Québec’s for new clients in Desjardins Credit Union points of service and the corporate market, and move toward a leadership position in terms Ontario network of caisses populaires. of market share. • Strategy for individuals: Desjardins Group seeks to become Québec’s The financial intermediation segment plans to continue to expand leader in wealth management, while continuing to serve all market the enterprise line of business in order to increase the size of its segments with competent personnel and competitive products. outstanding commercial and industrial portfolio, grow its market During this period, the challenge for the caisses will be to recruit share from 23% in 2003 to 25% by the end of 2006, and generate more savings while maintaining their position in credit. additional revenues. Desjardins wants to remain the largest business • Financial strategy: maintain a strong capitalization to allow force in Québec by bearing witness to the cooperative difference in Desjardins Group to ensure its development and obtain a reasonable the market by developing the 55 corporate financial centres (CFCs) yield on capital, and thus to protect its position on financial markets in Québec and the 3 in Ontario. The proximity and efficiency of CFCs and provide a high return to the community. represent a formula that is unique to Desjardins and that sets • Fédération strategy: The Fédération represents leverage allowing it apart from its competitors. the caisses and other Desjardins Group components to step up their development and better meet the needs of their members and clients. The financial intermediation segment seeks to continue to hone its The Fédération is a centre of expertise and a partner of the caisses. approach as a group of experts in order to increase the satisfaction of its members and occupy a greater space in the asset management market.

Desjardins Group’s electronic distribution network is very effective and the number of members who are beginning to use its comprehensive line of personalized on-line services is growing quickly. Desjardins Group strives to be a leader in the industry in terms of innovative, seamless and safe electronic services while ensuring that the network is developed in a profitable manner.

The goal of the financial intermediation segment is to maintain healthy profitability by investing in the development of profitable business inside and outside Québec, so as to increase revenues and diversify market risk. In this respect, Desjardins Credit Union (DCU), which is the largest credit union in Ontario with assets nearing $2 billion, will enable Desjardins to gradually offer the some 75,000 members and clients an array of products and services comparable to those available in Québec caisses starting in 2005 and to increase business development activities. MANAGEMENT’S DISCUSSION AND ANALYSIS 60 DESJARDINS GROUP

Table 3 FINANCIAL INTERMEDIATION: SEGMENT RESULTS

Selected data for the year ended December 31 (in millions of dollars and as a percentage)

2004 2003 2002 Total income(1) $ 3,962 $ 3,686 $ 3,555 Provisions for credit losses 111 82 113 Non-interest expenses 2,822 2,586 2,366 SURPLUS EARNINGS AFTER INCOME TAXES AND BEFORE PATRONAGE ALLOCATIONS TO MEMBERS(1) 763 713 780 Contributions to combined surplus earnings 71.2 % 85.5 % 90.5 % Patronage allocations to members $ 372 $ 443 $ 492

Average assets(2) 83,907 76,715 70,827 Average loans 70,549 63,972 58,532 Average deposits 73,514 66,938 62,431

KEY RATIOS(3) Productivity ratio 66.1 % 67.9 % 65.1 % Return on equity 15.8 13.7 15.5

(1) The items for the financial intermediation segment exclude the share of earnings resulting from the caisses’ investments in subsidiaries, which amounted to $307 million in 2004 ($121 million in 2003 and $82 million in 2002). (2) Average assets for the financial intermediation segment exclude the average value of investment carried at equity resulting from the caisses’ investments in subsidiaries, which amounted to $1.6 billion in 2004 ($1.4 billion in 2003 and $1.3 billion in 2002). (3) These ratios include the share of earnings from the caisses’ investments in the subsidiaries.

ANALYSIS OF THE FINANCIAL RESULTS The financial This segment’s contribution to Desjardins Group results stood at intermediation segment completed 2004 with surplus earnings 71.2%, compared to 85.5% in 2003. This fall in the relative proportion before patronage allocations of $763 million, a significant increase of contribution to Desjardins Group surplus earnings is explained by of $50 million, or 7%, as compared to $713 million in 2003. Profitability the high profitability of other business segments that, taken together, was driven by sustained growth in business volumes, particularly posted $186 million in additional surplus earnings and $307 million residential mortgages, both in new financing and sales of existing homes. in surplus earnings after income taxes. This performance increased Profitability was nevertheless held back by the increase in non-interest the relative weight carried in total amounts by companies engaged expenses, mainly staff compensation expenses and fees incurred on in other activities. partnership agreements involving computerized transactions. Patronage allocations to member-owners recorded in 2004 came to $372 million as compared to $443 million in 2003. Strong growth FINANCIAL of close to $6 billion experienced in all caisse financing activities, INTERMEDIATION but particularly in residential financing, encouraged the caisses CONTRIBUTION TO to set aside more funds in reserves. The additional reserves will COMBINED SURPLUS provide a higher level of capitalization required to ensure continued EARNINGS business development.

800 90.5 100 71.2 The productivity ratio, which captures the relationship between 85.5 non-interest expenses and total income including subsidiary 700 80

780 earnings, improved in 2004, reaching 66.1% as compared to 67.9%

713 in 2003. Despite a 9.1% increase in non-interest expenses, total 600 60 income rose 12.2% under the combined effect of business growth 763 and the excellent contribution to results from caisse investments 500 40 in subsidiaries. Return on equity, calculated as surplus earnings before patronage allocations to members over average equity, was 400 20 15.8% in 2004 as compared to 13.7% in 2003. This exceptional result gives added breathing room for dealing with exceptional circumstances and for investments in selected business development projects. 300 0 2003 2002 2004

Surplus earnings before patronage allocations to members (in millions of $)

Contribution to combined surplus earnings (%) DESJARDINS GROUP 61 MANAGEMENT’S DISCUSSION AND ANALYSIS

In 2004 net interest income grew $24 million to $2,896 million, In 2004, the financial intermediation segment expensed $111 million an increase of 0.8%. The net interest margin continued to come of provisions for credit losses, compared to $82 million in 2003. Despite under pressure, falling from 3.75% in 2003 to 3.45% in 2004, or this additional $29 million charge, the segment’s portfolio of loans is thirty hundredths of a percent. An increase in average assets over still of excellent quality. The balance of gross impaired loans over total $7.2 billion by the end of 2004, nevertheless grew net interest income. gross loans, improved to 0.47% as compared to 0.70% for 2003. This The network was able to profit from impressive growth in housing change was essentially due to a $129 million or 27.1% reduction in gross starts this year and from continued strength in the resale housing impaired loans outstanding. The coverage ratio, obtained by dividing market. In addition, interest risk has been managed under a strategy the cumulative provision for credit losses by gross impaired loans that optimizes and stabilizes net interest income from the caisses outstanding, was 212.4% in 2004, as compared to 167% in 2003. in the medium term. Curbed interest rate risk also contributed to results and demonstrated the wisdom of decisions made over Non-interest expenses were up $236 million or 9.1% for 2004, including the last few years. $129 million of compensation expense, $46 million committed to outsourcing of processing services and $61 million for other expenses. Other income stood at $1,066 million, an increase of $252 million or 31% from 2003. This performance outstripped previous years The growth registered in personnel-related costs reflects investments and was due, in part, to credit card activities where revenues grew in our human resources as specified in the 2002-2005 Human Resources as a result of expanded business volume at VISA Desjardins. Revenue Plan. Under the Plan, the Group will become a leader in quality business from market transactions conducted with institutional and commercial relationships. The increase in expenses for human resources is above clients of Caisse centrale Desjardins also played a role, growing revenues all attributable to the annual indexation of salaries and increases by $13 million. In addition, implementation of the new Accounting in related employee benefits, to an additional charge with respect Guideline on hedging relationships (AcG-13) boosted reported revenues to the employee profit-sharing plan, to salary adjustments for caisse by $94 million, including $72 million in interest on derivative products and Fédération employees and additional positions created in certain that was previously reported as interest income but will now be components for technological development activities, and to business attributed to other income, as well as an unrealized gain of $22 million development in the financial centres. The $46 million of additional from changes in the fair value of derivative instruments that were not charges for the outsourcing of processing services resulted from growth designated in hedging relationships. in processing volumes and telecommunications needs. Finally, most of the change in other expenses is explained by increased commissions and other types of compensation paid to market intermediaries for FINANCIAL credit card and point-of-sale financing activities and by a $15 million INTERMEDIATION expenditure under the Desjardins BONUSDOLLARS Rewards Program, BREAKDOWN OF TOTAL which rewards cardholders who register for this loyalty program. INCOME FOR 2004 In 2004, the financial intermediation segment also posted excellent 6.9% results in terms of the expansion of its asset base, which reached 4.0% $87.4 billion as at December 31, 2004, up $6.4 billion or 8% from 5.9% the previous year. This expansion was due to the strong role played 10.1% by the caisses in the residential market as well as growth in deposits with the caisses.

73.1%

Net interest income

Deposit and payment service charges

Lending fees and credit card service revenues

Trading and investment activities

Other MANAGEMENT’S DISCUSSION AND ANALYSIS 62 DESJARDINS GROUP

In credit activities, the financial intermediation segment posted The excellent performance of financial intermediation activities $6.6 billion of growth over the year, taking the gross loan portfolio stemmed from sustained efforts made by this segment and the other to $74.6 billion, or an increase of 9.7% for the year. Stable growth in the Desjardins components to develop the synergy between them as a Québec and Ontario economies played a role in generating this result: means of offering members and clients the best financial products an active residential market, sustained growth in consumer spending and high quality service throughout Québec and, increasingly, across and the turnaround in corporate investments in 2004 created very the rest of Canada. This growing complementarity between its favourable conditions for business development. Residential mortgage constituent parts has enabled the caisses to return over $1.3 billion loans, which alone accounted for 69.1% of the increase in the gross to the community in the form of patronage allocations over the last loan portfolio, jumped 12.2% or $4.5 billion, personal lending was up three fiscal years, ample evidence of the cooperative difference. 7.3% or $0.9 billion, and commercial and institutional lending grew $1.1 billion or 6.1%. It is worth noting that, in financing activities, new business from Caisse centrale Desjardins contributed to this solid performance, as the Caisse agreed to over $1.1 billion in new credits, including several in the Canadian market and, at times, through its participation in Canada-wide and U.S. banking syndicates, where its new subsidiary, Desjardins Commercial Lending U.S.A. Corp., is even better positioned to support Desjardins clients active in U.S. markets.

In terms of recruitment of savings, the financial intermediation segment’s on-balance sheet savings grew 7.2% to $76.5 billion. As at December 31, 2004, personal savings had increased $3.1 billion or 6.1% to $54 billion, while savings from companies, government bodies, deposit-taking institutions and others had grown 9.9% or $2 billion, to $22.5 billion. As a provider of funds, Caisse centrale Desjardins was particularly active over the last few years through capital supply programs, a regular presence in financial markets and contacts with investors, both across Canada and in Europe. This has raised Desjardins’ profile in the markets. As an example, consider the fact that the 500 million euros issue completed in the European market equalled the record issue of the previous year. DESJARDINS GROUP 63 MANAGEMENT’S DISCUSSION AND ANALYSIS

FINANCIAL INTERMEDIATION – • Increased the Group’s market share throughout Québec in most MAIN ACTIVITIES credit categories except consumer loans: – consumer credit slid 0.7% to 25.9%; FINANCING ACTIVITIES – residential mortgage loans rose 0.4% to 39%; – commercial and industrial credit as well as agricultural credit grew 0.4% to settle at 23.5% and 42.4%. DESCRIPTION Desjardins Group’s primary financing activities are as follows: STRATEGY The purpose of Desjardins Group is to continue offering highly competitive products and services that are tailored to the • residential mortgage credit, which includes loans granted needs of its members and clients in Québec, Ontario and elsewhere to purchase new homes or existing homes or for renovations; in Canada. Through its financing activities, it plays a major role at • consumer credit, which includes student loans, loans for the helping many individuals at acquiring property and purchasing durable purchase of durable goods such as furniture, electrical home goods. It also supports agricultural and commercial businesses appliances, electronics, and automobiles as well as advances in investment projects. to VISA Desjardins credit card holders; • commercial and industrial credit as well as agricultural credit, which includes installment loans and lines of credit; The following strategies will contribute to achieving this goal: • credit to government institutions and public and parapublic organizations. • focusing more on delivering integrated financing products and services; Desjardins Group is firmly committed to financing economic activity • optimizing the locations of corporate financial centres (CFCs) in Québec. Thanks to its full line of credit products and services and continuing to harmonize their business practices; available to all members and clients, individuals and businesses • encouraging personnel training by creating a continuous alike, the Group has become a leader in every area in which it operates improvement program for their skills. in Québec. Its expertise has set the groundwork for a Canada-wide expansion strategy that the Group launched in 2004. The strategy will OUTLOOK In Québec, Desjardins Group aims to continue developing serve as a springboard to strengthen its position in Ontario and speed its line of business aimed at individuals and at growing its market up its development elsewhere in Canada. presence among businesses so that it can hold 25% of this market share by the end of 2006. 2004 ACHIEVEMENTS • Launched Desjardins Investor STRATEGIC Line of Credit, which In Ontario and elsewhere in Canada, Desjardins Group wants to increase, offers an extremely attractive variable rate that enables certain in the medium and long-term, its penetration rate in these areas by savers to set up an investment strategy designed to maximize setting up various expansion strategies, either through accelerated returns. internal growth, alliances, acquisitions or other targeted actions. • Completely overhauled the line of credit cards offered by VISA Desjardins and created a range of prestige cards. • Created the Desjardins Homebuyer Leverage Mortgage Loan, which provides certain members and clients with the leverage required to purchase property and adds to an already competitive and flexible line of mortgage products. • Further consolidated its presence among merchants by way of the accord D program and the car dealership financing offer. • Accelerated the development of the enterprise line of business by, among other initiatives, creating a Corporate Market Group, setting up a modern system for managing relationships with the targeted client base, dynamically promoting its products to the target clients, and by providing greater automation of credit offers to certain business groups. MANAGEMENT’S DISCUSSION AND ANALYSIS 64 DESJARDINS GROUP

FINANCIAL INTERMEDIATION – • Continuation of the research and development of savings products MAIN ACTIVITIES favouring quick adaptation to the changing trends that characterize the financial industry. SAVINGS RECRUITMENT ACTIVITIES • Increased growth in Desjardins Group’s market share in Québec: – In the area of on-balance sheet savings, including products such as chequing accounts, regular savings, and term deposits where DESCRIPTION Desjardins Group’s main savings recruitment activities its relative position grew 0.7% to reach 44.6%. fall into two main groups, namely, savings appearing in the liabilities – In the field of off-balance sheet products, including securities item of the balance sheet and off-balance sheet savings, in other brokerage, investment funds and corporate venture capital funds words savings that are managed for others. The on-balance sheet such as for Capital régional et coopératif Desjardins, the Group’s savings includes amounts deposited by individuals, businesses and penetration rate rose 0.9%, to stand at 11%. government institutions, which represented one of the Group’s most significant financing sources at the end of 2004. Off-balance sheet savings comprises investment funds and other types of securities, STRATEGY As a result of thorough strategic planning and a strong such as bonds, treasury bills and shares. business plan, Desjardins Group seeks to make available to its members and clients, in Québec and Canada-wide, a full slate of diversified savings products that are both personalized and competitive, for both In the area of wealth management, Desjardins Group is an undisputed individual and corporate clients. key player in the Québec arena. With the efforts it has poured into Canada-wide expansion in 2004, the Group aims to become known across Canada for its solid expertise in this sector. The following strategies will contribute to achieving this goal:

The ongoing effort to effectively meet its members’ and clients’ growing • Increased accessibility of its products and services, both physically needs in terms of diversification of financial assets is one of Desjardins and electronically; Group’s main guides orienting its actions and development. • Ongoing research and development into the design of its savings products; • Fostering staff training by creating an ongoing competency 2004 ACHIEVEMENTS enhancement program. • Launch of a new line of Desjardins Funds products, offering a greater choice of funds in various asset categories. • Creation of a new indexed term savings product, Perspectives Plus, OUTLOOK In Québec, Desjardins Group seeks to consolidate its market a guaranteed deposit that allows one to benefit, through specialized share in the segment of on-balance sheet savings products and and experienced fund managers, from certain asset classes to continues to improve in the fields of investment funds and securities which most individual clients generally do not have access. brokerage. • Successful 2004 issue by Capital régional et coopératif Desjardins resulting in eligibility for a tax credit up to 50%, while promoting In Ontario and in other regions in Canada, Desjardins Group’s objective economic development by way of venture capital investments. The is to markedly improve, over the medium and long term, its relative issue found takers in only five days, demonstrating the popularity position in these fields, through the implementation of different of this type of investment among investors. expansion strategies, by way of rapid internal growth, relationships, • Continued deployment of brokerage services within caisses. acquisitions and even through other targeted actions. • Accelerated development of its network of seasoned advisors, known for their expertise and present throughout Québec and much of Ontario. • Adoption of a proactive attitude in managing maturities of certain indexed term savings products, consisting of proposing a special pre-term renewal offer to its members to maximize their return. DESJARDINS GROUP 65 MANAGEMENT’S DISCUSSION AND ANALYSIS

FINANCIAL INTERMEDIATION – STRATEGY Ensure the management, development and profitable MAIN ACTIVITIES evolution of the product and service offering of debit, credit and access cards, by drawing on the quality and excellence of its employees. CREDIT CARD ACTIVITIES To accomplish these goals, various technologies are used to:

DESCRIPTION Credit card activities are conducted by Desjardins • develop business models; Card Services (DCS), or VISA Desjardins, a business unit of the • set objectives, priorites and methods; Fédération des caisses Desjardins du Québec. With 3.2 million • carry out business and skills development; cardholders, Desjardins Card Services is the largest issuer of credit • implement the offering, including those of subsidiaries; cards in Québec, providing its varied clientele with an array of products, • promote service and product evolution in an effort to achieve such as payment solutions for cards held by individuals and operational and distributional effectiveness; businesses, client loyalty development strategies with the • strive to constantly improve service quality; BONUSDOLLARS reward program, and payment solutions for some • measure performance. 55,000 merchants. As a first-rate partner of the Desjardins caisse network, contribute DCS offers financing solutions to individuals, such as accord D to achieving their business goals by integrating the highest-level FINANCING (a separate, second limit on VISA Desjardins credit cards) service quality standards for individuals and businesses, members that is available in more than 4,200 stores across Canada. This financing and non-members alike. is also available through Desjardins’ caisse network for amounts less than $10,000. Financing solutions are also offered to businesses, notably The following strategies will contribute to achieving this goal: Business Freedom Solutions, accord D Business FINANCING, Business Card, and Purch@sing Card. • propose new online business solutions to the caisse network, offering added value to the members and economies of scale DCS ranks first among VISA credit card issuers, with the highest to Desjardins Group; percentages in terms of volume growth in Canada. •promote accord D FINANCING in order to develop the Canadian market, especially with merchants and credit unions; 2004 ACHIEVEMENTS • use online solutions to foster the network’s business development • Contributed $61 million to surplus earnings for the financial efforts, particularly the young worker clientele, major asset-holders, intermediation segment in 2004, compared to $46 million in 2003. and the Canadian market. • Desjardins Card Services’ volume of business, as issuer, reached $9.7 billion in 2004, an increase of 20% over 2003. OUTLOOK • Desjardins Card Services raised its Québec market share to 42%. • Major breakthrough in the hardware market with the product • Deployed a link with the chequing account for Business Freedom accord D FINANCING. Solution clients. • Integrated the Business account and agricultural sector • Integrated account management in AccèsD for individuals. management onto AccèsD. • Launched a new line of prestige credit cards. • Signed major partnership agreements on the Canadian market • A major partnership agreement with Coast Capital Savings Credit with credit unions and merchants. Union, the largest in Canada in terms of membership, and second • Integrated debit card transactions into the Desjardins in assets. caisse network. • Opened business centres in Vancouver, Toronto and Moncton • Launched a new prepaid purchase card. to serve our clients outside Québec. • Partnership with Desjardins Credit Union for the VISA Desjardins credit card product offering. BUSINESS VOLUME – • Signed agreements with more than 500 merchants in Canada ISSUER for accord D FINANCING. (in billions of $)

10 9,7 8 8,1 6 6,7

4 5,5 4,8

0 2001 2004 2000 2002 2003 MANAGEMENT’S DISCUSSION AND ANALYSIS 66 DESJARDINS GROUP

FINANCIAL INTERMEDIATION – • 40% rise in new business financing, climbing from $0.8 billion MAIN ACTIVITIES to $1.1 billion. • Activities in Canada and internationally, representing close to 35% CENTRAL FUND ACTIVITIES of our new business, drove this growth. • Creation of Desjardins Commercial Lending, a commercial lending subsidiary in the U.S. This subsidiary was very quickly utilized, DESCRIPTION Caisse centrale Desjardins (CCD), a cooperative notably through its financial support granted to Canadian businesses institution owned by Desjardins caisses, operates on Canadian that operate subsidiaries in the U.S. and international markets, collaborating with and complementing • Penetration of Canada-wide financing activities: participation the activities of other divisions of Desjardins Group. in nine Canada-wide banking syndicates, the majority being in our specialized financing sectors (forestry products, communications CCD’s operations include: and natural resources). • In the public and parapublic sectors, major successes in several • Acting as treasurer for Desjardins Group: ambitious projects. - Financial settlement and clearing of items through the caisse • Significantly greater presence on treasury product markets with network on a national and international scale; large business clients and institutions thanks to the implementation - Supplying funds to meet Desjardins Group’s liquidity requirements; of a team dedicated to business development: a dramatic rise - Managing the required reserves of liquidities; in foreign exchange and interest rate transactions. - Derivatives and other treasury products; • Strong increase in international products and services offered - Managing cash for Desjardins Credit Union. to businesses, translating into an increase in revenues of over 40%. • Serving as a provider of services to businesses and institutions, STRATEGY complementing those offered by the network: • Continue to rigorously manage liquidities and diversify our funding - Financing and banking services to the private sector (medium sources, as network needs grow fiercely. and large-sized firms) and to the public and parapublic sectors; • Continue to solidify relationships with large businesses and - The Desjardins International Service Centre that offers a institutions to be able to better support them and maximize comprehensive line of international products and services the positive spin-offs for the Group. to the caisse network and CFCs and Desjardins members; • Continue to support businesses in the Canadian, U.S. and - Management of two American subsidiaries: Desjardins Bank, international markets. based in Florida, which offers banking services to individuals • Consistent with business agreements made with corporate financial and small businesses, and Desjardins Commercial Lending, centres, continue developing the medium-sized business market the commercial loans subsidiary. in partnership with the caisse network. • Continue to develop business on treasury products offered to clients CCD plays a leading role both at the local level and in the Canadian of large organizations and institutions. and international arenas, given its multiple functions of financial agent, supplier of funds and treasury products, financial partner of businesses OUTLOOK and institutions, and liquidity manager. CCD supports Desjardins Group • Implementation of securitization structures. in its business development. Like Desjardins Group, Caisse centrale • Development of new concepts of indexed savings products. Desjardins receives exemplary credit ratings from the main rating • Concentration of efforts to develop businesses whose revenues agencies. Its ratings rank among the best in the entire financial are between $100 million and $250 million. industry, not only in Canada, but also internationally, in the financial • Added resources to develop the Ontario institutional market, cooperative sector. the private sector market and the credit union market in Canada. • Increased loans to the real estate sector and penetration 2004 ACHIEVEMENTS of the asset financing market. • Record contribution of $87 million to the caisse network in 2004, • Studies focused on setting up a Caisse centrale branch in the U.S. up 28% over 2003. to further expand the line of business services in this market. • Support to caisse network growth: loans in the caisse network grew from $1.3 billion to $2.7 billion. • Impact of Desjardins’ reputation on the financial markets, issue of 500 million euros on the European market, matching the year-earlier record. • More than 85% of the amount of the Canadian issue of $300 million from Caisse centrale was purchased by investors from outside Québec. DESJARDINS GROUP 67 MANAGEMENT’S DISCUSSION AND ANALYSIS

INSURANCE, TRUST SERVICES AND ASSET MANAGEMENT

Table 4 FINANCIAL RETROSPECTIVE

Selected data for the year ended December 31 (in millions of dollars and as a percentage)

2004 2003(1) 2002(1) CONSOLIDATED EARNINGS Operating income $ 3,617 $ 3,353 $ 2,891 Net interest and investment income 859 756 547 Claims, benefits and change in policy and related liabilities 2,975 2,941 2,300 Operating expenses 960 912 893 NET EARNINGS FROM CONTINUING OPERATIONS 301 178 143 Return on equity 22.5 % 15.1 % 13.8 %

Total assets $ 13,750 $ 13,212 $ 12,163 Assets under management 9,917 9,547 13,737 Assets under administration 187,323 158,535 135,896

CONTRIBUTION TO NET EARNINGS(2) Life and health insurance $ 127 $98$71 General insurance 127 46 32 Trust services(3) 24 11 17 Asset management and other 23 23 23 Net earnings from continuing operations $ 301 $ 178 $ 143

(1) 2002 and 2003 data was restated to exclude discontinued operations. (2) This result may differ from the results specific to each subsidiary, as it includes earnings attributable to non-controlling interests. (3) Including investment funds.

The extensive action plan that accompanied the 2004 restructuring The growth was due to a $230 million increase in net premiums and initiative translated into Desjardins Financial Corporation (the Financial a $23 million increase in trust services income over 2003. The overall Corporation) being integrated into the Fédération des caisses Desjardins increase in premiums, which was 7.3%, owes to a 6.9% increase in life du Québec. From now on, the activities that previously headed the insurance premiums in Québec and a corresponding 8.7% increase insurance, trust services and asset management segment are limited outside Québec. As for general insurance gross premiums, there was to the holding of the capital stock of its subsidiaries. a 5.5% rise in Québec and a 12.1% increase outside Québec.

The business development strategies set in 2003 for the Financial Net interest and investment income totalled $859 million as at Corporation were maintained in each of the subsidiaries in this segment. December 31, 2004, exhibiting a $103 million increase over last year. The result is attributable to an increase in the funds to be placed This segment includes the operations of Desjardins Financial Security arising from business growth, by stronger financial markets, and (life and health insurance), Desjardins General Insurance Group through a new strategy by which assets are assigned to the general (general insurance), Desjardins Trust (trust services and investment insurance segment. funds) and Desjardins Asset Management (asset management). Claims, benefits and change in policy and related liabilities amounted to ANALYSIS OF FINANCIAL RESULTS In 2004, net earnings $2,975 million, a $34 million increase over last year, $15 million of which in this sector stood at $302 million, a sharp 69.7% increase over was due to stronger business in group life and health insurance over the $178 million recorded in 2003. Net earnings from continuing the past two years. The level of patronage allocations to retention groups operations amounted to $301 million as against $178 million in 2003, increased in 2004 as a result of improved underwriting experience. for a return on equity of 22.5% in 2004. This segment’s dramatic rise The remaining increase owes to a rise in general insurance premiums. in net earnings stems mainly from substantially greater profitability in general insurance activity, which soared 176% higher than the 2003 Consolidated operating expenses were $960 million in 2004, rising results thanks to a growth in premiums, claims improvements, lower $48 million or 5.3% over 2003. The increase is mainly attributable operating costs, and improved investment revenues. All of the business to business growth expenses, the restructuring of asset management segments in life and health insurance enjoyed profitability in 2004, activities, and costs related to the deployment of Desjardins Trust especially the group insurance segment, whose net earnings rose activities into the Fédération. 26.3% in 2004. The increase in net fee income in the trust services segment also had a favorable impact on the overall profitability Total consolidated assets amounted to $13.8 billion as at of the segment. December 31, 2004. It represents a 4.1% increase and owes to asset growth in the insurance segment generated by business The total income for this segment for the year ended December 31, 2004 growth, offset by a drop in assets in the trust services segment, totalled $4,476 million, up $367 million or 8.9% compared to the previous whose loans dropped by $57 million and whose cash flows year. Consolidated operating income posted 7.9% growth over last year. and securities dropped by $320 million. MANAGEMENT’S DISCUSSION AND ANALYSIS 68 DESJARDINS GROUP

INSURANCE, TRUST SERVICES The second debate concerns genetics and life insurance. A working AND ASSET MANAGEMENT (CONTINUED) group has proposed a five-year moratorium on all use of data from genetic tests in the assessment of a policyholder for any coverage LIFE AND HEALTH INSURANCE ACTIVITIES up to a maximum to be determined. There is as yet no consensus on the value of data obtained from these genetic tests. DESCRIPTION Ranking fourth among life and health insurance companies in Canada and first in Québec in terms of volume of written Finally, in the wake of the investigation by New York State Attorney premiums, Desjardins Financial Security (DFS) is an active force in General Elliot Spitzer of certain commercial practices in the financial the industries of life insurance, health insurance and financial services services industry in the United States, the relationships between in Canada. It offers, through various channels of distribution, a tailored insurance companies and their middlemen, with regard to ownership combination of life and health insurance as well as innovative savings as well as to payment, are at the heart of another debate in Canada. products and services. It also owns two subsidiaries: Sigma Assistel, The Canadian Council of Insurance Regulators (CCIR) and the Autorité which offers assistance services throughout the world, and SFL des marchés financiers du Québec (AMF) are currently studying this Management, which distributes its products through about 1,050 partner- issue, while the Canadian Life and Health Insurance Association representatives of the SFL/LFS Financial Services. (CLHIA) has begun a process of deliberation that led to the announcement in December of a new series of initiatives to improve the information available to the consumers of financial products in Québec. INDUSTRY The consolidation of the life and health insurance industry continued in 2004 and, although opportunities for acquisitions are becoming harder to find, a significant number of alliances and On the social front, the collapse of the stock markets in 2002 and the partnerships affecting insurers and distributors were still apparent. financial difficulties of some pension funds had the effect of forcing Faced with ever stiffer competition, insurers will have to intensify elderly workers back onto the job market or delaying retirement for their efforts in order to improve their level of productivity some. This trend continues. The news of higher costs of health care and their efficiency. and medications, together with the reduction in financial support by the provincial government, explains this attitude among workers. This situation, coupled with the aging of the population, should favour Two great debates about regulations are currently under way in the the growth of the markets in group and individual retirement-savings financial services industry. The first pertains to federally chartered plans and in health insurance. banks and concerns the applicability of provincial laws governing insurance to their distribution of life and health insurance. The provincial courts are divided on this issue. The final outcome is important to Desjardins in the matter of fair competition because the caisses and Desjardins Financial Security, when distributing insurance, are required to respect the laws of all the provinces in which they do business.

2004 ACHIEVEMENTS • Record net earnings of $130 million, an 18.2% increase. • Net premiums of $2.1 billion, up 3.8%. • Growth of 3.8% in total income. • All business sectors showed a profit. • Credit insurance: volume of premiums exceeded $396 million and total insurance in force reached $46 billion. • Life and health insurance offered to Desjardins caisse members by the caisses’ financial security advisors: sales up 15.9% and policies issued up 6%. • Group insurance: net earnings ($105 million) surpassed the $100-million mark and unit costs declined. • Health insurance: the offering was enhanced and, in particular, new coverage for severe illnesses was added to the insurance products. • Group retirement savings: sales up 1.6% and five new mutual-fund managers were appointed. • Marked improvement in the company’s balance sheet. • A review of the company’s capital structure that enabled us to benefit from additional leverage, thus increasing the return on shareholder’s equity. • The implementation of a single nationwide system of insurance administration for groups and corporations. • An overhaul of the loan-insurance processes, which will make improvements in operational efficiency possible for DFS and its partners, the caisses, in addition to contributing to greater customer satisfaction. • The planned closure of operations in the Bahamas through the sale of that division. DESJARDINS GROUP 69 MANAGEMENT’S DISCUSSION AND ANALYSIS

STRATEGY OUTLOOK A pioneer in Canada-wide expansion at the heart of Desjardins Group, Desjardins Financial Security will rely on its DFS has as its mission to serve the changing needs of individuals strengths as it continues its expansion while remaining on the lookout and groups in the area of financial security by offering a tailored for possible acquisitions. The company confidently foresees good line of products and services in life and health insurance and in potential for growth. As the manager of the wealth and the financial retirement savings through employees and partners committed security of its roughly five million clients, including the members of to ensuring the satisfaction of the members of the caisses and the Desjardins caisses, Desjardins Financial Security will continue of its clients. to take part in the expansion of Desjardins Group’s business. The upsurge in the offering of life and health insurance services to the members By relying on its integration and partnership with Desjardins of the caisses through its team of financial security advisors also Group and its various components, DFS aims to be recognized as shows that this business model does indeed serve the members’ needs. an insurer with which clients and partners can easily do business, In the area of credit insurance, Desjardins Financial Security will continue a supplier of products and services tailored to the changing needs to innovate by adapting its service offering to the new channels of of its clients, an employer of choice, and an outstanding company distribution and by intensifying its presence in the corporate market. in the markets that it serves. It also aims to stand out by its efficiency and as a company offering a return that meets the With regard to its offering of life and health insurance services through expectations of its shareholder. other distribution networks, including SFL/LFS Financial Services and Laurentian Financial Services, Desjardins Financial Security will promote the opening of new financial centres, especially outside Québec. It will In accordance with DFS’s three-year plan for 2003-2005, the following also continue to apply its strategy to distinguish itself through the strategies will contribute to the achievement of our vision: integration of living benefits into its life-insurance product line and through the offering of innovative and competitive savings products. • Achieve a minimum 12% return on capital for each business segment, by the end of its three-year plan; In the area of group insurance, it will take advantage of the strong • Grow its market share through sustained internal growth, supported consolidation of the insurance industry to position itself as an option in Québec through insurance offerings to caisse members of choice, especially for large groups. In insurance distributed by and supported in Canada through individual and group financial institutions, it will continue to expand along with the Desjardins insurance offerings; Credit Union. In savings, Desjardins Financial Security aims to increase • Consolidate the company’s leadership position in the Québec market its market share, primarily in the fast-growing sector of group and position itself among the top five Canadian insurers nationwide; retirement savings. • In terms of productivity, increase efficiencies and cut operating costs by reviewing existing methodologies and optimizing business Finally, Desjardins Financial Security will continue in 2005 the processes, technology and e-commerce; overhaul of its processes, which will eventually lead to a reduction • In terms of organizational development, intensify efforts at in operating expenses and will contribute to profitable growth in all managing future recruitment and innovation and become known business segments. throughout Canada as a considerate, reliable, and progressive company that knows how to create value.

Table 5 DESJARDINS FINANCIAL SECURITY

Selected data for the year ended December 31 (in millions of dollars and as a percentage)

2004 2003 2002 Insurance and annuity premiums $ 2,090 $ 2,013 $ 1,704 Net investment income 655 640 441 Payments and credits paid to policyholders 2,086 2,071 1,594 Operating expenses 382 368 352 Taxes on earnings (recovery) 58 (19) 45 Net earnings 130 110 79 Net earnings attributable to the shareholder 128 100 70 Return on equity 19.6 % 14.1 % 10.8 % Assets of general funds $ 10,251 $ 9,666 $ 9,024 Total assets under management 14,928 14,050 13,049 MANAGEMENT’S DISCUSSION AND ANALYSIS 70 DESJARDINS GROUP

ANALYSIS OF FINANCIAL RESULTS Having surpassed the $100 million mark in 2003 for the first time in its history, the net GROUP INSURANCE INDIVIDUAL INSURANCE earnings of Desjardins Financial Security posted a substantial increase PREMIUMS BY PREMIUMS BY DISTRIBUTION NETWORK DISTRIBUTION NETWORK of 18.2% in 2004, closing the year at $130 million. The portion of (in millions of $) (in millions of $) earnings attributable to shareholders totalled $128 million, compared

to $100 million in 2003. This result corresponds to a return of 19.6% 1,500 1,432 400 352 1,316 on shareholder’s equity. 346 337

1,250 1,174 As for overall business growth, the income from insurance and annuity 300 premiums reached $2,090 million, compared to $2,013 million in 2003. 1,000 Growth was particularly pronounced in the segment of group insurance, 750 200 which experienced a net increase over 2003, registering a volume of premiums that totalled $1,432 million. Premiums for group insurance 500 products distributed to members of Desjardins Group rose by more 100 than $26 million. 250

0 0

NET PREMIUMS 2003 2003 (in millions of $) 2002 2004 2002 2004

1,500 Members of Members of Desjardins Group Desjardins Group 1,250 1,432 Other clients Other clients 1,316 1,000 1,174

750 Payments and credits paid to policyholders rose by $15 million in 2004 relative to 2003. Growth in group business over the past two years 500 explains this increase. The level of rebates on experience-rated policies went up in 2004 because of better underwriting experience. 250 351 352 337 346 306

0 193 In 2004, Desjardins Financial Security followed a policy of rigorous management of operating expenses by limiting the increase over those of 2003 to 3.8%. This increase is essentially tied to business 2003 2002 2004 growth in the segments of insurance for groups and companies and credit insurance. Group insurance Individual insurance The investment income of Desjardins Financial Security came to Savings $655 million, up 2.3% relative to 2003. This result was due primarily to the increase in funds to be invested that stemmed from business growth, to the improved performance of the financial markets in 2004, and to the intrinsic quality of the investment portfolio and the prudent Sustained sales growth and excellent underwriting results attributable and sound management thereof. to favourable economic circumstances contributed to the strong performance of the group insurance segment, which posted net The combined assets of the general funds reached $10.3 billion earnings of $105 million, 26.3% more than the previous year. In in 2004, up 6.1%, while the total assets under management were individual insurance, the volume of premiums reached $352 million, $14.9 billion, up 6.3%. a 1.7% gain in a flat market. In addition, the volume of premiums distributed to members of the Desjardins caisses registered a jump of 24.8% to total $78 million. Net earnings reached $19 million, compared to $29 million in 2003. Underwriting results, the positive fluctuation of the markets, and the strengthening of certain actuarial assumptions had an effect on these results. Finally, in savings, net annuity premiums reached $306 million, and sales of savings products totalled $405 million, distributed between the general funds and the segregated funds of Desjardins Financial Security. After registering a loss of $6 million last year, this segment achieved a net profit of $5 million. DESJARDINS GROUP 71 MANAGEMENT’S DISCUSSION AND ANALYSIS

INSURANCE, TRUST SERVICES STRATEGY AND ASSET MANAGEMENT (CONTINUED) DGIG wants to be considered the ultimate provider of general insurance products in Canada due to the skills and commitment GENERAL INSURANCE ACTIVITIES of its employees, extensive skills in the general insurance field, its market approach based on the best quality/price ratios DESCRIPTION Desjardins General Insurance Group (DGIG) is present in profitable markets and its results-oriented culture combined in the Canadian marketplace by way of four subsidiaries and provides with strict management. In addition, it plans to take full advantage a wide range of clients with all the coverage they need to protect their of its partnership with the Desjardins caisse network and physical assets and receive financial compensation for bodily injuries its association with groups. sustained in automobile accidents. Desjardins General Insurance operates in the individuals market in Québec through the Desjardins caisse network as well as a call centre. The Personal General Insurance distributes its automobile and property insurance products in Québec DGIG has adopted the following strategies: by relying on the support of groups (professional associations, employers, unions) that act as partners. The Personal Insurance Company operates • Continue to gain a competitive edge in order to maintain superior in a similar fashion but outside Québec. Essentially, both The Personal profitability while remaining disciplined in terms of operational entities conduct business by way of call centres. Finally, Certas Direct excellence; Insurance Company serves individuals in the “major markets” segment • Achieve dynamic and profitable growth outside Québec through primarily in Ontario and Alberta. the individuals segment of the “groups market”; • Maintain profitable growth in Québec through the individuals INDUSTRY In Québec, given the strong profitability of automobile segment of the “major market” and in partnership with the caisse insurance, DGIG decided to exercise its leadership by lowering rates. network and the individuals segment of the “groups market”; Outside Québec, overall conditions in the automobile insurance • Ensure a positive contribution to the performance of the businesses market quickly improved. The increase in claims experience slowed segment in Québec with respect to investment management; as a result of regulatory action and a decrease in the frequency • Foster the development of expertise and the future of the smallest claims. of the insurance field.

The home insurance market had a good year overall. Although OUTLOOK Business should continue to grow in 2005, especially in the it was affected by several weather-related events in the second half group insurance segment. In the “major market” segment, the targeted of the year, claims experience still benefited from the fact that the increase in the number of in-force policies is similar to the increase catastrophes were smaller than expected. achieved in 2004. However, the increase in premium volumes will be affected by rate decreases granted in Québec in 2004, which are expected to continue in 2005, and by the reforms in progress in several The Canadian business segment continued to show excellent results, other provinces, which are bringing about premium decreases. but DGIG holds only a small share of the market in Québec.

The claims experiences in the automobile insurance sector will deteriorate somewhat. The decrease in frequency and the slowdown in inflation of the average cost of claims relating to bodily injuries following the regulatory reforms should diminish somewhat.

Although profitability in 2005 is not likely to reach the record levels seen in 2004, DGIG still expects to achieve a return above the average return for the industry.

2004 ACHIEVEMENTS • Underwriting profits consolidated for a 12th consecutive year, contributing to a record level of net earnings of $127 million, for a 29.7% shareholder return. • End of the program to integrate operations outside Québec by dropping the old computer systems. In accordance with the strategy, substantial decrease in operating costs for these operations, which have now reached percentages comparable to those achieved in Québec. • The Personal insurance business outside Québec increased by 23%, corresponding to the company’s growth positioning. The increase in business for individuals in Québec remained at 5% in spite of decreases in automobile insurance rates. • The Company’s performance was publicly recognized with awards of excellence in Québec and Canada for the transformation of business processes. DGIG was selected as one of the top 50 employers in Canada for 2004 (employee survey sponsored by The Globe and Mail and La Presse). • Investment revenues improved due to the reorganization of investment management and the adoption of new methods of allocation for the various investment categories. MANAGEMENT’S DISCUSSION AND ANALYSIS 72 DESJARDINS GROUP

Table 6 DESJARDINS GENERAL INSURANCE GROUP

Selected data for the year ended December 31 (in millions of dollars and as a percentage)

2004 2003 2002 Gross premiums written $ 1,370 $ 1,270 $ 1,068 Net premiums earned 1,290 1,137 971 Combined ratio 89.4 % 97.9 % 96.8 % Underwriting profit $ 136 $24$31 Net investment revenues 94 60 30 Net earnings 127 46 32 Return on equity 29.7 % 13.4 % 10.5 % Total assets $ 2,449 $ 2,148 $ 1,786

ANALYSIS OF FINANCIAL RESULTS DGIG’s net earnings for 2004 The combined ratio, which includes claims costs to which operating total $127 million, compared to $46 million in 2003. These earnings costs are added, totals 89.4%, thereby generating underwriting profits correspond to a return on equity of 29.7%, compared to 13.4% last year. of $136 million in 2004 for a twelfth consecutive year. The result This substantial improvement in profitability is attributable to premium is mainly attributable to the excellent claims experience in Québec, growth, improved claims, decreased operating costs and improved the substantial drop in claims experience in other provinces investment revenues. In short, all the factors influencing profitability and the improvement in operating costs. were favourable. In Québec, the 65% claims experience in 2004 contributed to strong Gross insurance premiums were $1.4 billion, up 7.9% over last year. profitability for both automobile and property insurance. The premium In Québec, gross premiums amount to $850 million, an increase of increase in 2004 was especially beneficial since it was accompanied 5.5% and, outside Québec, they increased by 12.1%, to total $520 million. by an excellent claims experience resulting from the lower number of Growth is especially strong for The Personal Insurance Company, automobile insurance claims and the almost non-existent catastrophes whose premiums rose by 23% and for which the number of policies relating to home insurance. issued increased by 9%. The strong business growth in the other provinces was achieved in much More than 90% of DGIG’s activities in Québec relate to the individuals better market conditions for automobile insurance. The 75% claims market while, outside Québec, close to 75% of business relates to groups. experience finally reached acceptable levels. The average cost of claims In 2004, premiums generated in provinces other than Québec accounted for bodily injuries is declining. The claims experience for property for 38% of DGIG’s total business as compared to 36% in 2003. insurance was also unfavourably affected by several natural disasters which caused water damage. In Québec, Desjardins General Insurance premiums were written primarily by Desjardins Group members. In 2004, 46% of DGIG’s total DGIG’s operating costs decreased again in 2004. Operating costs premiums derive from the Desjardins caisse network, as compared represent 20.6% of net premiums earned in 2004, down 0.7 points to 48% in 2003. compared to 21.3% in 2003. This decrease is attributable to greater efficiency achieved due to the implementation of new processes and technological systems outside Québec, which allowed for a reduction GROSS PREMIUMS WRITTEN COMBINED RATIO in the operating cost ratio of the subsidiaries acquired in 2000 (in millions of $) (as a % of net premiums earned) to a level approximating that for activities carried out in Québec.

900 80 In addition to insurance underwriting profits, DGIG’s profitably is affected by net investment revenues. In 2004, these revenues totalled 76.6 750 850 $94 million, up $34 million compared to 2003. Investment revenues 806 60 72.6 68.8 earned in 2004 are favourably affected by the new asset allocation 600 712 strategy and by foreign exchange gains. Desjardins Asset Management, 450 40 DGIG’s sister company, manages DGIG investments. The return on the 520 book value of investments was 6.3% in 2004, compared to 4.9% in 2003. 464 300 356 20

150 24.2 21.3 20.6

0 0 2003 2003 2002 2004 2002 2004

Québec Claims experience

Outside Québec Costs DESJARDINS GROUP 73 MANAGEMENT’S DISCUSSION AND ANALYSIS

INSURANCE, TRUST SERVICES STRATEGY AND ASSET MANAGEMENT (CONTINUED) The manufacturer of investment funds aims to be a leading producer in Québec and a major producer in Canada by offering TRUST SERVICE ACTIVITIES products and services of high quality. Through the redeployment, including investment funds the Fédération hopes to contribute, through its subsidiaries, to the financial success of Desjardins’ members and customers DESCRIPTION The main subsidiary of Desjardins Specialized and, moreover, to help make Desjardins Group the leading Financial Services Management (DSFSM), Desjardins Trust (the Trust), manager of private wealth in Québec. designs and markets products and services in the areas of wealth management and administration. Specifically, the Trust specializes in investment funds, private management services, group savings The following strategies will help us to achieve our vision: plans, as well as securities administration and custody.

• Work closely with the caisse network to substantially increase sales In May 2004, the Board of Directors of the Fédération des caisses of funds and private management services; Desjardins du Québec approved the restructuring of the Trust’s • Deliver a competitive product offering by maintaining sound returns activities within the Fédération. Accordingly, the Trust’s activities that satisfy client expectations; of manufacturing and distributing investment funds were transferred • Fully develop its activities with other Desjardins Group networks to the Fédération on January 1, 2005, while specialized activities and diversify distribution channels on the basis of clear and of a fiduciary nature remained within a trust company connected distinct benefits; to the Fédération. • Contribute to Desjardins’ strategy for all of Canada based on the potential of its different business lines. INDUSTRY Investment funds outstanding in Canada grew by $58 billion in 2004 to reach $497 billion as at December 31. This represents a hike OUTLOOK The investment products aimed at private investors that of 13.3%, the largest annual growth since 1999. Cumulative net sales were developed by the Investment Funds & Trust Services Executive were $14.7 billion, an excellent result compared with that of 2003, which Division are in growing niches. The markets in investment funds, was marked by net redemptions of $0.6 billion. private management and group RRSPs are all promising, and Desjardins seeks to take a leading position. Giving special attention to developing The sound overall performance of the stock markets in 2004, with the investment solutions for a variety of segments of the market for private TSX up 12.7%, certainly contributed to this achievement. These results investors is a priority for 2005. also bear witness to the popularity and significance of investment funds in clients’ portfolios, in a market that many consider mature. Our offering in custodial services operates in a mature market. In order to consolidate its gains, Desjardins will exploit the synergies A noteworthy fact: banking institutions enjoyed remarkable success of its financial group so as to bring this very specialized service in this market in 2004, garnering approximately 60% of the industry’s into its global offering for large companies. total net sales. This success tends to confirm the increasing importance of banking networks in the distribution of investment products. In every market in which it offers products and services, the Investment Funds & Trust Services Executive Division plans to devote its resources to maintaining Desjardins’ current leading position in 2005 and to building developing markets.

2004 ACHIEVEMENTS • Updated the Desjardins Funds line of funds. • Merged the Maestral Funds into the Northwest Mutual Funds family, which was acquired by Desjardins in 2003. • Attained net sales of investment funds of $1.3 billion, an exceptional rate of growth of almost 225% relative to 2003. • Net sales of discretionary management totalled $87 million. • 28% growth in investment funds outstanding. • 17% growth in assets under administration, which totalled $196 billion. • The Trust bought back all of its Series 1 preferred shares. • Repositioned certain activities of its subsidiaries and of certain subsidiaries themselves within the Fédération des caisses Desjardins du Québec, to come into effect on January 1, 2005. MANAGEMENT’S DISCUSSION AND ANALYSIS 74 DESJARDINS GROUP

Table 7 TRUST SERVICES

Selected data for the year ended December 31 (in millions of dollars and as a percentage)

2004 2003 2002 Net fee income $ 111 $90$91 Net investment revenues 36 32 33 Operating expenses 112 103 96 Net earnings 26 12 18 Return on equity 23.5 % 13.5 % 22.6 % Total assets $ 980 $ 1,359 $ 1,296 Investment funds outstanding 8,003 6,230 4,870 Assets under administration (in billions of $) 196 167 143

ANALYSIS OF FINANCIAL RESULTS DSFSM achieved net earnings DISTRIBUTION OF NET of $26 million in 2004, compared to $12 million in 2003. This result FEE INCOME corresponds to a return on equity of 23.5%, compared to 13.5% in 2003. 7% 5% Net fee income reached $111 million as at December 31, 2004, thus showing growth of 23.3% compared to the same period last year. This 18% sound performance came essentially from revenues from investment funds, which saw a rise of 42% in one year, for a total of $59 million. This rise resulted from the difference of $1.8 billion in investment funds outstanding, which totalled $8 billion as at December 31, 2004, compared 53% to $6.2 billion on the year-earlier date. The good figures for net sales, 17% which came to $1.3 billion, and the positive effect of the financial markets explain the solid growth in funds outstanding. We also note that the acquisition of the Northwest funds on September 30, 2003 Investment funds enabled us to increase income by $7 million in 2004. Back office Securities custodial services

Discretionary management

NET FEE INCOME INVESTMENT FUNDS Other (in millions of $) OUTSTANDING (in billions of $) Net investment revenues totalled $36 million in 2004, whereas they 125 10 were $32 million in 2003. The quality of the loan portfolio made possible a greater recovery of provisions for losses and the Immigrant Investor 8.0 100 8 111 program, also contributed to higher revenues. 6.2 91 75 90 6 DSFSM’s operating expenses came to $112 million in 2004, whereas 4.9 they were $103 million in the previous year. This increase resulted 50 4 from the acquisition of Northwest during 2003, which led to an increase of $3 million in expenses; from higher salaries, which generated 25 2 additional personnel expenses; and from the costs related to the redeployment of the activities of the Trust within the Fédération. 0 0 DSFSM had assets of $980 million as at December 31, 2004, compared to $1,359 million as at December 31, 2003. This decline of $379 million 2003 2003 2002 2004 2002 2004 includes a reduction of $57 million in mortgages and commercial loans and a drop of $320 million in liquidities and securities relative Desjardins Funds to December 31, 2003, due to a transfer to another Desjardins entity. Northwest/Maestral Funds However, guaranteed deposits from institutional customers fell $326 million, and borrowing from the parent company and borrowing under common control declined by $74 million. In addition, the Trust Net fee income related to investment fund activities and to discretionary redeemed all of its Series 1 preferred shares for a total expenditure management represented 58% of the total fee income of DSFSM. of $21 million. These products experienced considerable growth in funds outstanding through their net sales and performed strongly on the financial markets, Assets under management, which are not included on the balance posting a 39% increase in income from these activities. The proportion sheet, consist of the assets that we administer for our clients; these of business volume from the Desjardins network of caisses was totalled $196 billion as at December 31, 2004, up 17.4% relative to approximately 59% of net fee income, compared to 57% in 2003. December 31, 2003. Assets belonged, among others, to investment funds, pension funds, institutional savings plans, custodial accounts, trust services, and various registered plans. Growth came primarily from investment funds and assets in custody. DESJARDINS GROUP 75 MANAGEMENT’S DISCUSSION AND ANALYSIS

INSURANCE, TRUST SERVICES STRATEGY AND ASSET MANAGEMENT (CONTINUED) Desjardins Asset Management’s primary mandate is to optimize the risk-return profile of all assets under its management. ASSET MANAGEMENT AND OTHER ACTIVITIES

DESCRIPTION Desjardins Asset Management manages more than $26 billion from the equity of the insurance subsidiaries and from To do so, it adopted a portfolio management approach that is based management authorizations that it has been awarded by other on optimizing returns according to a predetermined level of risk. Desjardins Group components. It also provides external clients In addition, it uses a multi-management approach by coordinating with asset management services in its recognized field of expertise. the outsourcing of certain mandates to external managers chosen Although it carries out most of its activities in Québec, Desjardins for their style and area of specialization. Asset Management also operates offices in Toronto and Vancouver. OUTLOOK In 2005, Desjardins Asset Management plans on completing The professionals of Desjardins Asset Management operate in three the implementation of the multi-management activities it began in 2004. areas of the investment sector: securities investments and financial It also intends on continuing to build a specialized team centered engineering, mortgages, and real estate investments. around the needs of its clients. As an asset manager, it intends on being a supplier of choice in its recognized areas of expertise and on continuing to develop and manage new savings and investment Its primary mission is to optimize returns on investments through products. Finally, it intends on continuing to grow business outside direct management, multi-management and by contributing to Québec such that it can deliver the best possible geographic the Group’s success by developing innovative and effective savings diversification of investments and stay attuned to potential and investment products. partnerships that could prove advantageous to the entire Desjardins Group. INDUSTRY In the coming years, the asset management and investment industry will have to face the challenge of delivering satisfactory returns in a climate characterized by low interest rates and lower-than-usual stock market returns, owing to, among other factors, fierce competition from Asian countries. In addition, the mortgages and real estate investment sector will have to deal with an increasingly competitive environment where supply exceeds demand.

2004 ACHIEVEMENTS In 2004, Opvest’s activities were integrated into some of those of Elantis Investment Management to create the new entity known as Desjardins Asset Management. The broadening of Desjardins Asset Management’s mission required it to assume management authorization mandates that were previously awarded to Elantis Investments and to implement multi-management activities.

Table 8 DESJARDINS ASSET MANAGEMENT

Selected data of asset management for the year ended December 31 (in millions of dollars)

2004 2003 2002 Fee income $61 $48$48 Operating expenses 35 27 26 Net earnings 20 15 17 Assets managed internally 23,420 19,540 16,483 Assets managed externally 2,909 5,975 780 Total assets under management 26,329 25,515 17,263

ANALYSIS OF FINANCIAL RESULTS Fee income of $61 million operating expenses of approximately $8 million. To allow the company was up 27.1% over 2003. Factors contributing to this increase include to properly plan its multi-management mandate, certain newly growth in alternative products outstanding as well as the management transferred asset management mandates had to be temporarily of new mandates awarded to Desjardins Asset Management following entrusted to an external manager at a cost of approximately $4 million. a late-2003 restructuring of Desjardins Group’s asset management The end result was an increase in net earnings of 33.3% over 2003. activities. This past year’s successes in terms of sales of certain indexed savings products managed by Desjardins Asset Management The increase in assets under management was 3.2%. It derives primarily also contributed to the 2004 increase in fee income. from an increase in Alternative Term Savings products outstanding, from the creation of the new Perspectives Plus Term Savings, and Operating expenses rose 29.6% over 2003. The increase is mainly from changes in the market value of securities, mortgage loans and attributable to the restructuring of asset management activities. After real estate assets. Of the $26.3 billion of assets under management, landing additional mandates, Desjardins Asset Management added Desjardins Asset Management, through its Desjardins Global Asset personnel to existing sectors and created new sectors such that it Management (DGAM) subsidiary, manages more than $3.8 billion in could optimally satisfy client needs. These changes incurred additional alternative products. MANAGEMENT’S DISCUSSION AND ANALYSIS 76 DESJARDINS GROUP

SECURITIES, VENTURE CAPITAL AND OTHER The group of nine firms owned by the largest Canadian banks (full-service and on-line brokerage) posted the following statistics: SECURITIES ACTIVITIES • 4.4% of the total number of firms DESCRIPTION Desjardins Securities is Desjardins Group’s brokerage • 63.9% of total industry income firm. It provides individuals, institutional investors, businesses and • 61.8% of total profits earned governments with the comprehensive line of products and services associated with a fully integrated brokerage firm. Individuals are Year 2004 was marked by two distinctly different periods. First, the first served by Desjardins Securities’ full-service brokerage and on-line quarter showed high levels of activity, which was a carry-over from brokerage (Disnat) divisions and the Desjardins service network. the level of activity observed during second-half 2003. The results were Business and government needs are met by the Group’s Corporate extremely positive for the industry as a whole and exceeded even the Finance, Debt Capital Markets, and Equity Capital Markets divisions. most optimistic projections. Then, at the start of second quarter 2004, With a presence in all regions of Québec, Desjardins Securities operates the financial markets demonstrated a spectacular reversal, making branches in Toronto, North York, Ottawa, Peterborough and Thunder the first quarter’s strong performance all but forgotten. This second Bay and has representatives for institutional investors in Vancouver. period lasted until the end of the year. The explanations behind the reversal are both political and economic: fluctuating oil prices, INDUSTRY The industry has not experienced significant changes the stagnation of interest rates at relatively low levels, the uncertainty in the past year. The number of brokerage firms is the same, of stock markets, the U.S. election, the rise in the Canadian dollar and employment levels rose 1.3%. As at December 31, 2004, and the resulting impact on exporters. Compared to last year, the the Canadian securities industry consisted of 205 brokerage firms overall increase in industry revenues derived, to an extent of 65%, and 37,739 employees. Despite the large number of industry players, from stellar first quarter performance. As for profits, however, the industry is quite concentrated. overall growth occurred only because of the substantial contribution made in the first quarter, as the change in profits was negative during the other three quarters of the year.

2004 ACHIEVEMENTS • Major investments aimed at growing resources, competencies and at improving infrastructures. • Total revenues increased by 33%, compared with 17% for the industry. • Overall Québec market share increased from 10% to 11%. • Assets under management grew by approximately 20%, rising from $13.8 billion to $16.5 billion. • Growth of revenues outside Québec: 25% of revenues in 2004 (17% in 2003). More than 70% of the revenues generated by institutional segments came from clients outside Québec, including 15% from the United States and Europe. • Desjardins Securities established its place among the major securities brokers in Canada by participating in the issues of major corporations as a member of a underwriting syndicate, thanks largely to a more comprehensive financial services offering involving, among other parties, Caisse centrale Desjardins. • Desjardins Securities led 16 financing operations for target companies, companies that fall within its development strategy, i.e., real estate, biopharmaceuticals and information technologies. These transactions involved all of the major Canadian brokers who participated in underwriting syndicates led by Desjardins Securities. These achievements demonstrate our expertise and our capacity to lead major share issue initiatives on the capital markets, to the same extent as the subsidiaries of major Canadian banks. • In terms of the value of financings, Desjardins Securities ranks first in Canada, according to the value of financings, as part of the Capital Pool Companies program, aimed at SMBs who want to carry out an accelerated initial public offering. • Finalization and deployment of the Desjardins Securities-Caisse phase of the network efficiency management project (TANDEM). DESJARDINS GROUP 77 MANAGEMENT’S DISCUSSION AND ANALYSIS

STRATEGY • Strengthening human, technological and organizational infrastructures while fostering growth in these areas and To help Desjardins Group achieve its objective of becoming maximizing profitability; the largest wealth manager in Québec by offering a complete • Providing a stimulating and respectful workplace for all employees, range of quality financial products and services to its individual thus making Desjardins Securities an employer of choice. and institutional clients across Canada. Desjardins Securities also seeks to support the growth of businesses and entrepreneurs OUTLOOK by contributing to the services offered by Desjardins Group and • To move forward with compliance and risk management efforts by taking on a leadership role in selected business segments. to support the company’s business development. • To pursue the efforts begun in 2003 with the caisse network to achieve business growth as part of the network efficiency The following strategies will help us to make our vision a reality management project. and to pursue growth, most notably by: • To raise our profile and increase our business volume, especially in Québec, in the full-service brokerage sector, in order to obtain • Realizing the firm’s potential, ensuring that Desjardins Group full coverage of the Québec market. takes its rightful place in the securities brokerage sector; • To enhance our on-line brokerage products and improve • Developing our skills, the quality of our team and products, their competitive edge. while raising the Group’s profile among target clienteles; • To capitalize on the investments made over the past three years with respect to expertise in the Equity Capital Markets, Research and Corporate Finance divisions.

Table 9 DESJARDINS SECURITIES

Selected data for the year ended December 31 (in millions of dollars and in numbers)

2004 2003 2002 Assets under administration $ 16,478 $ 13,827 $ 9,822 Total revenues 226 170 116 NET LOSS $ (0.1) $ (4) $ (4) Points of service 42 38 31 Total number of employees 1,232 1,070 923 In Québec 1,063 917 828 Outside Québec 169 153 95

ANALYSIS OF FINANCIAL RESULTS Total revenues stood at As at December 31, 2004, Desjardins Securities’ assets totalled $226 million for the year ended December 31, 2004 compared $2.5 billion, up $765 million over the previous year. Equity totalled to $170 million for 2003. This represents a 33% increase. All sectors $53 million. Assets under management totalled $16.5 billion, contributed to the increase. Commission revenues were up 38% for a 20% increase over 2003. Desjardins Securities complies with all the same period, while underwriting revenues grew by 46%. The other capital-related regulations imposed by self-regulatory organizations. revenue categories posted a 15% increase. During the year, Desjardins Securities carried out more than 1,477,000 transactions for its clients or itself, 32% more than in 2003. REVENUES REVENUE GROWTH (in millions of $) (%) For a third consecutive year, Desjardins Securities made significant investments to enhance its presence in existing markets and develop 300 80 new markets, enabling it to record substantial growth in total revenues. 60 However, profitability was affected by sluggish markets in the past 200 40 nine months and by expenses related to development and growth. 226 20 The net loss for the year amounted to $0.1 million compared to a 170 net loss of $4 million for the previous year. Payroll for the Desjardins 100 0 116 116 caisse network was $16 million, up $5 million over 2003. 104 -20

0 -40 2001 2004 2000 2002 2003 98/99 01/02 02/03 99/00 00/01 03/04

Industry

Desjardins Securities MANAGEMENT’S DISCUSSION AND ANALYSIS 78 DESJARDINS GROUP

SECURITIES, VENTURE CAPITAL AND OTHER A number of players in the venture capital industry are rebalancing their (CONTINUED) investment portfolio. Unlike what was seen in 2002 and 2003, in Québec there was an increase in the amounts invested per company since the VENTURE CAPITAL ACTIVITIES number of companies receiving financing dropped by 21.2% this year.

DESCRIPTION Desjardins Venture Capital is Desjardins Group’s The rise of the Canadian dollar and the slowdown in IPOs and mergers venture capital fund manager. It manages the assets of seven private and acquisitions delayed outflows and negatively affected the valuation Desjardins funds (Desjardins Venture Capital, Limited Partnership of certain portfolio investments. The forecasts for the coming years and six Desjardins regional investment funds) and Capital régional et are nevertheless promising; as the market calmed down, business coopératif Desjardins, a publicly-traded company founded by Desjardins valuations return to more reasonable levels. In addition, major clients Group in 2001 whose authorized capitalization could reach $1.4 billion (prime manufacturers) in certain technology sectors are gradually by 2011. The manager’s mandate is to provide the owners of the various becoming active once again and are contemplating large orders. funds under management with the rate of return expected and ensure that the specific objectives set by each of these funds are met. In terms of financial performance, Québec venture capital companies continue to post weak returns. This performance is certainly largely To meet the needs of its eight funds under management and to provide related to the young status of the Québec industry, but also to the goals companies and cooperatives across Québec with access to venture of various players. capital close to their place of business, Desjardins Venture Capital operates 14 offices across Québec. These offices are primarily located It is important to note that in Québec, there is currently a major in Desjardins corporate financial centres. This strategy is complemented withdrawal on the part of the government, which has confirmed that by a structure of specialized business segments, referred to as industry it would no longer finance developing businesses in certain sectors. skills. The offices work in concert with the regional teams in order to Moreover, in 2004 the government announced the creation of the provide entrepreneurs with relevant expertise tailored to their needs. regional economic intervention funds (FIER) to support economic development throughout Québec. Regional funds will be created INDUSTRY Québec’s venture capital industry managed to gradually by way of partnerships between the private and public sectors at recover in 2004 following the major repositioning in 2003. After a decade the initiative of regional entrepreneurs. In addition, a fund reserved of strong growth, 2003 was marked by a decline in investments by more for the financing of structuring projects and specialized funds will be than 20%. In 2004, investments by the venture capital industry totalled created by way of a public/private partnership with the three tax-exempt $618 million, which shows a slight increase over last year. funds which include Capital régional et coopératif Desjardins. The market is also characterized by a shortage of specialized, high value-added players, contributions by foreign investors that are gradually returning Most investments made in Québec this year related to transactions to levels seen at the beginning of the decade and an excessively involving expanding companies and those in traditional and information restricted number of true angel investors. technology and communications sectors. The life sciences sector, which began the year in a very strong position, is currently experiencing a significant reversal to close the year down by 34.2% compared to 2003.

2004 ACHIEVEMENTS • New commitments approximating $127 million in 97 companies. • Increase in our Québec market share, which went from 11.2% to 16.1%. Desjardins Venture Capital was involved in five of the ten largest transactions reported in Québec. • Desjardins Venture Capital is a partner of 176 companies and cooperatives, which allowed for more than 15,500 jobs to be created or maintained. • Desjardins Venture Capital is profitable once again.

STRATEGY The following strategies will contribute to the achievement of our vision:

Support Desjardins Group in achieving its goal of being recognized • Complete the service offering provided by caisses and corporate as the SMB partner with the best integrated service offering. financial centres and optimize synergies within Desjardins Group; Desjardins Venture Capital also aims to become the best venture • Benefit from the repositioning of the venture capital industry to capital fund manager in Québec in terms of partnerships with continue to improve our position as manager so that it reaches SMBs and cooperatives and in terms of contributing to Québec’s proportions appropriate to our economic strength and the quality economic development. of our offerings and to set us on a leadership path with respect to investment transactions in Québec; DESJARDINS GROUP 79 MANAGEMENT’S DISCUSSION AND ANALYSIS

• Ensure healthy profitability and maximize productivity; OUTLOOK Market new financial products, which should allow for • Contribute to economic development in Québec; an increase in business development in conjunction with the corporate • Gain recognition among SMBs and cooperatives as the leading financial centres. venture capital partner with respect to personalized business relationships, extensive networks, and access to expertise Increase our market share for near-equity financing of companies and sound advisory services focused on enhancing their in traditional sectors and cooperatives. business valuation. Meet the needs of cooperatives and companies in regions and thus achieve Capital régional et coopératif Desjardins’ legislated investment objectives by 2006.

Table 10 DESJARDINS VENTURE CAPITAL – ASSET MANAGEMENT ACTIVITIES

Selected data for the year ended December 31 (in millions of dollars and in numbers)

2004 2003 2002 Assets under management Desjardins Group $ 179 $ 184 $ 217 Capital régional et coopératif Desjardins 481 382 221 Total $ 660 $ 566 $ 438 Business partners 176 165 152 Investments made during the year $ 127 $86$77

Table 11 DESJARDINS VENTURE CAPITAL

Selected data for the year ended December 31 (in millions of dollars)

2004 2003 2002 Investments, on the books $ 136 $ 144 $ 176 Equity 147 138 174 Investments paid out during the year 5 21 27 Proceeds of disposition of investments during the year 25 512 NET EARNINGS (NET LOSS) FOR THE YEAR $8 $ (51) $ (26)

ANALYSIS OF FINANCIAL RESULTS Venture capital investment Due to the increased capital requirements resulting from the new Basel and reinvestment activities associated with all of the funds under Accord, in the spring of 2004 it was decided that the investment portfolio management translated into commitments totalling $127 million in held directly by Desjardins Venture Capital would enter into a disinvestment 97 Québec companies and cooperatives. Of this amount, $99 million was phase which was to span a three-year period. Investments paid out paid out in 2004. The business development strategies have therefore during the year therefore totalled $5 million, a substantial decline started to show results since Desjardins Venture Capital’s market share compared to the $21 million paid out in 2003, and mainly consisted in in Québec increased from 11.2% in 2003 to 16.1% in 2004; the most reinvestments to continue to support companies already in the portfolio. pronounced increase was witnessed in the traditional businesses sector. Despite the lingering unfavourable economic climate, the manager’s efforts allowed for the disposal of several investments and cash inflows As at December 31, 2004, assets of the eight funds under management of more than $25 million in 2004 compared to $5 million in 2003. of Desjardins Venture Capital totalled $660 million compared to $566 million a year earlier, up 16.6%. The growth of assets under The year 2004 ended with net earnings of $8 million compared to a management in the last two years is mainly attributable to the annual loss of $51 million in 2003. The improvement in these results is chiefly capital raising carried out by Capital régional et coopératif Desjardins, attributable to an increase in the value of investments held in companies which resulted in $101 million in 2004 and $164 million in 2003. This in traditional sectors. It should be noted, however, that the value of fund now represents 72.9% of funds under management. certain investments in public companies fluctuated dramatically due to changes in their securities listing. The new technologies sector is now also undergoing a recovery after several difficult years. One company in our portfolio made an IPO in December 2004, which contributed to this recovery. MANAGEMENT’S DISCUSSION AND ANALYSIS 80 DESJARDINS GROUP

REVIEW OF COMBINED FINANCIAL STATEMENTS

TOTAL INCOME

HIGHLIGHTS • Total income rose by 9.2%, stimulated by sustained business growth • Net interest income was up $37 million, or 1.1%, owing to a rise in the volume of loans • Other income rose $673 million, or 15.7% • Other income represented 58.7% of total income, an increase of 330 basis points

Table 12 TOTAL INCOME

For the year ended December 31 (in millions of dollars and as a percentage)

2004 2003 2002 Net interest income $ 3,488 41.3 % $ 3,451 44.6 % $ 3,267 47.3 % Other income 4,953 58.7 4,280 55.4 3,643 52.7 $ 8,441 100.0 % $ 7,731 100.0 % $ 6,910 100.0 %

Total income consists of net interest income and other income. The rise of $37 million, or 1.1%, in net interest income is attributable In 2004, Desjardins Group’s total income reached the record high of to sustained growth in credit activities, particularly in the area $8,441 million, which represents a significant increase of $710 million, of residential mortgages. or 9.2%, relative to 2003. NET INTEREST INCOME Desjardins Group follows a philosophy of prudent and efficient management of interest rate risk by matching assets and liabilities, carefully managing a variety of financial TOTAL INCOME instruments, and pursuing strategies of investment in diversified (in millions of $) funds together with value-added asset growth, which makes it 9,000 possible to keep up with and contribute positively to net interest income. Thus, on account of the strategy of optimization and 7,500 stabilization of net interest income that has been instituted, this 4,953 year’s results reflect the decisions made over the past several years. 6,000 4,280 3,643

3,438 Net interest income is the difference between interest income earned 4,500 3,117 on assets such as loans and securities, and interest expense related to liabilities such as deposits, notes, borrowings and subordinated 3,000 debentures. Table 13 shows changes in net interest income for the main 3,451 3,488 3,267 asset and liability classes, while Table14 presents their contributions 2,888

1,500 2,738 to net interest income in terms of the fluctuations in interest rates 0 as well as in Desjardins Group’s assets and liabilities over the course of the year. 2001 2004 2000 2002 2003 As at December 31, 2004, net interest income totalled $3,488 million

Net interest income and showed growth of $37 million over the results from the previous year. Accordingly, the benefit gained from greater volumes, which yielded Other income additional net income of $292 million, was offset by the drop of 28 basis points in the profit margin (3.49% for 2004) due to a competitive environment marked by weakness in interest rates and that reduced The change is attributable to the “Other income” category, which posted net interest income by $255 million, as shown in Table 14. a large gain of $673 million, or 15.7%, relative to the previous year. The increase comes primarily from net premiums for insurance and annuities, which rose by $251 million as a direct consequence of the growth in the business of the insurance subsidiaries combined with the increase of $212 million in income related to trading activities and investments. Thus, as shown in Table 12, other income constitutes an increasingly large share of total income, with a ratio of 58.7% in 2004, compared to 55.4% in 2003 and 52.7% in 2002. DESJARDINS GROUP 81 MANAGEMENT’S DISCUSSION AND ANALYSIS

Growth in net interest income is primarily attributable to the financial Accounting Guideline AcG-13 had an adverse effect on the yield of intermediation segment, which posted growth of $24 million, or 0.8%, interest-bearing assets, as the portion of interest related to derivatives as shown in Note 24 to the Combined Financial Statements, which that formerly was categorized as interest income from loans will presents information for each segment. This segment, in which the henceforth be categorized as other income when the derivatives do caisses are dominant, continues to perform well, contributing 83% not qualify for hedge accounting. Accordingly, for 2004, some $72 million to the Group’s entire net interest income, a result only slightly lower in interest on derivatives could not be designated as hedges; this than the rate of 83.2% that was obtained last year. meant that 8 cents of every $100 of average interest-bearing assets were listed as other income in 2004. More specifically, as Table 14 shows, growth of $7.9 billion, or 9.2%, in average volume of interest-bearing assets contributed $446 million Interest expense rose $18 million, or 1.1%. The influence of an in interest income. The spectacular sustained vitality in the residential increase of 9.5% in average interest-bearing liabilities, which added mortgage market, fuelled by weak interest rates, enabled Desjardins $154 million in additional interest charges, was partially offset by the Group to take advantage of its leading position in the area of residential drop of 19 basis points in the average cost of funds financed by deposits, financing to increase its overall average portfolio of residential mortgages borrowings, and subordinated debentures, which reduced interest by $4.2 billion, or 11.6%. The other categories of financing also benefited expense by $136 million. from economic circumstances that favoured a sustained increase in consumer spending and the marked recovery in corporate investments. All in all, the increase in net interest income resulted from dynamic growth in business volume, thanks to sustained efforts to offer members At the same time, it must be noted that the decline in interest rates a broad range of financial products tailored to their needs, as well as to seen in 2004, including a drop of 69 basis points in the average prime prudent and efficient management of interest rate risk, which enabled rate, resulted in the reinvestment of assets at ever lower interest rates, Canada’s largest cooperative financial group to yield, for the benefit which contributed to the decline of $391 million in interest income. of its member-owners, net interest income of $3,488 million, or 3.49% Furthermore, the implementation as of January 1, 2004, of the new as a percentage of average assets.

Table 13 NET INTEREST INCOME ON AVERAGE ASSETS AND LIABILITIES

For the year ended December 31 (in millions of dollars and as a percentage)

2004 2003 Average balance Interest Average rate Average balance Interest Average rate ASSETS Interest-bearing assets Securities, cash and deposits with financial institutions $ 20,605 $ 821 3.98 % $ 19,222 $ 848 4.41 % Loans 72,597 4,378 6.03 66,117 4,296 6.50 Total interest-bearing assets 93,202 5,199 5.58 85,339 5,144 6.03 Other assets 6,676 — — 6,113 — — Total assets $ 99,878 $ 5,199 5.20 % $ 91,452 $ 5,144 5.62 % LIABILITIES AND EQUITY Interest-bearing liabilities Deposits $ 74,350 $ 1,616 2.17 % $ 68,094 $ 1,609 2.36 % Borrowings and subordinated debentures 1,651 95 5.75 1,342 84 6.26 Total interest-bearing liabilities 76,001 1,711 2.25 69,436 1,693 2.44 Other liabilities 17,101 — — 15,904 — — Equity 6,776 — — 6,112 — — Total liabilities and equity $ 99,878 $ 1,711 1.71 % $ 91,452 $ 1,693 1.85 % NET INTEREST INCOME $ 3,488 $ 3,451 AS A PERCENTAGE OF AVERAGE ASSETS 3.49 % 3.77 % MANAGEMENT’S DISCUSSION AND ANALYSIS 82 DESJARDINS GROUP

Table 14 IMPACT ON NET INTEREST INCOME OF CHANGES IN BALANCES AND RATES

For the year ended December 31 (in millions of dollars and as a percentage)

2004-2003 Increase (decrease) Change in Change in Average Average average volume average rate Interest volume rate ASSETS Securities, cash and deposits with financial institutions $ 1,383 (0.43)% $ (27) $ 55 $ (82) Loans 6,480 (0.47) 82 391 (309) CHANGE IN INTEREST INCOME $ 55 $ 446 $ (391) LIABILITIES Deposits $ 6,256 (0.19)% $ 7 $ 136 $ (129) Borrowings and subordinated debentures 309 (0.51) 11 18 (7) CHANGE IN INTEREST EXPENSE $ 18 $ 154 $ (136) CHANGE IN NET INTEREST INCOME $ 37 $ 292 $ (255) DESJARDINS GROUP 83 MANAGEMENT’S DISCUSSION AND ANALYSIS

OTHER INCOME Other income comprises all income not classified as Life and health insurance activities at Desjardins Financial Security net interest income. In 2004, other income grew $673 million (a 15.7% produced insurance and annuity premiums of $2,090 million, a 3.8% increase from figures posted for 2003) and accounted for 58.7% of increase over 2003. Growth in group insurance was particularly strong the total income posted for 2004 (as compared to 55.4% in 2003). with premiums reaching $1,432 million, mostly due to sustained growth in sales, and growth in premiums from group insurance for Desjardins The growth witnessed in other income is largely attributable to a Group members increased by more than $26 million. In personal significant increase in net premium income, or insurance and annuity insurance, premium volume stood at $352 million, registering a close premiums from life and health insurance and general insurance to 2% increase despite a stagnant market. The result was a volume of activities. This expansion was due to excellent growth in business premiums distributed to caisse members that grew 24.8% to $78 million. at our subsidiaries. Taking 66% of the total, net premium income Finally in savings, net annuity premiums stood at $306 million and represented the largest single component of other income, an increase sales of savings products totalled $405 million, split between the of $251 million or 8.3% compared to results posted for 2003. general funds and segregated funds of Desjardins Financial Security.

Table 15 OTHER INCOME

For the year ended December 31 (in millions of dollars and as a percentage)

2004 2003 2002 Net premiums $ 3,267 $ 3,016 $ 2,563 Deposit and payment service charges 402 393 370 Lending fees and credit card service revenues 229 190 161 Trust services and securities dealings 317 234 189 Trading and investment activities 329 117 110 Other 409 330 250 $ 4,953 $ 4,280 $ 3,643 Growth in other income 15.7 % 17.5 % 6.0 % Other income as % of total income 58.7 % 55.4 % 52.7 %

SOURCES OF NET PREMIUMS(1) OTHER INCOME (in millions of $) For the year ended December 31, 2004

8.3% 2,400 6.6% 2,000 6.4% 2,090 1,600 2,013 4.6% 1,704 1,200 8.1%

66.0% 1,290

800 1,137 971

400

Net premiums 0 Deposit and payment service charges 2003 2002 2004 Lending fees and credit card service revenues Life and health insurance Trust services and securities dealings General insurance Trading and (1) The difference between the total investment activities of results and the sum of the Other operating segment results is due to intersegment transactions. MANAGEMENT’S DISCUSSION AND ANALYSIS 84 DESJARDINS GROUP

Gross premiums written in the general insurance segment, an area on September 30, 2003 boosted income by $7 million in 2004. Net fee of expertise of Desjardins General Insurance Group (DGIG), totalled income from investment funds and discretionary management activities $1.4 billion, up 7.9% over 2003. In Québec, gross premiums totalled represents 58% of DSFSM’s total fee income. The level of these products $850 million, a 5.5% increase, and outside Québec they rose 12.1% outstanding grew considerably through net sales and through the to $520 million. Growth was particularly strong at The Personal good performance of financial markets, which led to a 39% increase Insurance Company, where premiums increased 23% and the number in revenues from these activities. of policies issued was up 9%. Over 90% of DGIG’s activities in Québec are in the individual insurance market, while outside Québec, almost Securities brokerage underwriting commissions increased 38% due 75% of the business is in group insurance. In 2004, premiums written to an increase in the volume of stock transactions, among other factors, in provinces other than Québec represented 38% of DGIG’s total while underwriting income was up 46%. Desjardins Securities conducted business, compared to 36% in 2003. In Québec, Desjardins General over 1,477,000 transactions in 2004, either for itself or on behalf of Insurance premiums were written primarily by Desjardins Group its clients, representing an increase of 32% over 2003. members and represent 46% of DGIG’s total premiums. Net premiums earned by the general insurance segment totalled $1.3 billion, a 13.5% Income from trading and investment activities, consisting in part of gains increase over 2003. on derivative products and investment income, came to $329 million in 2004, or $212 million more than 2003. The new accounting guideline Deposit and payment service charges were similar to charges posted (AcG-13) entitled “Hedging Relationships”, applied since January 1, 2004, for 2003. had the effect of increasing other income by $102 million. This included an unrealized gain of $30 million arising from changes in the fair value Revenues from lending fees and credit cards, composed mainly of credit of derivatives that were not designated in hedging relationships as well card service charges, totalled $229 million in 2004, a 20.5% increase as interest income of $72 million on these same derivatives, previously over 2003. This growth reflects the ease of use associated with credit presented as interest income but now reported as other income. card payment solutions and the improved accessibility under our In addition, investment income other than interest from insurance accord D FINANCING service offered within the caisse network and subsidiaries grew in 2004, mainly as a result of increased funds for by many merchants across Canada. VISA Desjardins business volume investment generated by business growth, by improved performance reached $9.7 billion, 20% more than in 2003. The number of cards of financial markets in 2004, by the intrinsic quality of the investment reached 3.2 million. portfolio and its prudent and sound management, by a new strategy implemented with respect to use of funds and by foreign exchange Revenues from trust services and securities dealings came to gains. It is worth noting that in 2003, the venture capital subsidiary $317 million in 2004, up 35.5% from 2003. This class of other income posted lower investment income because it recorded a loss in the consists mainly of fee income from trust activities, commission value of its investments recorded at fair market value. income and securities brokerage underwriting commissions. The “Other” category of income stood at $409 million, up $79 million Fee income from the trust activities of Desjardins Specialized from 2003. This increase is explained in part by higher fee income Financial Services Management (DSFSM) totalled $111 million in 2004, related to asset management, notably because of an increase in up nearly 24% from 2003. The good performance derived essentially alternative products outstanding and because of successful sales from investment fund income that grew 42% over the year to $59 million. of certain indexed savings products. In addition, the more than 40% This increase stemmed directly from a $1.8 billion increase in investment increase in income from international and foreign exchange services funds outstanding, which reached $8 billion as at December 31, 2004 also contributed to growth of other income under the heading “Other”. as compared with $6.2 billion at the end of 2003. The solid growth witnessed in funds outstanding can be traced to robust net sales results, or $1.3 billion for the year, and the impact of strong financial markets. In addition, the acquisition of Northwest Mutual Funds DESJARDINS GROUP 85 MANAGEMENT’S DISCUSSION AND ANALYSIS

NON-INTEREST EXPENSES

HIGHLIGHTS • Non-interest expenses totalled $6,840 million, a 5.4% increase • The productivity ratio achieved in 2004 was 66.1%, compared with 67.9% in 2003

Table 16 below depicts the breakdown of non-interest expenses the 12.2% increase in total income was greater. One contributing factor by category. For fiscal 2004, they totalled $6,840 million, representing was the excellent financial performance of the Group’s subsidiaries, a $351 million, or 5.4%, increase over 2003. The increase in non-interest which allowed the segment’s share of earnings to rise by $188 million expenses is essentially attributable to $185 million in additional in 2004 and thus single-handedly improved the productivity ratio by expenses linked to staff compensation, $46 million for outsourcing roughly 300 basis points. processing services, a $114 million increase in other expenses, and additional expenditures of $14 million on communications. CLAIMS, BENEFITS, ANNUITIES AND CHANGES IN INSURANCE PROVISIONS Expenses related to claims, benefits, Desjardins Group calculates productivity from the results of the financial annuities and changes in insurance provisions represent 43.5% of all intermediation segment. This performance indicator expresses non-interest expenses, as opposed to 46% last year. Consequently, the ratio of operating expenses to total income, including the share little changed in this expenditure category in comparison to 2003 of earnings generated by the caisses’ investments in the subsidiaries, in the Group’s combined financial statements, after account is as a percentage. In 2004, this ratio was 66.1%, a 180 basis point taken of a restatement of an expense posted by a life and health improvement over the 67.9% level of the previous year. Despite the insurance subsidiary. 9.1% growth in non-interest expenses experienced by this segment,

Table 16 NON-INTEREST EXPENSES

For the year ended December 31 (in millions of dollars and as a percentage)

2004 2003 2002 Claims, benefits, annuities and changes in insurance provisions $ 2,975 $ 2,983 $ 2,299 Salaries and fringe benefits Salaries 1,607 1,474 1,310 Fringe benefits 344 292 296 1,951 1,766 1,606 Premises, equipment and furniture, including depreciation Technology 84 79 71 Depreciation 135 130 136 Other expenses 121 131 123 340 340 330 Outsourcing processing services 279 233 225 Communications 212 198 199 Other expenses Business and capital tax and deposit insurance premiums 146 138 124 Sponsorships 52 43 38 Employee training 35 30 23 Deposit-related expenses 46 39 37 Commissions 235 188 172 Other personnel-related expenses 51 44 45 Other expenses 518 487 427 1,083 969 866 $ 6,840 $ 6,489 $ 5,525 Productivity ratio – financial intermediation segment 66.1 % 67.9 % 65.1 % MANAGEMENT’S DISCUSSION AND ANALYSIS 86 DESJARDINS GROUP

SALARIES AND FRINGE BENEFITS During fiscal 2004, expenditures OTHER EXPENSES Premises, equipment and furniture, including related to human resources increased by $185 million, or 10.5%, depreciation, totalled $340 million, exactly the same as last year. It reflecting a $133 million, or 9%, growth in salaries, and improvements is worth noting that costs in this category were held constant despite in fringe benefits amounted to $52 million, or 17.8%. Note that salaries the ongoing transformation of the financial services physical and fringe benefits represent 28.5% of non-interest expenses, distribution network in Québec compared to 27.2% last year. The outsourcing of processing services occupies a growing share The total payroll was $1,607 million, versus $1,474 million for 2003. in the cost structure. Consequently, we list it as a separate item. This change is largely attributable to a combination of factors, including Up $46 million, it represents 4.1% of total non-interest expenses. the indexation of salaries, the recording of costs associated with This increase is essentially attributable to strong growth in financial the employee profit-sharing plan, and improvements to the staff’s transactions by members and clients, the impact of which is to drive working conditions under the 2002-2005 Human Resources Plan. up processing and telecommunications costs. In 2004, expenditures The higher payroll is also a direct consequence of the growth of staff on communications, which include telephony, advertising, messenger assigned to technological development activities in some components services and stationery, rose by $14 million, or 7.1%, to $212 million. of the financial intermediation segment and to the hiring of high calibre This growth is primarily attributable to advertising and public relations, advisors in specialized sectors to support business development but also to postage and mailing costs. in the financial centres. Other expenses amounted to $1,083 million, up $114 million, or 11.8%, In 2004, costs associated with fringe benefits rose by $52 million, over 2003. This increase springs from a variety of sources, principally from $292 million to $344 million. Note 18 to the Combined Financial the $47 million more in commissions paid to market intermediaries, Statements gives details on the pension plans and other post-retirement a substantial share of which ($29 million) is connected to growth in benefit plans and shows a net plan expense of $194 million, up the business volume of Desjardins Securities; a $9 million increase $34 million compared to last year, of which $29 million is from pension in monies reinvested in the community in the form of sponsorships, plans. Note that a significant effect of the falling interest rate was donations, and scholarships, and a further $15 million for the Desjardins to increase commitments associated with accrued benefits. BONUSDOLLARS Rewards Program granted to cardholders registered with this consumer loyalty development program. This last element In accordance with the Act respecting the disclosure of the compensation is also due to the provision rate and an increased business volume. received by the executive officers of certain legal persons, Desjardins Group Also note that sustained business volume growth in several segments publishes the compensation earned by its five most highly-paid officers. further contributed to the hike in other expenses.

Table 17 on page 87 provides detailed information on the individual remuneration paid to these executives for the year NON-INTEREST EXPENSES GROWTH IN ended December 31, 2004. (in millions of $) NON-INTEREST EXPENSES

5,000 30

4,000 25

20 3,000 3,865 17.4 3,506

3,226 15 2,975 2,983 2,000 10.2

2,299 10 5.3 1,000 8.7 5 4.9 5.4 0 0 2003 2002 2004 2003 2002 2004

Claims, benefits, Total growth, % annuities and changes in insurance provisions Total growth, % (Excluding claims, benefits, Other annuities and changes in insurance provisions) DESJARDINS GROUP 87 MANAGEMENT’S DISCUSSION AND ANALYSIS

Table 17 REMUNERATION OF KEY EXECUTIVE OFFICERS IN 2004

Incentive plan(1) Other Other annual Salary Annual Long-term benefits benefits Name and main responsibilities $$$$$ MR. ALBAN D’AMOURS President and Chief Executive Officer Desjardins Group 856,788 397,108 —(2) N/A (4) MS. MONIQUE F. LEROUX President of Desjardins Financial Corporation(6) and Chief Executive Officer of the subsidiaries 530,173 236,139(3) 318,106(3) N/A (4) MR. BERTRAND LAFERRIÈRE President and Chief Operating Officer Fédération des caisses Desjardins du Québec 530,173 212,705(3) 200,406(3) N/A (4) MR. JEAN-PIERRE DE MONTIGNY President and Chief Operating Officer Desjardins Securities 384,941 171,453(3) 179,517(3) N/A (4) MR. JEAN-GUY LANGELIER President and Chief Operating Officer Caisse centrale Desjardins 362,056 160,029(3) 112,477(3) 60,000(5) (4)

(1) Amounts are paid in cash in the year following the year in which they are earned. (2) As President of Desjardins Group, Mr. D’Amours has asked to be excluded from the long-term bonus plan. (3) Participant in the integrated management incentive bonus plan, which combines short- and long-term bonuses. The bonus available under the plan is determined at the end of each year based on the extent to which the objectives set at the beginning of the year have been met (annual) and on Desjardins Group’s overall performance (long-term). For a given year, 40% or 50% of the available bonus is payable in cash, and the balance (long-term) is not vested and remains at risk based on the results of the Group. The bonus portion thus accrued but not earned is generally not paid out until death, retirement, or disability. (4) The personal benefits awarded to the senior executives over the course of the year did not exceed the lesser of 10% of their annual salary plus bonus, or $50,000. (5) Related to his responsibilities as President and Chief Executive Officer of Desjardins Credit Union. (6) At Mid-2004, was appointed Senior Executive Vice-President and Chief Financial Officer of Desjardins Group.

INCOME AND OTHER TAXES Income taxes on surplus earnings In addition, most Desjardins Group companies that are not financial include income taxes on the activities of the caisses, Caisse centrale services cooperatives have public corporation status and, as such, Desjardins, and the Fédération, as well as on other entities in are subject to the tax regulations that apply to public corporations. Desjardins Group that are not financial services cooperatives. Indirect taxes consist of income taxes and taxes on capital, property Unlike most other financial institutions, which are large public and business taxes, taxes on the payroll and fringe benefits, and corporations, Desjardins Group is a decentralized cooperative financial the goods and services tax (GST) and sales taxes. Indirect taxes are group in which each individual caisse, Caisse centrale Desjardins, included in non-interest expenses. and the Fédération are private and independent companies. Each caisse is therefore subject to the tax regulations applicable to private In 2004, the entities of Desjardins Group paid close to $588 million companies. Legislation has made these regulations adaptable so that in direct and indirect taxes. the caisses can accumulate sufficient general reserves to serve as a capital base for the protection of members’ deposits. When the general reserve reaches the level specified in the legislation, the caisse is subject to the same tax rates as those applicable to large corporations. Furthermore, the caisses are subject to a tax on capital, based on a formula adapted to cooperative financial organizations. MANAGEMENT’S DISCUSSION AND ANALYSIS 88 DESJARDINS GROUP

CREDIT QUALITY

HIGHLIGHTS • Gross impaired loans outstanding are down $198 million, or 33.9% • Total coverage ratio of 195.1%

IMPAIRED LOANS Loans are considered impaired when, in PROVISIONS FOR CREDIT LOSSES When a loan becomes impaired, Management’s opinion there is reasonable doubt as to the collectibility the reduction in carrying amount should be recognized as a charge of the principal or interest. All loans 90 or more days past due fall in the period in which impairment is identified. into this category, unless the loan is fully secured or in the process of collection. Finally, a loan is considered impaired when it In 2004, Desjardins Group made a $94 million charge for provisions is contractually more than 180 days in arrears. for credit losses, compared to $75 million in 2003. This charge represented 0.13% of the average gross loans, compared to 0.11% As at December 31, 2004, gross impaired loans outstanding dropped a year earlier. $198 million, thus reducing to 0.50% (0.83% in 2003) the ratio of impaired loans in the total portfolio. All categories of loans continued to post reductions in impaired items except for the agricultural GROSS IMPAIRED LOANS PROVISIONS FOR category, where the situation persisted; the beef and pork sectors CREDIT LOSSES remained sensitive, especially because of the decline in prices and the extra expenses associated with new environmental standards. 1,000 1.8 280 0.5 1.56 0.41 1.5 240 The strength of the real estate markets (both residential and 800 1.28 0.4 commercial), largely attributable to favourable economic conditions 200 1.01 1.2 and the general level of interest rates, is itself responsible for 52.5%, 0.83 600 160 0.23 0.3 or $104 million, of this reduction in gross impaired loans. Nevertheless, 892

0.9 240 in 2005 we shall have to monitor the negative impact of the appreciation 765 0.18 400 0.50 120 0.2

643 0.13 of the Canadian dollar, seen in 2004, on the manufacturing sector. 0.6 80 0.11 130 584 200 0.1 Finally, the net balance of impaired loans, which is the gross amount 0.3 111 94 386 40 of these loans less the cumulative provision for credit losses, showed 75 improvement, falling by $104 million to a negative amount of ($367 million) 0 0.0 0 0.0 at the end of 2004, compared to a negative amount of ($263 million) at 2001 2004 2000 2002 2003 2001 2004 the end of 2003. As Table 18 on page 89 shows, net impaired loans 2000 2002 2003 outstanding now represent (0.48)% of the total portfolio. In millions of $ In millions of $

As a % of gross loans As a % of average gross loans DESJARDINS GROUP 89 MANAGEMENT’S DISCUSSION AND ANALYSIS

Table 18 IMPAIRED LOANS BY CATEGORY OF BORROWER

As at December 31 (in millions of dollars and as a percentage)

2004 2003 2002 Specific Gross provisions for Carrying Carrying Carrying Gross loans impaired loans credit losses value value value

(1) (1) Residential mortgages $ 43,199 $ 79 0.18 % $ 19 $ 60 0.14 % $ 79 $ 111 Consumer, credit card, and other personal loans 13,372 70 0.52 36 34 0.25 32 26 Farm loans 4,554 18 0.40 6 12 0.26 15 10 Commercial mortgages 4,686 62 1.32 22 40 0.85 83 88 Other loans 10,853 157 1.45 65 92 0.85 128 104 Total impaired loans excluding general provision 76,664 386 0.50 148 238 0.31 337 339 General provision 605 (605) (600) (599) Total impaired loans including general provision $ 76,664 $ 386 0.50 % $ 753 $ (367) (0.48)% $ (263) $ (260)

(1) As a percentage of gross loans.

Table 19 COVERAGE RATIO

As at December 31 (as a percentage)

2004 2003 2002 Residential mortgages 24.1 % 27.5 % 31.9 % Consumer, credit card, and other personal loans 51.4 56.2 65.3 Farm loans 33.3 31.8 44.4 Commercial mortgages 35.5 39.0 40.5 Other loans 41.4 47.5 56.5 Total coverage ratio excluding general provision 38.3 42.3 47.3 Total coverage ratio including general provision 195.1 % 145.0 % 140.4 %

CUMULATIVE PROVISION FOR CREDIT LOSSES The cumulative As at December 31, 2004, specific provisions stood at $148 million provision for credit losses in the combined balance sheets is maintained ($247 million in 2003). This balance represented 38.3% of the gross at a level high enough to absorb Management’s best estimate of potential impaired loan portfolio, as against 42.3% on the year-earlier date. losses related to the loan portfolio, given its assessment of economic conditions. It is decreased by actual write-offs, net of recoveries, General provision The general provision is maintained at a level high and increased by provisions for credit losses charged to the Combined enough to reflect Management’s best estimate of provisions for credit Statements of Income. In the Combined Balance Sheet, it is deducted losses with regard to loans not yet identified as impaired. from the appropriate assets and is made up of two components, specific provisions and a general provision. To determine the required level of the general provision, Desjardins Group uses an internal model to estimate the potential losses in the In 2004, the total coverage ratio for impaired loans was 195.1%, loan portfolio, excluding impaired loans. It also provides a risk estimate compared to 145% in the previous year. This ratio is obtained by dividing for each loan category, taking into account portfolio changes over time the cumulative provision for credit losses, i.e., the specific provisions and the impact of credit risk relating to the business cycle. and a general provision, by gross impaired loans. The 2004 coverage ratio is considered satisfactory. According to the guidelines issued by the Autorité des marchés financiers, the general provision qualifies as eligible Tier 2 capital, Specific provisions When Management identifies a loan as impaired, to an amount equal to 87.5 basis points of risk-weighted assets. the loan’s carrying value is adjusted to reflect its estimated realizable As at December 31, 2004, the general provision for credit risk totalled value and to determine if a specific provision should be taken $605 million, compared to $600 million on the year-earlier date. on the loan. No specific provision is taken on credit card balances; they are written off completely when no payment has been received for a period of 180 days. MANAGEMENT’S DISCUSSION AND ANALYSIS 90 DESJARDINS GROUP

BALANCE SHEET MANAGEMENT

HIGHLIGHTS • Strong loan portfolio growth of 9.6%, among the highest in 15 years • Desjardins Group’s increased presence among businesses: a 0.4% growth in its relative position in Québec • A notable expansion in the Group’s relative position in Québec in the market for deposits (+ 0.7%), investment funds (+0.8%), and securities brokerage (+0.9%)

TOTAL ASSETS During 2004, Desjardins Group’s total assets grew by $7.3 billion, or 7.6%, to a total of $103.6 billion as at December 31, GROWTH IN ASSETS LIQUIDITIES AS A (%) compared to an increase of $9.6 billion, or 11.1%, posted at the end PERCENTAGE OF TOTAL ASSETS of 2003. This slowdown is primarily attributable to lagging savings recruitment, particularly from individuals, businesses, and government 12 25 bodies. Owing to an improvement in the economy, the demand for credit has remained robust. 10

11.1 20 21.7 21.3 21.0 21.0 The upswing in the business cycle is largely due to stronger growth 8 20.6 in domestic demand which, in turn, springs from the remarkable 15 boom in investment in housing, strong household consumption 6 7.6

expenditures attributable to higher after-tax incomes, and a 5.9 10 4

substantial acceleration in business expenditures, especially 4.8 on machinery and equipment. 4.1 5 2

Desjardins Group, a major economic player, took full advantage 0 0 of improvements in the economies of Québec and Ontario in 2004, where developments created very attractive openings for business 2001 2001 2004 2000 2002 2003 2004 2000 2002 2003 development in several areas of activity. Consequently, many of its members and clients benefited from the Group’s involvement in the social and economic development of communities in which it is present. Whether in wealth management or financing, it helps them bring their plans to fruition.

Table 20 CONDENSED BALANCE SHEET

As at December 31 (in millions of dollars and as a percentage)

2004 2003 2002 ASSETS Cash and deposits with financial institutions $ 1,325 1.3 % $ 1,389 1.5 % $ 1,392 1.6 % Securities 20,006 19.3 19,461 20.2 16,776 19.4 Loans 75,911 73.3 69,273 72.0 62,990 72.7 Other assets 6,332 6.1 6,147 6.3 5,488 6.3 $103,574 100.0 % $ 96,270 100.0 % $ 86,646 100.0 % LIABILITIES AND EQUITY Deposits $ 76,987 74.3 % $ 72,219 75.0 % $ 64,587 74.5 % Other liabilities 17,603 17.0 16,278 16.9 14,607 16.9 Subordinated debentures 1,589 1.6 1,154 1.2 1,208 1.4 Non-controlling interests 235 0.2 247 0.3 405 0.5 Equity 7,160 6.9 6,372 6.6 5,839 6.7 $103,574 100.0 % $ 96,270 100.0 % $ 86,646 100.0 % DESJARDINS GROUP 91 MANAGEMENT’S DISCUSSION AND ANALYSIS

Liquidities totalling $21.3 billion Individual savings: the main source of funds

Desjardins Group’s holdings in cash and securities totalled $21.3 billion Individual savings Desjardins Group has always paid particular as at December 31, 2004, for a year-over-year increase of $481 million attention to its individual customers when recruiting savings. Owing or 2.3%, versus a $2.7 billion or 14.8% advance in 2003. This reduction to the specific features associated with this category of savings, such is attributable to stronger demand for credit from members and clients, as its greater stability, its generally lower costs, and its easy which caused growth in its loans portfolio to increase more than accessibility, most financial institutions compete fiercely to attract deposits received. Nonetheless, the volume of the Group’s liquidities this clientele. Over the years, Desjardins Group has implemented remained at 20.6% of total assets at year-end, compared with 21.7% strategies that have allowed it to become a leader in this industry. in 2003. Desjardins Group’s liquidity management standards are Indeed, the preponderance of individual savings in its deposit liabilities, discussed in greater detail below in the section “Cash position and 71.1% at the end of 2004, evidences its expertise in the matter. As at sources of financing”. December 31, 2004, its total volume was $54.8 billion, up $2.7 billion or 5.2%, compared to an increase of $3.6 billion, or 7.5%, at the same GROWTH IN DEPOSITS date in 2003. Relatively low interest rates, in conjunction with the drawing power of some other savings products, such as investment funds and $4.8 billion growth in deposits securities, created a climate that was somewhat adverse to recruiting deposits. Nonetheless, despite this challenging environment, in 2004 Desjardins Group was able to maintain its relative position at nearly Combined deposits at Desjardins Group totalled $77 billion as at 1.7% in the highly competitive Ontario market while increasing it December 31, 2004, against $72.2 billion at the end of 2003. This substantially, by 0.7%, in Québec over the same period, to 44.6%. represents annual growth of $4.8 billion, or 6.6%, which is largely attributable to savings deposited by members and clients, individuals, Desjardins Group offers a wide variety of savings products, all of which businesses and government institutions. These deposits, comprising have been very well received by individual clients. In the following 91.1% of deposit liabilities at year-end 2004, grew by $4 billion, or 6%, table, these products are grouped into three main categories: demand annually, to $70.1 billion as at December 31. Thus, we see that the deposits, notice deposits and fixed-term deposits. At the end of 2004, growth of Desjardins Group is largely attributable to these sources of fixed-term deposits represented 69.6% of individual savings in the financing. As to other sources of financing available to the Group, such Group’s deposit liabilities. As at December 31, 2004, its year-over-year as securities issues on financial markets, these are used only in a growth was $1.2 billion, or 3.1%, for a total of $38.1 billion. complementary capacity. They amounted to 8.9% of deposit liabilities at the end of 2004, having grown by $0.8 billion, or 12.6%, to $6.9 billion as at December 31, 2004. Page 94 contains further information on An increase exceeding $5 billion in off-balance sheet the state of cash flows and sources of financing, and page 103 describes savings products the Group’s liquidity risk management policies.

Desjardins Group pursued its expansion into the area of off-balance sheet savings products in 2004. Indeed, in light of the solid results DEPOSIT PORTFOLIO QUÉBEC MARKET SHARE obtained in investment funds and securities brokerages, we can assert COMPOSITION PERSONAL SAVINGS As at December 31, 2004 RECRUITMENT ACTIVITIES that it has made great strides. The strong recovery of stock exchanges (%) during the last quarter and its positive impact on investor confidence, in conjunction with the launch of the new line of Desjardins Funds and 8.9% 50 continued development of its brokerage activities, allowed the Group to increase off-balance sheet savings products under administration 20.0% 40 or management by $5.2 billion, or 24.7%, to reach $26.4 billion as at December 31, compared to an increase of $4.8 billion, or 29.7%, 30 in 2003.

20 71.1%

Individuals 0 Businesses 2001 2004 Other 2000 2002 2003

On-balance sheet savings

Securities

Investment funds MANAGEMENT’S DISCUSSION AND ANALYSIS 92 DESJARDINS GROUP

Table 21 DEPOSITS

As at December 31 (in millions of dollars and as a percentage)

2004 2003 Demand Notice Fixed-term deposits deposits deposits Total Total Individuals $ 13,568 $ 3,059 $ 38,144 $ 54,771 71.1 % $ 52,077 72.1 % Businesses and governments 7,626 228 7,497 15,351 20.0 14,047 19.5 Deposit-taking institutions and other 38 — 6,827 6,865 8.9 6,095 8.4 $ 21,232 $ 3,287 $ 52,468 $ 76,987 100.0 % $ 72,219 100.0 %

LOAN GROWTH QUÉBEC MARKET SHARE Steady growth in 2004 CREDIT ACTIVITIES (%)

45 Desjardins Group experienced steady growth in credit activities during 2004. Its firm commitment to an ongoing contribution to economic development in all regions in which it is active, combined 40 with its dynamism in supplying credit to individuals, companies, and government bodies, are clearly part and parcel of these excellent 35 results. It has particularly made its mark in financing homeownership, commercial and industrial loans, and farm loans. A brief analysis 30 by broad credit category is presented at the end of this section. 25 As at December 31, 2004, Desjardins Group’s loan portfolio, net of the cumulative provision for credit losses, was $75.9 billion, up $6.6 billion, 20 or 9.6%, compared to an increase of $6.3 billion or 10% at the same date in 2003. Loans to individuals contributed much to this growth, 2001 2004 representing 73.8% of Desjardins Group’s loan portfolio at the end 2000 2002 2003 of this fiscal year. They totalled $56.6 billion as at December 31, 2004, Farms loans for an increase of $5.7 billion, or 11.3%, over the year, versus growth of $4.6 billion or 10% at the end of 2003. Residential mortgages Consumer, credit card and other personal loans Commercial and industrial

Table 22 LOANS BY CATEGORY OF BORROWER

As at December 31 (in millions of dollars and as a percentage)

2004 2003 Residential mortgages $ 43,199 56.4 % $ 38,380 54.7 % Credit cards 3,216 4.2 2,749 3.9 Other personal loans 10,156 13.2 9,717 13.9 Farm loans 4,554 5.9 4,369 6.2 Governments and other public and parapublic institutions 2,759 3.6 2,657 3.8 Commercial mortgages 4,686 6.1 4,878 7.0 Other commercial loans 8,094 10.6 7,370 10.5 76,664 100.0 % 70,120 100.0 % Cumulative provision for credit losses (753) — (847) — $ 75,911 — $ 69,273 — Loans guaranteed by governments and other public and parapublic institutions included above $ 19,138 — $ 17,636 — Loans guaranteed by governments and other public and parapublic institutions as a percentage of total gross loans 25.0 % — 25.2 % — Loans to individuals as a percentage of total gross loans 73.8 % — 72.5 % — DESJARDINS GROUP 93 MANAGEMENT’S DISCUSSION AND ANALYSIS

Other financing categories, such as loans to business and government, Consumer credit In 2004, Desjardins Group was also very active which accounted for 26.2% of the loans portfolio at the end of 2004, in the consumer credit sector, including advances on credit cards, also contributed to these results, though in a more modest capacity. particularly in financing durables: furniture, appliances, and As at December 31, 2004, they amounted to $20.1 billion, up $819 million, automobiles. Consumers’ enthusiastic shopping drove the demand or 4.2% over the year, compared to an increase of $1.6 billion or 9% for loans. As at December 31, 2004, outstanding loans in this area posted in 2003. totalled $13.4 billion, compared to $12.5 billion at the end of 2003, representing an increase of $906 million, or 7.3%. The popularity of the Note that the financing activities of Desjardins Group are governed by VISA Desjardins card and its associated accord D FINANCING program, strict credit risk management practices. These are described in detail along with the dynamism shown by Desjardins Group in its dealings in the “Risk management” section on page 102. with car dealerships, are among the factors that made these results possible. The Group held 25.9% of this market in Québec during the last fiscal year. The housing boom continued in 2004

Growth of 4.3% in loans to businesses Residential mortgages The buoyancy of the housing market continued in Québec and the rest of Canada throughout 2004. A shortage of rental units, stronger growth of after-tax income, and low mortgage rates Commercial and industrial credit Business investment increased explain the persistence of this housing boom. After three uninterrupted somewhat in Québec and Canada in 2004. For example, this growth years of growth, a levelling off will occur in this area of activity. For was 7% in Québec, compared to a mere 2.6% posted in 2003. This example, in Québec, housing starts exceeded 58,000 units – a level expansion in businesses’ expenditures is largely explained by the that has not been observed since 1988. Nearly 65,000 existing houses improving economic environment, the persistence of relatively low were sold. This frantic activity drove up prices in this sector by over financing costs, and the notable appreciation of the Canadian dollar, 10% for a third consecutive year. which facilitated purchases of machinery and equipment from the United States, along with several large infrastructure projects and Desjardins Group participated in this shopping spree by helping many expansions. In particular, investments in fixed assets increased of its members and clients buy homes in 2004. With a strong presence slightly, by 1.3%, while purchases of machinery and equipment in the housing market, especially in Québec, it was able to benefit surged ahead by 9%. from this climate, which was very conducive to business development. Despite strong growth in this area, which is partially attributable to Desjardins Group, which has become a key player among financial greater consumer loyalty to lending institutions and a ratio of credit institutions funding commercial and industrial ventures, especially losses that is typically low, the Group saw its relative position grow in Québec, strengthened its ties, which were already strong, with many by 0.4% in Québec and 0.2% in Ontario, to approximately 39% and 0.8%, small and medium-sized enterprises (SMEs), as well as with larger respectively, by the end of 2004. As at December 31, 2004, its residential firms. As at December 31, 2004, Desjardins Group’s outstanding loan mortgage portfolio amounted to $43.2 billion, up $4.8 billion, or 12.6%, portfolio in this market, including commercial mortgages and other over last year, compared to an increase of $3.4 billion or 9.8% posted commercial loans, was $12.8 billion, versus $12.2 billion at the end in 2003. of 2003, representing an annualized growth of $532 million, or 4.3%. The Group’s efforts in this sector translated into an appreciable gain of 0.4% in its penetration rate in Québec, which amounted to 23.5% RESIDENTIAL MORTGAGE CONSUMER LOANS by the end of the year. LOANS IN QUÉBEC IN QUÉBEC (%) (%) Farm and other loans As a result of the considerable difficulties seen in agriculture all over Canada in 2004, especially in certain forms 14 41 12 30 of livestock production, such as beef, the demand for loans in this area dropped precipitously. Nonetheless, continuing its long tradition 12 40 10 of involvement in this market, Desjardins persists in its support of 10 39 8 28 farmers. As at last December 31, outstanding farm loans totalled 8 $4.6 billion, compared to $4.4 billion at the end of 2003, an increase 38 6 of $185 million or 4.2%. With these results the Group was able to 6 move its relative position in Québec to 42.4%, posting a respectable 37 4 26 gain of 0.4%. 4

2 36 2 Lastly, we note Desjardins Group was very active in financing governments and public and parapublic institutions in Québec. At the end of 2004,

Growth 0 35 share Market Growth 0 24 share Market outstanding loans in this area posted an annualized increase of $102 million, or 3.8%, to a level of $2.8 billion. 2001 2001 2004 2004 2000 2002 2003 2000 2002 2003

Growth in volume – Growth in volume – Desjardins Group Desjardins Group

Growth in volume – Growth in volume – market market

Market share Market share MANAGEMENT’S DISCUSSION AND ANALYSIS 94 DESJARDINS GROUP

CASH POSITION AND SOURCES OF FINANCING Desjardins’ A very high proportion of securities (more than 90.6%) is placed in management practices, characterized by prudence, ensure that the the investment account as opposed to the trading account, which, institution always has sufficient liquid assets to meet its commitments. by definition, is more volatile and cannot be mixed with a stable supply Two indicators are used to measure the degree of liquidity risk source. In addition, the securities are largely made up of securities and financing risk: the high percentage of liquid assets compared issued by governments and public bodies and by private companies to total assets, and the strong proportion of individual deposits to with high credit ratings of R-1M (DBRS rating agency). total deposits. The proportion of deposits by individuals in all deposits demonstrates The Group’s percentage of liquid assets, which is much higher than the stability of Desjardins’ sources of funds. Less affected by the the amount required by regulatory authorities, provides Desjardins volatility of financial markets and largely made up of amounts below with great leeway if a major withdrawal of funds were to occur. Liquid $100,000, deposits by individuals are mixed with a base supply and, assets consist of cash and readily marketable securities. Disposal owing to this fact, stand as a key factor in the financing strategy. of such assets would enable the Group to quickly satisfy the financial needs arising from maturing deposits that will not be renewed, As at December 31, 2004, the percentage of deposits by individuals unexpected withdrawals of companies, or any growth strategy that was 71.1%, which is comparable to the percentages of the past five years. will have to be implemented in a short timeframe. Also, in 2004, and in keeping with the trends of previous years, As at December 31, 2004, the ratio of cash and securities to total assets Desjardins has been able to rely on deposits with longer terms than was 20.6%, which is lower than the corresponding ratios of recent years. those of its competitors, as its deposits are made mostly by individuals, The drop in the ratio owes to the sharp rise in residential mortgage a quality of Desjardins Group that demonstrates the strength of its loans but also to a decision of officers to exercise stricter management retail supply network. over the Group’s balance sheet. Furthermore, more in-depth analyses on the optimal holdings of securities for a financial institution were In this regard, the network of Desjardins caisses has been innovative carried out with this in mind. Even excluding the securities provided for several years by offering indexed savings products to members, for regulatory purposes, notably with respect to Desjardins’ involvement an alternative to traditional savings. Facing ever-lower interest rates, in clearing and payment systems, as well as the securities posted and in an effort to diversify their portfolios, members demonstrated to the balance sheet of the Group’s insurance companies, the ratio is an initial interest in a savings product in which returns are tied to maintained at a high level, so much so that Desjardins fully satisfied the stock markets. Then, in the wake of the 2001 terrorist attacks and the liquidity requirements stipulated in the laws and regulations 2002 financial scandals, which made the stock market less appealing, applicable to the financial intermediation segments. members turned to remunerated savings using various asset distribution strategies. As at December 31, 2004, indexed savings deposits stood at $6.3 billion and partially satisfied the especially CASH AND SECURITIES DEPOSITS BY INDIVIDUALS strong demand for credit in the residential sector. AS A PERCENTAGE AS A PERCENTAGE OF TOTAL ASSETS OF ALL DEPOSITS Furthermore, deposits payable on demand and deposits payable after notice are constantly growing; for the most part, they correspond 25 80 to current account balances and deposits held in chequing accounts. They accounted for some 30.4% of all individuals’ deposits or 21.6% of 75.7 75.0 75.0

72.1 71.1 all deposits. These amounts, which are not highly sensitive to interest 20 60

21.7 rate fluctuations, combined with equity and provisions, are key to our 21.3 21.0 21.0 20.6 interest rate management strategy, which aims to grow and optimize 15 40 net income.

15.0 15.0 15.0 15.0 15.0 Deposits from businesses and governments, as well as deposits 10 20 from banks and brokers, totalled $22.2 billion as at December 31, 2004, 21.6 21.6 20.9 20.7

20.0 that is, some 28.9% of all deposits.

5 0 2001 2001 2004 2000 2002 2003 2004 2000 2002 2003

Cash and securities Deposits payable on demand and after notice Regulatory requirements Total deposits by individuals DESJARDINS GROUP 95 MANAGEMENT’S DISCUSSION AND ANALYSIS

Of this amount, $9.4 billion originates from Caisse centrale Desjardins, Recourse to the institutional market, through the issuance of short-term which operates on the financial markets as Desjardins Group’s and medium-term deposits and notes, remains, however, bound by wholesale collector. As such, it enjoys high credit ratings that are the limits that Desjardins Group does not intend to exceed. If asset representative of the financial solidity of Desjardins Group and its growth continues at the pace of recent years, the caisse network network of caisses, which provides the Group with credibility and could choose asset securitization so as not to depend too heavily recognition among institutional investors. The borrowings program on borrowers. Furthermore, a team was set up in 2004, jointly with set up by Caisse centrale give it access to a diverse range of capital the Fédération and Caisse centrale, so that the operation could be with respect to clients, markets, maturities, currencies and regions. carried out in a short time frame, as required. Desjardins Group could therefore grow and strengthen its supply sources to keep the high Desjardins Group also set up a borrowing program in the form degree of liquidity required by its financial transactions. of senior bonds, which are issued by Capital Desjardins in order to facilitate and speed up access to the market. An initial issuance of $450 million was carried out in March 2004.

Recourse to the institutional market, which is complementary to member deposits, is modulated according to the needs of caisses. If demand from the caisse network corresponds to a cyclical imbalance, or a limited duration, there is more recourse to the money market, where maturities are usually 90 days or less. On the other hand, if the excess demand stems from a recurring and permanent insufficiency of funds, as has been the case for several years due to the strong residential mortgaging activity, recourse is usually more long-term for significantly larger amounts and by way of public distribution.

Table 23 CREDIT RATINGS

The financial strength of Desjardins Group is represented by the excellent credit ratings of Caisse centrale Desjardins

DBRS Standard & Moody’s Poor’s Short term R-IM A-I + P-I Medium and long term AA (low) AA - Aa3 MANAGEMENT’S DISCUSSION AND ANALYSIS 96 DESJARDINS GROUP

CAPITAL MANAGEMENT

HIGHLIGHTS • At 13.58%, Desjardins Group’s Tier 1 capital ratio is one of the highest in the Canadian banking industry • A $754 million rise in reserves • Controlled growth of risk-adjusted assets

ANALYSIS OF RESULTS On December 31, 2004, Desjardins Group In 2004, rating agencies again recognized the solid level and posted a Tier 1 capital ratio of 13.58% for risk assets, one of the highest particularly high quality of our capital structure and reaffirmed our in the Canadian banking industry. At year end, the Group’s equity favourable credit ratings, among the best of the major Canadian totalled $7.1 billion, representing a year-over-year increase of 12.3%. banking institutions. The components of equity are presented in Table 24 on page 97. REGULATORY FRAMEWORK OF THE BANK FOR INTERNATIONAL The goal of Desjardins Group’s capital management is to ensure SETTLEMENTS (BIS) The capital adequacy and composition of maintenance of a strong equity position, especially in Tier 1 capital, Desjardins Group are governed by the guideline on capital adequacy which provides evidence of the quality of its capital and supplies issued by the Autorité des marchés financiers in April 2003. the leeway necessary for its development. Desjardins Group’s capital management activities are integrated with its financial management This guideline, which borrows extensively from international equity and risk management activities in terms of the risk to which the standards adopted by the Bank for International Settlements (BIS) company is exposed in the normal course of business. In 2004, the in 1988, has been adapted to suit the cooperative nature of deposit- Board of Directors reaffirmed the mandate of the Asset/Liability taking institutions and financial services institutions governed Management (ALM) Committee in its role supporting the Desjardins by the Act respecting financial services cooperatives. Group Strategic Management Structure Committee’s responsibility to ensure that the Group adopts appropriate capital management As of the early 1990s, the Group has voluntarily complied with the position and strategies that comply with approved risk management regulatory requirements set out by the Basel Committee on Banking policies. This Committee, which consists of key individuals and upper Supervision. It did so to allow comparisons to be made against other management from the Group, meets on a regular basis and assumes financial institutions active in international markets, given Desjardins major responsibility for the management of interest rate risk, Group’s presence in that arena. as described on page 103. As stipulated by the Autorité des marchés financiers guideline and The total capital ratio represents 13.70% of risk assets. In 2004, strong in keeping with prudential regulations, Desjardins Group’s total equity capital growth was primarily attributable to an increase in reserves is reduced by certain investments made in subsidiary companies. of $754 million and the issuing of senior bonds on the Canadian market Investments in insurance and securities subsidiaries are entirely for an amount of $450 million. deducted from equity. Other investments are treated on a consolidated basis and, for certain liability and small-scale investments, the guideline Over the course of year, total risk-weighted assets rose 7.2% to a total allows investments to be treated as credit risk. of $52 billion. The Group continues to practise controlled growth of risk-adjusted assets and uses appropriate mechanisms to reduce Assets at risk in the financial intermediation network are calculated risk to the fullest extent possible. according to the risk weight associated with each on- and off-balance sheet item. Table 25, on page 98, lists the components of risk-adjusted assets. MINIMUM CAPITAL RATIO The minimum capital ratio recommended MAINTAINING A BENEFICIAL CAPITAL STRUCTURE As in for compliance with BIS regulatory requirements and to be ranked the past, the Group’s equity growth was largely attributable to capital as a well-capitalized institution is 8%. Moreover, Tier 1 capital must from surplus earnings in 2004. represent at least half of the total ratio.

Like in previous years, all Desjardins Group entities were in compliance The Office of the Superintendent of Financial Institutions Canada has with the minimum regulatory requirements for capital adequacy, set targets of 7% and 10%, respectively, for the Tier 1 and total capital subject to the applicable jurisdiction as at December 31, 2004. ratios. Desjardins Group substantially surpasses these minima. DESJARDINS GROUP 97 MANAGEMENT’S DISCUSSION AND ANALYSIS

THE EVOLUTION OF EQUITY-RELATED BANKING STANDARDS One change is that regulatory capital will henceforth include an In recent years, the Basel Committee on Banking Supervision has amount linked to operational risk. Furthermore, the current provision begun a thorough re-evaluation of capital adequacy requirements. allowing regulatory bodies to require that financial institutions hold The goal is to link the capital requirements to specific foreseeable reserves in excess of the prescribed minimum remains in effect. risks in light of the financial institution’s specific experience. The final text of the New Basel Capital Accord was approved in June of 2004. Under the new rules, there is a requirement for greater transparency with respect to information on risk management. In light of this, In particular, these changes allow better measurement of the risk Desjardins Group pursued its efforts to account for the many changes and sensitivity of on- and off-balance sheet activities so as to better contained in the new requirements and to comply with best practices align regulatory equity with trading capital. in risk management in 2004.

Table 24 CAPITAL AND CAPITAL RATIOS(1)

As at December 31 (in millions of dollars and as a percentage)

2004 2003 TIER 1 CAPITAL Shares $ 836 $ 834 Reserves 5,654 4,900 Undistributed surplus earnings 554 536 Non-controlling interests 21 21 7,065 6,291 TIER 2 CAPITAL Subordinated debentures 1,374 976 Shares 83 81 General provision 436 408 1,893 1,465 INVESTMENTS(2) (1,832) (1,410) TOTAL CAPITAL $ 7,126 $ 6,346 RISK-WEIGHTED ASSETS On-balance sheet assets $ 50,361 $ 47,002 Off-balance sheet financial instruments 1,643 1,498 $ 52,004 $ 48,500 CAPITAL RATIOS Tier 1 capital 13.58 % 12.97 % Tier 2 capital 3.64 3.02 Investments (3.52) (2.91) Total capital ratio 13.70 % 13.08 %

(1) The data is from the financial intermediation segment. (2) This amount correspond to the consolidated value of the investment in the subsidiary companies, and the surplus of the value of the investment in Desjardins Venture Capital Inc. and Desjardins Venture Capital, Limited Partnership in relation to the cost. MANAGEMENT’S DISCUSSION AND ANALYSIS 98 DESJARDINS GROUP

Table 25 RISK-ADJUSTED ASSETS(1)

As at December 31 (in millions of dollars and as a percentage)

2004 2003 On-balance Main risk- Risk-weighted Risk-weighted On-balance sheet assets sheet amount weighting rates balance balance Cash and deposits with financial institutions $ 1,337 0-100 % $ 49 $ 169 Securities issued or guaranteed by Canada, the provinces and municipalities 6,562 0-20 8 15 Other securities 4,707 0-100 2,368 2,439 Loans issued or guaranteed by Canada, the provinces and municipalities 7,772 0-20 771 758 Mortgages insured by the government 10,242 0 — — Other mortgages 31,465 0-100 21,587 20,368 Other loans 24,407 0-100 22,851 20,304 Other assets 3,950 0-100 2,727 2,949 $ 90,442 $ 50,361 $ 47,002

2004 2003 Credit Equivalent Contractual conversion credit Main risk- Risk-weighted Risk-weighted Off-balance sheet financial instruments amount factor risk weighting rates balance balance CREDIT INSTRUMENTS Guarantees and standby letters of credit $ 512 0-100 % $ 499 20-100 % $ 379 $ 347 Credit commitments Original term of one year or less 26,940 0 — 0 — — Original term of over one year 3,028 0-50 1,755 0-100 1,037 893 1,416 1,240 DERIVATIVE FINANCIAL INSTRUMENTS Interest rate contracts 53,112 (2) 742 0-50 148 170 Foreign exchange contracts 12,176 (2) 600 20-50 138 138 Other contracts 7,784 (2) 734 0-50 212 159 498 467 Impact of master netting agreements (271) (209) 227 258 TOTAL OFF-BALANCE SHEET FINANCIAL INSTRUMENTS 1,643 1,498 TOTAL RISK-WEIGHTED ASSETS $ 52,004 $ 48,500

(1) The data is from the financial intermediation segment. (2) Interest rate, foreign exchange and other contracts are converted into their “credit risk equivalent” by adding the total replacement cost (obtained by market valuation) of all outstanding contracts that have a positive value and an amount of potential risk exposure based on the total contract amount, distributed according to the remaining term. DESJARDINS GROUP 99 MANAGEMENT’S DISCUSSION AND ANALYSIS

OFF-BALANCE SHEET ITEMS

HIGHLIGHTS • Assets under administration of $187.3 billion, an increase of 8.7% over 2003 • Credit instruments of $33.7 billion made available to members and clients in 2004 • In 98.2% of cases, the counterparties to derivative financial instruments have high credit ratings

In the normal course of its operations, Desjardins Group makes to its strength in this area and the performance of the stock markets. various off-balance sheet commitments. Assets under management totalled $10.4 billion as at December 31, 2004, compared to $9.9 billion at the end of 2003, an increase of $470 million These include assets under administration and management or 4.7%. for members and clients, credit instruments, derivative financial instruments, and contractual obligations. Assets under administration and management, it should be remembered, are composed chiefly of financial assets in the form ASSETS UNDER ADMINISTRATION AND MANAGEMENT of investment funds, securities held in custody and accrued pension As at December 31, 2004, Desjardins Group acted as a trustee fund assets, which do not belong directly to Desjardins Group, but or manager of $203.8 billion compared to a volume of $172.4 billion to its members and clients. For this reason, they are not recorded recorded at the end of 2003. This represents a substantial jump on its balance sheet. of $31.4 billion, or 18.2%, in the financial assets that members and clients have entrusted to Desjardins Group. It is clearly attributable

Table 26 ASSETS UNDER ADMINISTRATION AND MANAGEMENT

As at December 31 (in millions of dollars and as a percentage)

2004 2003 % change % change ASSETS UNDER ADMINISTRATION Individual and institutional trust and custodial services $194,677 17.7 % $165,349 17.9 % Investment funds(1) 9,124 30.1 7,013 28.0 $203,801 18.2 % $172,362 18.3 % ASSETS UNDER MANAGEMENT Institutions and individuals $ 1,275 (56.3)% $ 2,916 (65.6)% Investment funds(1) 9,124 30.1 7,013 28.0 $ 10,399 4.7 % $ 9,929 (28.9)%

(1) Include $7.1 billion of Desjardins Funds and $2 billion of other funds issued by the subsidiaries.

CREDIT INSTRUMENTS AND DERIVATIVES The risks related to Credit Instruments In order to meet its members’ and clients’ financing these off-balance sheet items are managed using the same strict rules needs, Desjardins Group makes credit instruments available to them. as those applied to on-balance sheet items. In Management’s opinion, Credit instruments include guarantees and standby letters of credit, these off-balance sheet items result in no unusual risk. securities lending and credit commitments representing amounts that have been authorized but that have not been used by members The calculation of the weighted balance based on the risk related and clients. to these off-balance sheet items, presented in Table 25 on page 98, is consistent with the guideline on capital adequacy issued These instruments expose Desjardins Group to credit and liquidity risks. by the Autorité des marchés financiers. The management of these risks is described on pages 102 and 103 of the Management’s Discussion and Analysis. Table 27 on page 100 Note 1 to the Combined Financial Statements of Desjardins Group presents the contractual amounts of the credit instruments, by term explains the accounting policy used to account for derivatives. to maturity. Since many of these credit instruments expire or terminate In addition, Notes 19 and 22 provide detailed information on derivatives without being funded, the contractual amounts do not represent actual and commitments respectively. future liquidity requirements. MANAGEMENT’S DISCUSSION AND ANALYSIS 100 DESJARDINS GROUP

Table 27 CREDIT INSTRUMENTS BY TERM TO MATURITY

As at December 31 (in millions of dollars)

Less than From 1 From 3 More than Total Total one year to 3 years to 5 years 5 years 2004 2003 Guarantees and standby letters of credit $ 292 $ 164 $ 24 $ 2 $ 482 $ 352 Securities lending 4,025 — — — 4,025 4,149 Credit commitments 27,643 829 328 350 29,150 25,807 Total credit instruments $ 31,960 $ 993 $ 352 $ 352 $ 33,657 $ 30,308

Derivative financial Instruments Derivative financial instruments Desjardins Group limits the credit risk associated with derivative are contracts whose value is based on an underlying asset, interest financial instruments by doing business with counterparties with a rates, exchange rates or other financial indices. Desjardins Group high creditworthiness. One of the tables in Note 19 to the Combined uses derivative financial instruments for asset and liability management Financial Statements of Desjardins Group presents derivative financial and trading purposes. Most contracts are traded by mutual agreement. instruments according to credit risk rating and the type of counterparty. Desjardins Group uses swaps, futures contracts and options. These According to the replacement cost, the table shows that 98.2% instruments are used mainly to mitigate the risks associated with of counterparties have a credit rating ranging from AAA to A. fluctuations in interest and exchange rates and other market risks. Desjardins Group also limits credit risk by entering into master netting agreements with certain counterparties to allow for the On January 1, 2004, Desjardins Group adopted the Accounting Guideline net settlement of all positions covered by the master agreements “Hedging Relationships” (AcG-13) issued by the CICA, as well as the in the event of insolvency. Emerging Issues Committee Abstract of Issue Discussed “Accounting for Trading, Speculative or Non-hedging Derivative Financial Instruments” The market risk associated with derivative financial instruments refers (EIC-128). This Guideline deals with the identification, designation, to the risk of fluctuations in the market value of these instruments documentation and effectiveness of hedging relationships and indicates resulting from fluctuations in the parameters affecting this value, when hedge accounting should be discontinued. Under EIC-128, notably interest and exchange rates. One of the tables in Note 19 each derivative financial instrument that does not qualify for hedge to the Combined Financial Statements of Desjardins Group presents accounting should be measured at fair value and recognized in the the maturities of the notional amounts of derivative financial instruments. balance sheet as an asset or a liability and changes in fair value As a general rule, the market risk associated with derivative financial should be recognized in income. In connection with the adoption instruments with short-term maturities is less than that associated of the Accounting Guideline as at January 1, 2004, Desjardins Group with derivative financial instruments with longer maturities. As at reviewed its accounting policies so as to recognize all derivative December 31, 2004, based on the notional amount, 49.4% of derivative financial instruments at fair value in the balance sheet whereas, financial instruments mature in less than one year. in the past, only those instruments used for trading purposes were presented in this manner. Note 1 to the Combined Financial Statements The risk-weighted balance for Desjardins Group’s derivatives as presented on page 112 provides details regarding accounting policies at December 31, 2004 amounted to $249 million when all master relating to derivative financial instruments and the effect that this netting agreements were accounted for. Guideline has on income for the year. CONTRACTUAL COMMITMENTS Desjardins Group has contractual These derivative financial instruments mainly result in a credit and commitments to make future payments on borrowings, subordinated market risk exposure for Desjardins Group. The manner in which these debentures and leases. Borrowings and subordinated debentures risks are managed is described on pages 102 to 104 of the Management’s are presented in Desjardins Group’s Combined Balance Sheet, Discussion and Analysis. but leases are not. Notes 10, 12 and 22 to the Combined Financial Statements contain information on these contractual commitments. The credit risk associated with derivative financial instruments refers to the risk that a counterparty will fail to honour its contractual obligations toward Desjardins Group at a time when the fair value of the instrument is positive for the Group. The credit risk associated with derivative financial instruments normally corresponds to a small fraction of the notional amount. The replacement cost and the credit risk equivalent are two measurements used to measure this risk. The replacement cost refers to the current replacement cost of all contracts that have a positive fair value. The credit risk equivalent is equal to the sum of this replacement cost and the future credit exposure, which is an estimate of the possible increase in the replacement cost over the remaining term of the contracts calculated according to a formula established by the Bank for International Settlements (BIS). DESJARDINS GROUP 101 MANAGEMENT’S DISCUSSION AND ANALYSIS

RISK MANAGEMENT The Integrated Risk Management Executive Division drafts and submits recommendations on policies, limits and standards applicable Desjardins Group is exposed to different types of risk encountered to all of Desjardins Group and oversees compliance in the various in the normal course of business, including: entities. This unit also develops practices and procedures applied in the caisse network. The risk management team of each of the Group’s • Credit risk components formulates or reviews policies and procedures adapted • Liquidity risk to the specific needs of its operations. Competent and well-informed • Market risk individuals at all levels of the organization are charged with ensuring • Operational risk rigorous application of the rules. The Group’s policies and procedures • Insurance risk are designed to proactively identify potential risks and to measure, assess and manage them in a sound and prudent manner, notably by Desjardins Group’s goal in risk management is to optimize the specifying the controls to be applied and reporting requirements. relationship between risk and return within acceptable limits. This is achieved through sound and prudent risk-management strategies, The mission of Desjardins Group’s internal audit team is to inform, policies and management control procedures that are applied advise and support members of boards of directors, senior management throughout the organization’s various functions. and managers, and provide them with reasonable assurance concerning the control over the operations of each of the entities served and the The Fédération’s Board of Directors assumes responsibilities with overall Group. This includes providing independent assessments of respect to guiding, planning, coordinating and overseeing all of the risk management, control and corporate governance procedures and Group’s operations. In 2004 the Board created the Risk Management making proposals on improving their effectiveness. Commission, charged with supporting the Board in some of its risk management responsibilities with respect to the Group. The commission The caisse network in Québec is monitored by the Desjardins Bureau consists of five unrelated officers. The Audit and Inspection Commission for Financial Monitoring and Enforcement (the Bureau), as required by and the Board of Ethics and Professional Conduct are two additional Québec’s Act respecting financial services cooperatives. The purpose of authorities guiding governance of the Group’s risk. such monitoring, conducted through the application of best practices, is to evaluate the network’s policies, procedures and controls as well Changes in the organization of the Group have reinforced the Group’s as the manner in which they are applied with a goal of ensuring sound centralized management structure. These changes include the creation and prudent risk management. Furthermore, the Bureau examines of six major strategic functions, including integrated risk management, activities performed for the caisses by the Fédération, including liquidity the transfer of Desjardins Financial Corporation activities to the management. Responses to the Bureau’s reports to the Boards of Fédération and the transformation of the Planning and Strategic Directors of the caisses and the Fédération are closely monitored. Development Committee into the Desjardins Group Strategic Management Structure Committee. All of the changes have been INTEGRATED RISK MANAGEMENT AND THE NEW BASEL designed to ensure an integrated vision and synergy within the Group’s CAPITAL ACCORD In June 2004 the Basel Committee on Banking risk management activities. In addition, the Board of Directors created Supervision approved the final text of the new capital accord, which an integrated risk management committee made up of leaders of focuses on risk management and fosters the continuous development various Group functions and experts from Desjardins Group’s major of risk assessment capacity in financial institutions by closely components. This committee will assist the Desjardins Group Strategic associating capital requirements with modern risk management Management Structure Committee in fulfilling its responsibility to methods. As part of efforts to apply best risk management practices, oversee the development of an appropriate, effective, integrated Desjardins Group continued to implement its integrated risk and permanent risk management process. management and the Basel Accord program throughout 2004. This important work on managing credit, liquidity, market and operational The risk management approach is founded on principles that place risk will continue through 2005 and coming years in order to refine primary accountability for results and risk management on entities our comprehensive vision of risk management and integrate it and units and that grant the Board of Directors of all Desjardins into the management of all Group activities. entities a leadership role in monitoring the risks and results of these units and entities. Several committees support the Board and the management of each component in their efforts to fulfil their risk management responsibilities.

Three independent functional units complete the governance infrastructure of Desjardins Group’s risk management framework. MANAGEMENT’S DISCUSSION AND ANALYSIS 102 DESJARDINS GROUP

CREDIT RISK Mitigating credit risk The sheer number of borrowers, for the most part individuals but also small and medium-sized enterprises from all Credit risk is the risk of losses resulting from a borrower’s or sectors of the economy, plays a role in diversifying the financing portfolio. counterparty’s failure to meet its contractual obligations, whether The chart below presents the distribution of loans by borrower category. or not they appear on the balance sheet. Over half of the portfolio consists of residential mortgages, for which, statistically, the loss experience is low. Additional information on changes in the loan portfolio can be found on pages 92 and 93 of the section Desjardins Group is exposed to this risk primarily as a result of entitled "Balance Sheet Management." When required, Desjardins its credit-granting activities with members and clients. As at Group uses mechanisms to share risk with other financial institutions. December 31, 2004, loans represented 73.3% of the assets on the balance sheet (72% as at December 31, 2003).

LOAN DISTRIBUTION BASED Managing credit risk The risk management framework described ON BORROWER CATEGORY above allows for a more dynamic, sound, prudent, efficient and As at December 31, 2004 profitable management of credit risk.

10.6% Credit risk framework A single, general policy provides a framework 6.1% for all of Desjardins Group’s credit risk management activities. This 3.6% standard is complemented by other policies, standards, practices and procedures that structure the duties of the parties involved, 5.9% specify the degree of risk that Desjardins Group is willing to assume, define concentration limits and determine risk management and 13.2% 56.4% control guidelines. 4.2% Granting credit and establishing credit limits Desjardins Group aims to serve all of its members and clients effectively. To this end, the caisse Residential mortgages network has developed robust distribution channels tailored to the scope and nature of their specific needs. For example, our corporate Credit cards financial centres, specialized in serving several industries, allow Other personal loans the Group to offer business members services in line with their Farm loans expectations. The experts in these centres facilitate meeting these Governments and objectives and foster better risk management. other public and parapublic institutions

Desjardins Group has the systems it needs to support all its financing Commercial mortages and risk management activities, notably systems for analyzing and Other commercial loans rating risk and for reviewing commitments. These systems and tools are reviewed and upgraded on a continuing basis. The largest requests for financing are analyzed and authorized by specialists and committees. Risk assessment measurements The principal measurements used Policies, practices and procedures form a framework for developing to assess credit risk are the gross impaired loans to gross loans ratio and implementing authorization limits. Desjardins Group also calls on (expressed as a percentage), the coverage rate and the provisions for the necessary segment specialists and provides continuous training credit losses to average gross loans ratio (expressed as a percentage). to ensure that they remain current in their respective fields. Data on these measurements and additional information on impaired loans, the charge for provisions for credit losses and the cumulative In the caisse network more specifically, all significant lending is provision for credit losses are provided in the section entitled "Credit subject to written authorizations from the Fédération, which also Quality" on pages 88 and 89. monitors changes in credit risk. In addition to controls used in the caisses, the corporate financial centres and the Fédération, Desjardins Follow-up procedures are designed to ensure early detection of any Group relies on the Desjardins Bureau for Financial Monitoring and deterioration of risk on any loan and to manage such risk or trigger Performance to oversee the sound and prudent management of immediate action. Furthermore, loans may be classified as impaired, caisse credit activities in Québec, in particular by monitoring and a specific provision may be made on them at an appropriate time. compliance in the application of standards and policies. The adequacy of the specific provision is reassessed on a quarterly basis. When required, specialized teams take charge of the files and handle collections and institute corrective measures. DESJARDINS GROUP 103 MANAGEMENT’S DISCUSSION AND ANALYSIS

LIQUIDITY RISK MARKET RISK

Liquidity risk refers to Desjardins Group’s capacity to raise the Market risk refers to the risk of changes in the market value necessary funds (by increasing liabilities or converting assets) of financial instruments resulting from fluctuations in the to meet a financial obligation, whether or not it appears on the parameters affecting this value; in particular, interest rates, balance sheet, on the date it is due or otherwise. exchange rates and their volatility.

Liquidity risk can arise from the structure of the balance sheet due Desjardins Group is exposed to market risk primarily through positions to discrepancies between the actual maturity dates of assets and taken through its traditional financial intermediation activities. Desjardins liabilities, to financing for future operations, to member and client Group is also exposed to market risk through its trading activities. behaviour or to disturbances in the markets or in economic conditions. Managing market risk Market risk is primarily a risk of loss related Managing liquidity risk Desjardins Group manages liquidity risk to interest rate and exchange rate volatility. The various business in order to ensure that it has access, at all times and in a profitable segments have established stop-loss mechanisms as a response manner, to the funds it requires to meet its financial commitments as to changes in financial market positions. they become due. Managing this risk involves maintaining a minimum level of liquid securities, stable and diversified sources of funding and Managing interest rate risk Financial intermediation activities, or the an action plan to implement in the event of unusual circumstances. taking of deposits and the granting of loans, expose Desjardins Group Liquidity risk management is also a key component of an overall risk to a type of market risk that mainly takes the form of interest rate risk. management strategy because it is essential to market and depositor The interest rate risk of activities other than trading corresponds to confidence. The various Desjardins Group business segments make the potential impact of interest rate fluctuations on net interest income a point of exercising prudence in their liquidity risk management and and the economic value of equity. The extent of this risk is a function base it on the nature of their operations. of gaps appearing in the amounts of assets, liabilities and off-balance sheet instruments when they reprice during a given period. The caisse network, the Fédération and Caisse centrale Desjardins must maintain a minimum amount of liquid securities, and this amount Dynamic and prudent management is applied in order to optimize is prescribed under a specific framework. Liquidity management is net interest income while minimizing the negative impact of rate centralized at Caisse centrale Desjardins and is monitored on a daily movements. Desjardins Group’s policies describe the applicable basis. Eligible securities must meet high security and negotiability principles and mechanisms used to manage this type of risk. standards. At the same time, Caisse centrale Desjardins ensures that cash flows arising from its financial transactions are matched in an Simulations are run to measure the impact of different variables optimal manner. Policies and specific requirements are also defined on changes in net income and the economic value of equity for several and implemented for subsidiaries according to the specific nature years. Assumptions used in the simulations are based on an analysis of their activities. of historical data and on the impact of different interest rate conditions on changes to the data. These assumptions concern changes in the Desjardins Group, through its distribution network that covers balance sheet structure, member behaviour and pricing. Strategies are all of Québec and other parts of Canada, ensures stable and applied chiefly through interest rate swaps. As at December 31, 2004, diversified funding according to type, source and maturity by offering being inside the security corridor had the effect of minimizing the a competitive range of savings products. In addition to offering retail impact of rate movements on financial results. savings products, Desjardins Group can issue securities and borrow on national and international markets to complete and diversify Periodic reports assessing this risk are submitted to senior management its funding. Furthermore, access to these markets is facilitated by on a regular basis. The Asset/Liability Management (ALM) Committee Desjardins Group’s high level of capitalization and the excellent credit meets regularly to analyze and adopt strategies resulting from rate ratings it receives from rating agencies. Additional information on environments tied to different types of economic conditions. Desjardins Group’s cash position and its sources of funding may be found on page 94 of the Management’s Discussion and Analysis. Note 20 to the Combined Financial Statements on page 134 shows Desjardins Group’s position with respect to interest rate sensitivity and Desjardins Group has drawn up an action plan for rapid and effective to the matching of maturities as at December 31, 2004. The situation intervention to minimize disturbances caused by sudden changes in presented reflects the position on this date only. It may subsequently market conditions. With this fallback plan, Desjardins Group will be vary according to changes in member behaviour, the interest rate able to meet its commitments in the event of disruptions in markets environment and the strategies adopted by the Asset/Liability or in economic conditions. Management Committee. MANAGEMENT’S DISCUSSION AND ANALYSIS 104 DESJARDINS GROUP

Managing foreign exchange risk Foreign exchange risk arises when Regulatory compliance A compliance function was created in 2003 and the actual or expected value of asset items denominated in a foreign an officer was named to head Desjardins Group compliance activities. currency is higher or lower than that of liability items denominated The officer’s role includes providing an independent overview of how in the same currency. Since the vast majority of Desjardins Group’s Desjardins Group complies with the regulations governing its activities. transactions are conducted in Canadian dollars, its exposure to In 2004, the Fédération’s Board of Directors adopted a policy framework exchange risk is limited. Caisse centrale Desjardins has established specifically for regulatory compliance within the Group. a specific policy for managing foreign exchange risk. INSURANCE RISK Managing market risk related to trading activities Trading activities are primarily related to market making, arbitrage operations, positioning Insurance risk includes risks tied to the design and pricing of in markets and the sale of financial products to meet the needs of insurance products as well as risks associated with underwriting members and clients. The securities portfolio trading account represents, and claims settlements. as at December 31, 2004, less than 2% of total assets on the balance sheet. All these activities are governed by restrictive limits. The risk associated with designing and pricing products is the risk that OPERATIONAL RISK the initial pricing is or will become insufficient. The risk associated with underwriting and claims settlements is the risk arising from the Operational risk is the risk of inadequacy or breakdown attributable selection of risks, from claims settlement and from contractual clause to processes, people, internal systems or outside events and management. resulting in losses, unattained objectives or negative impacts on reputation. Managing insurance risk Product design and pricing risk arises from the potential for errors in predictions concerning the many factors used to set premiums, including future returns on investments, Operational risk is inherent to any commercial operation. Losses can technical results concerning losses, mortality and morbidity and arise primarily from fraud, damage to tangible assets, illegal acts, administrative expenses. Strict pricing standards are followed, and lawsuits, faulty systems or problems in transaction processing or occasional verifications are performed by the insurance subsidiaries process management. Operational risk arises from both our internal in order to compare predictions with actual results. The pricing activities and outsourced activities. of a certain number of products may be adjusted according to actual results. Managing operational risk The primary objective is to keep operational risk at an acceptable level while ensuring quality service to Desjardins Desjardins Group insurance subsidiaries manage the risk associated members and clients as well as organizational efficiency. Various with underwriting and claims settlements mainly by setting appropriate administrative units within the Fédération and within subsidiaries risk selection criteria and by limiting potential losses through reinsurance support operational risk management by establishing orientations, agreements. Such agreements do not, however, release them from policies and procedures designed to manage, monitor and follow up on their obligations toward clients in the event that the reinsurers run risk exposure. Internal controls and systems are examined periodically into financial difficulties. As a result, the subsidiaries are also exposed by internal auditors and, for the caisses, by the Desjardins Bureau to a credit risk related to the reinsurers. To minimize this risk, the for Financial Monitoring and Performance. These systems include subsidiaries sign reinsurance treaties with stable, well-established risk monitoring, insurance coverage, security equipment as well as and duly accredited companies. recovery plans and back-up facilities designed to provide services in the event of a disaster. They also include an organizational structure Insurance segment subsidiaries comply with the code of sound that promotes the separation of duties, the delegation of decision- management practices established by the regulatory organizations making and the use of operational controls. that govern them and they are subject to dynamic capital adequacy testing. Various scenarios were tested in 2004 in order to measure Practices and control mechanisms are periodically reviewed as part their effects on the capitalization ratio and validate the capitalization of the continuous improvement process and under new legislative ratio’s adequacy in each case. requirements. Several projects that were undertaken in 2004 and that will be pursued in the coming years address the need for sound and prudent management of operational risk. One of these projects involves developing Desjardins Group’s database used to collect information on the nature, frequency and seriousness of its operational losses. DESJARDINS GROUP 105 COMBINED FINANCIAL STATEMENTS

REPORT BY THE AUDIT AND INSPECTION COMMISSION

The Audit and Inspection Commission (the “Commission”) is tasked with supporting the Board of Directors in its various monitoring responsibilities for Desjardins Group. Its mandate consists primarily of analyzing the financial statements, their presentation, the appropriateness of the accounting principles adopted, risk management as it relates to financial information, internal control systems, internal and external audit processes, the procedures applied to such audits, and regulatory compliance.

The Commission reviews Desjardins Group’s quarterly and annual financial statements, related press releases, the annual MD&A, and the Annual Information Form.

The Commission ensures that Management has designed and implemented an effective internal control system with respect to financial reporting, asset protection, fraud detection and regulatory compliance. It also ensures that management has implemented systems to manage the main risk categories that may influence the financial results of the caisse network and Desjardins Group.

Also examined are files that document the caisse network’s evolution, including the financial position of the caisses, particular situations detected in the caisses, follow-ups made, credit losses, and how certain accounting policies and practices, such as the management method for the general provision, are applied. As for the Desjardins Bureau for Financial Monitoring and Enforcement, the Commission ensures that its action plan on caisse audits and inspections is carried out and also reviews comment letters, inspection reports with adjustments and the follow-ups that are performed.

The external auditor is under the direct authority of the Commission. The Commission, to satisfy its responsibilities regarding external auditors, ensures and preserves the external auditor’s independence by authorizing all non-audit-related services, by recommending auditor appointments and renewals, by recommending and settling auditor compensation and by conducting annual auditor evaluations. In addition, the Commission supervises the work of the external auditors and examines their audit proposal, their audit mandate, their annual audit strategy, their auditors’ reports, their auditors’ management letter, and Management’s comments. Desjardins Group has a policy that governs the awarding of contracts for related services. Specifically, this policy addresses the following: a) the services that can or cannot be performed by external auditors; b) the procedures that must be followed before mandates may be awarded; and c) the responsibilities of the principal parties involved. The Commission receives a quarterly report on the contracts awarded to external auditors by each of Desjardins Group’s components.

The Commission also ensures and preserves the independence of Desjardins Group’s internal audit service. It analyzes the internal audit team’s annual audit strategy as well as its responsibilities, performance, objectivity and team personnel. The Commission reviews the internal audit team’s summary reports and, if necessary, takes follow-up action. When doing so, the Commission meets with the Internal Auditor of Desjardins Group to discuss any important matters submitted to management. With respect to relations with the Autorité des marchés financiers, the Commission reviews the inspection report issued by this organization as well as the quarterly financial reports submitted to it.

The Commission meets privately with external auditors, Management, the Internal Auditor of Desjardins Group, the Inspector and Auditor General of Desjardins Group, and representatives from the Autorité des marchés financiers. Every quarter, it reports to the Board of Directors and, if necessary, makes recommendations. Lastly, to comply with sound corporate governance practices, the Commission annually reviews the degree of efficiency and effectiveness with which it has performed the tasks set out in its charter.

The Commission is made up of five independent administrators who have the knowledge required to read and interpret the financial statements of a financial institution.

Ms. Andrée Lafortune, FCA and Ms. Jacqueline Mondy as well as Messrs. Jean-Guy Bureau, Marcel Lauzon and Pierre Leblanc, FCA, who are members of the Commission, met on 15 occasions during the 2004 fiscal year.

ANDRÉE LAFORTUNE, FCA Chair COMBINED FINANCIAL STATEMENTS 106 DESJARDINS GROUP

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

The Combined Financial Statements of Desjardins Group and all the information contained in this Annual Report are the responsibility of the Management of the Fédération des caisses Desjardins du Québec, whose duty is to ensure their integrity and fairness.

The Combined Financial Statements were prepared according to Canadian generally accepted accounting principles and according to the accounting requirements of the Autorité des marchés financiers, as applicable. The Combined Financial Statements necessarily contain amounts established by Management according to estimates, which it deems fair and reasonable. These estimates include, among other things, policy and related liabilities performed by the valuation actuaries of the insurance subsidiaries. All financial information presented in the Annual Report is consistent with the audited Combined Financial Statements.

As the Management of the Fédération des caisses Desjardins du Québec is responsible for the reliability of the Desjardins Group Combined Financial Statements and related information, and the accounting systems from which they are derived, appropriate internal controls over operations and related accounting practices are maintained. The organizational structure provides for effective segregation of duties, standards in personnel hiring and training, as well as the application of control methods that are regularly updated, thereby ensuring adequate supervision of operations. The effectiveness of the controls and systems is evaluated on a regular basis by the Desjardins Bureau for Financial Monitoring and Enforcement and by the Group’s Internal Audit Division.

The Autorité des marchés financiers conducts inspections of the Desjardins Group components under its authority on an ongoing basis.

The Board of Directors of the Fédération des caisses Desjardins du Québec approves the financial information presented in the Annual Report of Desjardins Group based on the recommendation of the Audit and Inspection Commission. The Audit and Inspection Commission is mandated by the Board of Directors to examine the Combined Financial Statements and Management’s Discussion and Analysis of Desjardins Group. Also, the Audit and Inspection Commission, consisting of directors who are neither officers nor employees of any Desjardins Group component, also exercises a monitoring role to ensure that management implemented adequate systems and control procedures for the presentation of quality financial information that includes the required disclosures in the delays requested.

The Combined Financial Statements were examined by the auditors appointed by the Board of Directors; namely, Samson Bélair/Deloitte & Touche, s.e.n.c.r.l. and the Audit Department of the Desjardins Bureau for Financial Monitoring and Enforcement, whose report follows. The auditors may meet with the Audit and Inspection Commission at any time to discuss their audit and any questions related thereto, notably the integrity of the financial information provided and the quality of internal control systems.

ALBAN D’AMOURS MONIQUE F. LEROUX, FCA President and Chief Executive Officer Senior Executive Vice-President, Desjardins Group Chief Financial Officer Desjardins Group

Lévis, February 19, 2005 DESJARDINS GROUP 107 COMBINED FINANCIAL STATEMENTS

AUDITORS’ REPORT

TO THE MEMBERS OF THE FÉDÉRATION DES CAISSES DESJARDINS DU QUÉBEC We have audited the combined balance sheet of Desjardins Group as at December 31, 2004 and 2003 and the combined statement of income, the combined statement of changes in equity and the combined statement of cash flows for each of the years included in the three-year period ended December 31, 2004. These financial statements are the responsibility of the management of the Fédération des caisses Desjardins du Québec. Our responsibility is to express an opinion on these Combined Financial Statements based on our audit.

Our audit was conducted in accordance with Canadian generally accepted auditing standards, which require that we plan and perform an audit to obtain reasonable assurance that 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. It 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 Combined Financial Statements present fairly, in all material respects, the financial position of Desjardins Group as at December 31, 2004 and 2003 and the results of its operations and its cash flows for each of the years included in the three-year period ended December 31, 2004 in accordance with Canadian generally accepted accounting principles.

Samson Bélair/Deloitte & Touche, s.e.n.c.r.l. Audit Department Chartered Accountants Desjardins Bureau for Financial Monitoring and Enforcement

Québec City, February 19, 2005 Lévis, February 19, 2005 COMBINED FINANCIAL STATEMENTS 108 DESJARDINS GROUP

COMBINED BALANCE SHEET

As at December 31 (in millions of dollars)

2004 2003 ASSETS Cash and deposits with financial institutions $ 1,325 $ 1,389

Securities (Note 4) Investment account 18,117 18,428 Trading account 1,889 1,033 20,006 19,461

Loans (Note 5) Residential mortgages 43,199 38,380 Consumer, credit card and other personal loans 13,372 12,466 Business and government 20,093 19,274 76,664 70,120 Cumulative provision for credit losses (Note 5) (753) (847) 75,911 69,273 Other assets Land, buildings and equipment (Note 6) 1,182 1,183 Interest receivable 415 347 Derivative-related assets 1,274 1,146 Clients’ liability under acceptances 149 450 Other (Note 7) 3,143 2,855 Assets from discontinued operations and operations held for sale (Note 26) 169 166 6,332 6,147 TOTAL ASSETS $103,574 $ 96,270 LIABILITIES AND EQUITY LIABILITIES Deposits (Note 8) Individuals $ 54,771 $ 52,077 Business and government 15,351 14,047 Deposit-taking and other institutions 6,865 6,095 76,987 72,219 Other liabilities Policy and related liabilities (Note 9) 9,821 9,151 Borrowings (Note 10) 127 155 Interest payable 636 640 Derivative-related liabilities 1,404 987 Acceptances 149 450 Other (Note 11) 5,319 4,750 Liabilities from discontinued operations and operations held for sale (Note 26) 147 145 17,603 16,278

Subordinated debentures (Note 12) 1,589 1,154

Non-controlling interests (Note 13) 235 247 EQUITY Share capital (Note 14) 851 848 Capital stock (Note 15) 79 77 Undistributed surplus earnings 553 535 Reserves 5,677 4,912 7,160 6,372 TOTAL LIABILITIES AND EQUITY $103,574 $ 96,270

The accompanying notes are an integral part of the Combined Financial Statements.

On behalf of the Board of Directors of the Fédération des caisses Desjardins du Québec

ALBAN D’AMOURS MADELEINE LAPIERRE Chairman of the Board Vice-Chair of the Board DESJARDINS GROUP 109 COMBINED FINANCIAL STATEMENTS

COMBINED STATEMENT OF INCOME

Year ended December 31 (in millions of dollars)

2004 2003 2002 INTEREST INCOME Loans $ 4,378 $ 4,296 $ 4,135 Securities 821 848 783 5,199 5,144 4,918 INTEREST EXPENSE Deposits 1,616 1,609 1,573 Subordinated debentures and borrowings 95 84 78 1,711 1,693 1,651 NET INTEREST INCOME 3,488 3,451 3,267 OTHER INCOME Net premiums 3,267 3,016 2,563 Deposit and payment service charges 402 393 370 Lending fees and credit card service revenues 229 190 161 Trust services and securities dealings 317 234 189 Investment and trading activities 329 117 110 Other 409 330 250 4,953 4,280 3,643 TOTAL INCOME 8,441 7,731 6,910 PROVISIONS FOR CREDIT LOSSES 94 75 111 NON-INTEREST EXPENSES Claims, benefits, annuities and changes in insurance provisions 2,975 2,983 2,299 Salaries and fringe benefits 1,951 1,766 1,606 Premises, equipment and furniture, including depreciation 340 340 330 Outsourced item processing 279 233 225 Communications 212 198 199 Other 1,083 969 866 6,840 6,489 5,525 OPERATING SURPLUS EARNINGS FROM CONTINUING OPERATIONS 1,507 1,167 1,274 Income taxes on surplus earnings (Note 16) 418 314 377 SURPLUS EARNINGS FROM CONTINUING OPERATIONS BEFORE NON-CONTROLLING INTERESTS AND PATRONAGE ALLOCATIONS TO MEMBERS 1,089 853 897 Non-controlling interests (Note 13) 18 25 24 SURPLUS EARNINGS FROM CONTINUING OPERATIONS BEFORE PATRONAGE ALLOCATIONS TO MEMBERS 1,071 828 873 Discontinued operations and operations held for sale (Note 26) 1 6 (11) SURPLUS EARNINGS BEFORE PATRONAGE ALLOCATIONS TO MEMBERS 1,072 834 862 Patronage allocations to members (Note 17) 372 443 492 Tax recovery on patronage allocations to members (Note 16) (106) (143) (158) SURPLUS EARNINGS FOR THE YEAR AFTER PATRONAGE ALLOCATIONS TO MEMBERS $ 806 $ 534 $ 528

The accompanying notes are an integral part of the Combined Financial Statements. COMBINED FINANCIAL STATEMENTS 110 DESJARDINS GROUP

COMBINED STATEMENT OF CHANGES IN EQUITY

Year ended December 31 (in millions of dollars)

2004 2003 2002 SHARE CAPITAL Balance at beginning of year $ 848 $835 $828 Net change during the year 3 13 7 Balance at end of year $851 $848 $835 CAPITAL STOCK Balance at beginning of year $ 77 $74 $38 Issuance of preferred shares 2 336 Balance at end of year $79 $77 $74 UNDISTRIBUTED SURPLUS EARNINGS Balance at beginning of year $ 535 $493 $336 Surplus earnings for the year after patronage allocations to members 806 534 528 Remuneration on permanent shares (net of income taxes recovered) (20) (14) (20) Dividends on preferred shares (3) (3) (1) Transfer to stabilization reserve (3) (8) (12) Transfer to general reserve (762) (467) (338) Balance at end of year $553 $535 $493 RESERVES STABILIZATION RESERVE Balance at beginning of year $ 268 $260 $248 Transfer from undistributed surplus earnings 3 812 Balance at end of year $271 $268 $260 GENERAL RESERVE Balance at beginning of year $ 4,644 $ 4,177 $ 3,870 Cumulative effect of changes in accounting policies(1) — — (31) Transfer from undistributed surplus earnings 762 467 338 Balance at end of year $ 5,406 $ 4,644 $ 4,177 TOTAL RESERVES $ 5,677 $ 4,912 $ 4,437 TOTAL EQUITY $ 7,160 $ 6,372 $ 5,839

The accompanying notes are an integral part of the Combined Financial Statements.

(1) Represents the effect of applying Section 3062 of the Handbook of the Canadian Institute of Chartered Accountants (CICA), – Goodwill and Other Intangible Assets – and the adoption of the fair value based method for the investments of certain subsidiaries. DESJARDINS GROUP 111 COMBINED FINANCIAL STATEMENTS

COMBINED STATEMENT OF CASH FLOWS

Year ended December 31 (in millions of dollars)

2004 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES Surplus earnings for the year after patronage allocations $ 806 $ 534 $ 528 Adjustments for: Depreciation 135 130 136 Amortization of realized deferred and unrealized net gains on investment securities (24) (98) (2) Net change in policy and related liabilities 670 943 288 Future income taxes 105 (83) 8 Provisions for credit losses 94 75 111 Non-controlling interests 18 25 24 Net gain on disposal of investment securities (25) (122) (48) (Appreciation) depreciation, venture capital investment (14) 39 7 Changes in operating assets and liabilities Interest receivable (68) (3) 2 Interest payable (4) 13 (137) Trading account securities (856) (259) (391) Derivative-related assets (128) (83) 93 Derivative-related liabilities 417 (257) 366 Other 130 311 370 1,256 1,165 1,355 CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 4,768 7,632 2,414 Issue of debt securities and debentures 450 34 850 Repayment of debt securities and debentures (28) (117) (119) Net change in share capital 3 13 7 Issuance of preferred shares 2 336 Remuneration of permanent shares (net of income taxes recovered) (20) (14) (20) Dividends on preferred shares (3) (3) (1) 5,172 7,548 3,167 CASH FLOWS FROM INVESTING ACTIVITIES Net change in loans (6,732) (6,358) (4,190) Net change in investment account securities 374 (2,245) (208) Net change in land, buildings and equipment (134) (115) (71) Net proceeds on disposal related to restructuring of asset management, discontinued operations and operations held for sale — 22 — Business acquisitions, net of cash — (20) — (6,492) (8,716) (4,469) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (64) (3) 53 Cash and cash equivalents at beginning of year 1,389 1,392 1,339 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,325 $ 1,389 $ 1,392 COMPOSITION OF CASH AND CASH EQUIVALENTS Cash $ 1,005 $ 985 $ 954 Deposits with financial institutions and the Bank of Canada 107 94 52 Cheques and other notes in transit (net amount) 213 310 386 $ 1,325 $ 1,389 $ 1,392 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid during the year $ 1,715 $ 1,680 $ 1,788 Income taxes on surplus earnings paid during the year 270 203 118

The accompanying notes are an integral part of the Combined Financial Statements. COMBINED FINANCIAL STATEMENTS 112 DESJARDINS GROUP

NOTES TO THE COMBINED FINANCIAL STATEMENTS (Amounts presented in the tables of the notes to the Combined Financial Statements are in millions of dollars, unless otherwise stated).

Desjardins Group is made up of the Fédération des caisses Desjardins du Québec, its member caisses and its subsidiaries, the Fédération des caisses populaires de l’Ontario and its member caisses and the Fonds de sécurité Desjardins, all of which contribute to the development of caisse activities. Desjardins Group, a cooperative financial group, is a leading player in the economic and social development of the communities it serves.

Note 1 SIGNIFICANT ACCOUNTING POLICIES

ACT RESPECTING FINANCIAL SERVICES COOPERATIVES Pursuant to the Act respecting financial services cooperatives, the Combined Financial Statements of Desjardins Group have been prepared by Management in accordance with Canadian generally accepted accounting principles (GAAP) and the accounting requirements of the Autorité des marchés financiers, which do not differ from GAAP. In preparing the financial statements, management is required to make certain estimates and assumptions that affect assets and liabilities and the reporting of contingent assets and liabilities in the financial statements, as well as income and expenses for the periods covered. The main items for which Management must have passed careful judgment notably include the cumulative provision for credit losses, valuation of financial instruments at fair value, policy and related liabilities, patronage allocation to members, net charge related to employee future benefit plans and income tax assets and liabilities. Actual results may differ from these estimates.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES On January 1, 2004, the Desjardins Group adopted the requirements of Section 1100 of the Handbook of the Canadian Institute of Chartered Accountants (CICA) “Generally Accepted Accounting Principles”, on a prospective basis. Section 1100 establishes standards for financial reporting in accordance with GAAP. It also specifies the sources that should be consulted when selecting accounting policies or when determining which information to disclose in instances where a topic has not explicitly been addressed in GAAP’s primary sources. The application of this standard eliminates certain practices that could have been applied in a specific industry. Following the adoption of this Section, the net amounts receivable from financial institutions resulting from the clearing settlement system are now recorded in assets under the item “Cash and deposits with financial institutions”, whereas the net amounts payable to financial institutions are recorded in liabilities under the item “Deposits”. As at December 31, 2003, the net balance for all of the financial institutions was presented in assets. Furthermore, certain other notes in transit were reclassified. The impacts of these reclassifications on the Combined Financial Statements were negligible.

COMBINED FINANCIAL STATEMENTS These financial statements include the accounts of the components of Desjardins Group. The principles used in the preparation of the Combined Financial Statements are similar to those used in the preparation of the consolidated financial statements. The Combined Financial Statements include the assets, liabilities, equity and the operating results of the Desjardins Group entities, following the elimination of intercompany transactions and balances.

SECURITIES Securities include investment account and trading account securities.

Investment account securities Investment account securities are held until maturity or until the market offers more attractive investment opportunities.

Debt securities are carried at unamortized cost. Premiums and discounts are amortized using the effective yield method over the terms of the related securities. Amortization of these premiums and discounts and interest income are recorded in “Interest income – Securities”. Gains and losses realized on the disposal of these securities, as well as any write-downs necessary to reflect other-than-temporary impairments in value, are recognized immediately in “Other income – Investment and trading activities”. Only gains and losses realized on the disposal of securities held by the life and health insurance subsidiary are deferred and depreciated using the straight-line method over the remaining life of the security, for a maximum of 20 years.

Equity securities held in companies subject to significant influence are carried at equity while other equity securities are carried at cost and preferred shares are carried at cost, net of premiums and discounts, except those held by the life and health insurance subsidiary, which are accounted for using the moving average market value method. Revenues derived from the equity method of accounting and the dividends received for securities accounted for at cost are recognized under “Interest income – securities”. Gains and losses realized on the disposal of equity securities, as well as any write-downs necessary to reflect other-than-temporary impairments in value, are recognized immediately in “Other income – Investment and trading activities”. However, realized and unrealized gains and losses on equity securities of the life and health insurance subsidiary are deferred and included in income using the declining balance method at a rate of 15.0% per annum.

The venture capital investments of subsidiaries in the development capital investment segment, including investments in companies subject to significant influence, are carried at their fair value. The realized and unrealized gains and losses on these investments are immediately charged to “Other income – Investment and trading activities”.

Trading account securities Trading account securities, which are acquired for resale in the short term, are carried at their fair value. Interest income from trading account securities is recorded with income from securities. Securities sold short are recorded as liabilities and carried at their fair value. Gains and losses, either realized or unrealized, are recognized immediately in “Other income - Investment and trading activities”. DESJARDINS GROUP 113 COMBINED FINANCIAL STATEMENTS

Note 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOANS Loans, including advances to policyholders, are stated at cost, net of the cumulative provision for credit losses.

A loan is considered impaired and the related interest is no longer calculated when: a) there is reasonable doubt as to the collectibility of a portion of the principal or the interest or b) the interest or principal repayment is contractually 90 days or more past due, unless the loan is fully secured or in the process of collection, or c) the loan is more than 180 days in arrears. As soon as a loan is considered impaired, interest accrued but not collected is capitalized to the loan, and no interest is recorded thereafter. Subsequent payments received are accounted for as a credit to the principal. A loan ceases to be considered impaired and interest is once again accounted for under the accrual method when principal and interest payments are up to date and the collectibility of the loan is no longer in doubt.

Collateral is obtained if deemed necessary for a member’s or client’s loan facility following an assessment of its creditworthiness. Collateral normally takes the form of an asset such as cash, government securities, shares, receivables, inventory or fixed assets.

Assets acquired to settle an impaired loan before May 1, 2003 are recorded at the loan’s carrying value on the date of transfer. A provision is taken for any portion of the loan’s carrying value beyond the fair value of the assets. Operating income along with any gains or losses on the disposal of these assets are treated as provisions for credit losses.

A long-lived asset foreclosed after May 1, 2003 is classified as an asset held for sale if it meets the criteria in the standard entitled “Disposal of Long-Lived Assets and Discontinued Operations”. A foreclosed long-lived asset classified as held for sale is measured at fair value less cost to sell at the date of foreclosure. Foreclosed assets held and used in the normal course of business are measured at fair value and classified as land, building and equipment. When the value at which the foreclosed assets are initially measured differs from the carrying value of the loan, the difference is charged to earnings. Thereafter, estimated cash inflows and disbursements during the holding period are included in earnings for the year as non-interest expenses.

COMMISSIONS ON LOANS The commissions collected and the direct fees related to the assembly, restructuring, and renegotiation of loans are treated as being integral to the return from the loan and are deferred and amortized as interest income over their estimated terms. Commitment and preparation commissions are also included in “Interest income – Loans”, according to expected term if it is probable that a loan will result; if not, these commissions are recorded as other income during the commitment or preparation period. Loan syndication fees are carried to other income when the syndication agreement is signed unless the return on the loan kept by Desjardins Group is less than the return from other comparable lending institutions that participate in the financing. In such instances, an appropriate portion of the commissions is deferred by charging it to interest income over the term of the loan.

CUMULATIVE PROVISION FOR CREDIT LOSSES The cumulative provision for credit losses reflects Management’s best estimate of potential credit losses related to a portfolio of items which are both on and off the balance sheet and its assessment of economic conditions. Any material change could result in a change to the cumulative provision for credit losses currently recognized.

The cumulative provision is increased by provisions for credit losses charged to the statement of income and decreased by write-offs and recoveries on loans for which provisions have already been taken. The cumulative provision for credit losses is made up of specific and general provisions. For the loan portfolio, credit risk is assessed regularly and specific provisions are determined, on a loan by loan basis, for all loans considered impaired. Credit card balances are written off completely when no payment has been received for a period of 180 days. In addition, a general provision is taken in order to reflect Management’s best estimate of probable losses within the portion of the loan portfolio not yet classified as impaired. The general provision is determined in advance using a statistical model based on changes in loans by category. Moreover, an additional amount is considered in order to reflect the impact of economic and other factors. The general provision does not represent future losses or serve as a substitute for the specific provisions.

Loans are written off when all attempts at restructuring and collection have been made and the prospect of further recovery is remote.

The carrying value of impaired loans is adjusted by discounting expected future cash flows at the rate of interest inherent in the original loan. The provision is equal to the difference between this valuation and the balance of the loan. Any variation in the cumulative provision for credit losses due either to the passage of time or a revision of expected payments is recorded under “Provisions for credit losses” in the combined statement of income. COMBINED FINANCIAL STATEMENTS 114 DESJARDINS GROUP

Note 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LAND, BUILDINGS AND EQUIPMENT Land is recorded at cost. Buildings, equipment, furniture and leasehold improvements are recorded at cost less accumulated depreciation and are depreciated over their estimated useful lives using the declining balance or straight-line method. Gains and losses on disposal of fixed assets are recognized in “Other income – Other” in the year in which they are realized.

Rates or terms of depreciation: Buildings 2.5 to 20% Computer equipment 20 to 50% Furniture, fixtures and other 5 to 50% Leasehold improvements Term of the lease plus first renewal option

On January 1, 2004, Desjardins Group prospectively adopted the requirements of CICA Handbook Section 3063 entitled “Impairment of Long-Lived Assets”. This Section establishes the standards for the recognition, measurement and disclosure of the impairment of long-lived assets and replaces the provisions concerning the depreciations previously contained in Section 3061 “Property, Plant, and Equipment”. Under this new standard, an impairment loss must be recognized for an asset held for use when the carrying value exceeds the total undiscounted cash flows that will likely result from the use and eventual disposal of the asset. The amount of the loss to be recognized corresponds to the excess of the carrying value over the fair value. The application of this new standard did not have a significant impact on Desjardins Group’s Combined Financial Statements.

DISPOSAL OF LONG-LIVED ASSETS AND DISCONTINUED OPERATIONS Desjardins Group adopted the new accounting standard entitled “Disposal of Long-Lived Assets and Discontinued Operations”, presented in Section 3475 of the CICA Handbook, with respect to the disposal of assets after May 1, 2003. Under the standard, long-lived assets classified as held for sale must be measured at the lower of their carrying amount or fair value less cost to sell. The fair value is determined using the method with respect to prices for similar assets. These assets are now classified as “Other assets – Other” in the combined balance sheet.

GOODWILL AND OTHER INTANGIBLE ASSETS Acquisitions of subsidiaries are recorded using the acquisition method. Under this method, goodwill is the excess of the acquisition price of a subsidiary over the fair value of net assets acquired. Under the standard, goodwill and intangible assets with indefinite useful lives cease to be amortized and, at a minimum, are tested annually for impairment. The impairment test consists in a comparison, by reporting unit, of the fair value of goodwill versus its carrying value. When the carrying value of goodwill exceeds its fair value, the excess amount is recorded in income during the period in which the impairment is determined under “Non-interest expense – Other”.

Desjardins Group’s intangible assets with finite lives mainly include software and are presented at cost less accumulated amortization. They are amortized using the straight-line method on their estimated useful lives, which do not exceed a five-year period. Intangible assets are included in “Other assets – Other” in the combined balance sheet.

ACCEPTANCES AND CLIENTS’ LIABILITY UNDER ACCEPTANCES The potential liability of a Desjardins Group entity under acceptances is recorded as a liability in the combined balance sheet. The entity’s recourse against the client, in the event of a call on any of these commitments, is recorded as an equivalent offsetting asset. Fees earned are reported in income under “Other income – Other”.

REVERSE REPURCHASE AGREEMENTS AND REPURCHASE AGREEMENTS Desjardins Group enters into short-term purchases of securities under reverse repurchase agreements and, at the same time, into sales of securities under agreements to repurchase at a fixed price and date. These agreements are treated as collateralized lending transactions and are recorded in the combined balance sheet at the selling and purchase price committed to in the agreement. According to the accrual basis of accounting, the difference between the predetermined selling price and the purchase price is recorded in “Interest income” and, inversely, the difference between the selling price and the predetermined redemption price is recorded in “Interest expense”.

REAL ESTATE INVESTMENTS Real estate investments are carried at cost, and gains and losses on disposal, as well as any write-downs necessary to reflect other-than-temporary impairments in value, are included in income under “Other income – Other” in the year they are realized.

Real estate investments held by the life and health insurance subsidiary are carried according to the moving average market method at a rate of 10% per annum. Their value is appraised based on a three-year cycle by a qualified outside appraiser. Gains and losses on the disposal of these investments are deferred and recorded in income using the declining balance method at a rate of 10% per annum. Any decline in value that is other than temporary and affects the whole real estate investment portfolio is immediately charged to income for the year. DESJARDINS GROUP 115 COMBINED FINANCIAL STATEMENTS

Note 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

POLICY AND RELATED LIABILITIES In life and health insurance, policy and related liabilities include policy liabilities under life insurance and annuity contracts. Policy liabilities represent the amounts that, together with estimated future premiums and investment income, will provide for all the life and health insurance subsidiary’s commitments under policies in force regarding estimated future benefits, policyholder dividends and related expenses. It is the responsibility of the designated actuary of the subsidiary to assess the policy liabilities amount to be established each year to cover future commitments. Policy liabilities are determined using the Canadian Asset Liability Method, which is consistent with accepted Canadian actuarial practice.

In general insurance, provisions for claims and adjustment expenses are calculated on a discounted basis, with a margin for adverse deviations. Separate estimates of loss are provided for each claim made. In addition, a provision is made for adjustment expenses, for changes in claims made and for claims incurred but not reported on the basis of past experience and in-force policies. These estimates are reviewed and updated regularly, and restatements are included in income.

REINSURANCE In life and health insurance, premium income, payments to policyholders, policy liabilities and changes in policy liabilities related to contracts under reinsurance agreements are recorded net of amounts ceded to other insurers. In general insurance, the reinsurer’s share of unearned premiums and claims and adjustment expenses is recorded under “Other assets – Other”. Insurance earnings are recorded net of reinsurance transactions.

NET PREMIUMS Gross premiums for all types of insurance policies and policies with limited mortality or morbidity risk of the life and health insurance subsidiary are recognized as revenue when they become due. When these premiums are recognized, policy liabilities are calculated to ensure that revenues and expenses are matched. The general insurance subsidiary’s premium income is distributed equally over the term of the insurance policies on a monthly expiry basis. The portion of the premium corresponding to the time remaining at the end of the year is included in unearned premiums.

DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are financial contracts which derive their value from an asset, interest rate, foreign exchange rate or other financial index. By far most derivatives are traded privately between Desjardins Group and the counterparty, and include forward exchange contracts, interest rate and currency swaps, total return swaps, forward rate agreements, and interest rate and stock index options. The remaining transactions are carried out on regulated exchanges and consist mainly of futures contracts.

Derivative financial instruments used for trading purposes or for asset and liability management purposes. Derivative financial instruments used for trading purposes are used in order to meet member and client demand. These derivative financial instruments are recorded in the balance sheet at fair value, and the realized or unrealized gains and losses are recorded under “Other income – Investment and trading activities”. The derivative financial instruments held for asset and liability management purposes are used to manage the risks related to interest rates and the foreign currency exposure of balance sheet assets and liabilities, firm commitments and forecasted transactions. In addition, some derivative financial instruments used by the life and health insurance subsidiary are recorded in “Securities – Investment account”, when they qualify as such, and are recorded on the same basis as portfolio investments.

The fair value of all financial derivative instruments is determined using pricing models that incorporate the current market prices and the contractual prices of the underlying instruments, the time value of money, yield curves and volatility factors. In the consolidated balance sheet, the derivative financial instruments that have a positive fair value appear as assets, and those with a negative fair value appear as liabilities, respectively, under the headings “Derivative-related assets” or “Derivative-related liabilities”.

Adoption of Accounting Guideline AcG-13 “Hedging Relationships” On January 1, 2004, Desjardins Group adopted the CICA Handbook Accounting Guideline entitled “Hedging Relationships” (AcG-13) and abstract 128 of the Emerging Issues Committee (EIC-128) “Accounting for Trading, Speculative or Non-hedging Derivative Financial Instruments”. EIC-128 requires that derivative financial instruments that are no longer part of an eligible hedge relationship under AcG-13 be recorded at their fair value, and changes in these fair values charged to income.

In accordance with the adoption of AcG-13, Desjardins Group reviewed its accounting policies to ensure that all derivative financial instruments are recorded at fair value on the balance sheet, whereas beforehand, only those held for trading purposes were recorded as such. The positive and negative fair values, as well as resulting deferred gains and losses, are presented as assets and liabilities. Due to this fact, the combined balance sheet as at December 31, 2003 has been restated, the effect being that “Derivative-related assets” and “Other liabilities – Other” rose by $81M and “Derivative-related liabilities” and “Other assets – Other” decreased by $375M. Due to the adoption of AcG-13 on January 1, 2004, derivative financial instruments could no longer qualify for hedge accounting as of that date. The transitional gain was deferred to be amortized over the remaining duration of the derivative financial instruments. COMBINED FINANCIAL STATEMENTS 116 DESJARDINS GROUP

Note 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Documenting and recognizing hedging relationships Several derivative financial instruments held for the purposes of asset and liability management qualify for hedge accounting. To qualify for hedge accounting, the hedge relationship must be recognized and documented from the moment it is implemented. Such documentation must address in particular the specific strategy for managing risk, the asset, liability or cash flows that are being hedged as well as the measure of effectiveness of this hedge. The derivative financial instrument must prove highly effective to compensate for changes in the fair value or the cash flows attributable to the risk being hedged. Derivative financial instruments that qualify for hedge accounting are recorded in the balance sheet at fair value, and changes in fair value are recorded in “Other assets – Other” and “Other liabilities – Other” and are recognized in income during the same period that the gains, losses, income, and charges related to the hedge item are recorded. In particular, interest rate and currency swaps that qualify for hedge accounting are recorded such that the proceeds or charges on the derivative financial instruments are carried into income as an adjustment to the interest income or expense of the hedged item. The amounts payable or receivable from the counterparties are carried to “Derivative-related assets” or “Derivative-related liabilities” in the combined balance sheet. The gains and losses on currency swaps compensate for the exchange gains and losses from items hedged in corresponding currencies.

Derivative financial instruments held for purposes of asset and liability management that do not qualify for hedge accounting are recorded in the balance sheet at fair value, and changes in fair value are recorded in income under “Other income – Investment and trading activities”.

Cessation of hedging relationships The designation of a derivate financial instrument as a hedge is discontinued in the following cases: the hedged item is sold or matures, the hedge is no longer effective, Desjardins Group terminates the hedging relationship or it is no longer likely that the forecasted transaction will take place essentially at the time and in the way indicated at the inception of the hedging relationship. Changes in fair value related to the derivative financial instruments that have ceased to qualify for hedge accounting before maturity are carried to “Derivative-related assets” or “Derivative-related liabilities” in the combined balance sheet and recognized in income for the same period as the underlying transaction being hedged. If a designated hedged item is sold, is extinguished or matures before the related derivative financial instrument terminates, any realized and unrealized gains or losses on this derivative financial instrument are recognized in income under “Other income – Investment and trading activities”.

Equity-linked deposit contracts and equity indexes Desjardins Group records at fair value certain deposit obligations for which the obligation varies according to the return on equities or an equity index and which entitle the investors, after a specified period of time, to receive the higher of a stated percentage of their principal investment or a variable amount calculated based on the return on equities or an equity index. Changes in fair value are recorded to the combined statement of income as they occur.

FOREIGN CURRENCY TRANSLATION Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate prevailing on the balance sheet date. Income and expenses are translated at the average exchange rate in effect during the year. The resulting gains and losses, realized or unrealized, are recognized in “Other income - Other”.

INCOME TAXES ON SURPLUS EARNINGS Income taxes on surplus earnings are accounted for on a tax liability method, whereby income taxes reflect the expected future tax effects of temporary differences between the value of assets and liabilities for accounting purposes compared with tax purposes. Under this method, the income tax provision includes current and future income taxes. Future income tax assets or liabilities are calculated based on the tax rates expected to apply when the assets are realized and the liabilities are settled. Future income tax assets and liabilities are recognized under “Other assets – Other” and “Other liabilities – Other”.

EMPLOYEE FUTURE BENEFIT PLANS Most employees participate in the Desjardins Group Pension Plan provided through a multi-employer defined benefit plan. Since the procedures of the Plan are such that the future changes in salary levels will have an impact on the amount of future benefits, the cost of benefits is determined through actuarial calculations using the projected benefit method pro rated on years of service and Management’s best estimate assumptions concerning the expected return on plan investments, salary increases and employees’ retirement age. Calculation of the expected return on plan assets is based on the value of pension fund assets measured at market-related values. The method used to calculate the market-related value for all the asset categories consists of amortizing the difference between the long-term return objective of the Plan’s investment policy and the return of the pension fund over a five-year period.

Defined benefit costs primarily correspond to the aggregate of: a) the actuarially computed cost of pension benefits provided in respect of the current year’s service, b) imputed interest on the accrued benefit obligation, c) the actual return on plan assets, d) the actuarial gains and losses, e) the plan amendments, f) curtailment gains and settlement, g) adjustments to take into consideration the long-term nature of these costs. The actuarial gains (losses) result from the difference between the long-term actual return on pension assets and the expected return, the changes made to the actuarial assumptions used to determine the accrued pension obligations and the experienced gains or losses on these obligations. The excess of any net actuarial gains or any actuarial losses on 10% of the higher of the balance of the obligation as part of accrued pension benefits or the related market value of Plan assets at the beginning of year is amortized on the average remaining estimated service life of the employees. The cumulative excess of pension fund contributions over the amounts recorded as defined benefit costs is reported under “Other assets – Other”. DESJARDINS GROUP 117 COMBINED FINANCIAL STATEMENTS

Note 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EMPLOYEE FUTURE BENEFIT PLANS (CONTINUED) The employees of some components benefit from various defined benefit or defined contribution pension plans. To estimate the cost of the defined benefit pension plans, these subsidiaries use the projected benefit method pro rated on years of service and Management’s best estimate assumptions concerning the expected return on plan investments, salary increases, retirement age and expected health care costs and an interest rate established based on market rates. Pension fund assets are valued at market value.

Desjardins Group also offers its retired employees and their dependants life, medical and dental insurance coverage. The cost of these benefits is accrued over the service life of employees according to accounting policies similar to those used for pension plans and the increase in costs will have an impact on future benefits. The accrued cost of post-retirement benefits is reported in “Other liabilities – Other”.

On June 30, 2004, the Desjardins Group prospectively adopted the amendments of CICA Handbook Section 3461 entitled “Employee Future Benefits”. The Section requires the disclosure of supplementary information on the assets, cash flows, and the net cost of periodic benefits related to the defined benefit plan and to other post-retirement benefits. The new requirements are in force for fiscal years ending as of June 30, 2004 as well as for the interim periods ending as of the same date. The supplementary information is provided in Note 18. The application of this new standard did not significantly impact Desjardins Group’s Combined Financial Statements.

ASSETS UNDER MANAGEMENT AND SEGREGATED FUNDS Assets under management and segregated funds of the life and health insurance subsidiary are held for the direct beneficial interest of clients and policyholders. These assets under management are therefore excluded from the combined balance sheet. The income derived from the management services are recorded to income under “Other income – Other”.

COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the presentation adopted in the current year.

Note 2 FUTURE ACCOUNTING CHANGES

VARIABLE INTEREST ENTITIES In June 2003, the CICA issued an Accounting Guideline (which was revised in August 2004) entitled “Consolidation of Variable Interest Entities” (AcG-15). This Guideline is effective for annual and interim periods beginning on or after November 1, 2004. A variable interest entity (VIE) refers to an entity whose equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support from a third party, or an entity whose investors, as a group, do not have the power to make decisions about the entity’s activities or are not obliged to absorb the expected losses or the right to receive expected residual returns, if they occur. Under this Guideline, a VIE must be consolidated by its primary beneficiary, that is, the entity that assumes the expected losses and/or the possibility of receiving the principal residual returns. The application of AcG-15 on January 1, 2005 will result in the consolidation of Desjardins Credit Union Inc., a cooperative in which Desjardins Group has a substantial subordinate investment and Centaur Trust, a trust in which an entity of Desjardins Group holds an interest of $54M, representing 90% of the units. The result of applying this new Guideline will be an increase in assets of $1,879M and in liabilities of $1,898M as well as a reduction in undistributed surplus earnings of $19M. Desjardins Group is closely monitoring events that could change the current interpretation of AcG-15.

LIABILITIES AND EQUITY In January 2004, the CICA amended CICA Handbook Section 3860 entitled “Financial Instruments – Disclosure and Presentation”. The amendments require that contractual obligations that can be settled through the issuer’s choice to issue a variable quantity of equity instruments belonging to him be presented as a liability and not as equity. These new requirements will come into force on January 1, 2005 and will not have an impact on Desjardins Group’s Combined Financial Statements.

Note 3 BUSINESS COMBINATION

In 2003, the Fédération des caisses populaires de l’Ontario (FCPO) and the Fédération des caisses Desjardins du Québec (FCDQ) authorized the renewal of their partnership agreement. The new agreement, in effect since January 1, 2004, has resulted in a business combination between the FCPO, the caisses populaires of Ontario and Desjardins Group.

This combination was recorded using the pooling of interest method. The effect of this transaction is to group assets, liabilities and equity using the value recorded in the books of the subject entities. These items are presented in the following table as at January 1, 2004. In addition, prior period financial statements were restated in order to account for financial position and operating income as though the entities had formed one single entity since their creation.

Assets Liabilities Equity Total income Desjardins Group $ 94,652 $ 88,454 $ 6,198 $ 7,712 Fédération des caisses populaires de l’Ontario and the caisses populaires of Ontario 2,310 2,105 205 96 COMBINED FINANCIAL STATEMENTS 118 DESJARDINS GROUP

Note 4 SECURITIES

Maturity 2004 2003 No Under 1 to Over 3 to Over 5 to Over specific Carrying Fair Carrying Fair 1 year 3 years 5 years 10 years 10 years maturity value value value value INVESTMENT ACCOUNT SECURITIES ISSUED OR GUARANTEED BY Canada $ 282 $ 92 $ 1,129 $ 318 $ 278 $ — $ 2,099 $ 2,161 $ 1,892 $ 1,967 Yield 2.76 % 4.16 % 4.18 % 4.84 % 5.69 % 4.29 % 4.60 % The provinces or municipal corporations in Canada 644 2,495 2,513 1,871 2,768 — 10,291 10,873 9,719 10,241 Yield 5.12 % 3.63 % 3.82 % 5.24 % 6.09 % 4.72 % 5.08 % School or public corporations in Canada 65 39 41 35 96 — 276 296 415 437 Yield 4.76 % 5.66 % 8.11 % 6.80 % 6.25 % 6.16 % 6.02 % Government institutions abroad 5 — 8 — 24 — 37 39 87 90 Yield 2.64 % 3.19 % 5.53 % 4.63 % 4.69 % OTHER SECURITIES IN CANADA Financial institutions 1,094 357 84 179 25 — 1,739 1,747 2,359 2,365 Yield 2.87 % 3.11 % 4.11 % 5.35 % 5.71 % 3.28 % 2.85 % Other issuers 1,061 234 143 284 240 9 1,971 2,025 2,353 2,415 Yield 2.63 % 2.43 % 4.71 % 6.07 % 6.51 % 3.73 % 3.89 % Equity securities 31 17 17 6 — 522 593 607 736 768 SECURITIES FROM FOREIGN ISSUERS Financial institutions 17 28 31 1 30 — 107 110 66 69 Yield 1.32 % 2.90 % 7.12 % 9.00 % 5.39 % 4.63 % 4.17 % Other issuers 7 66 10 37 10 486 616 624 637 631 Yield 2.50 % 5.44 % 9.35 % 8.11 % 5.85 % 6.37 % 5.17 % Equity securities — ————388388399164 147 TOTAL INVESTMENT ACCOUNT 3,206 3,328 3,976 2,731 3,471 1,405 18,117 18,881 18,428 19,130 TRADING ACCOUNT SECURITIES ISSUED OR GUARANTEED BY Canada 51 123 314 79 4 — 571 571 494 494 The provinces or municipal corporations in Canada 114 103 102 168 55 — 542 542 448 448 School or public corporations in Canada 34 14 4 5 — — 57 57 46 46 OTHER SECURITIES IN CANADA Financial institutions 1 — — 12 — — 13 13 88 Other issuers 94 1454—10810817 17 Equity securities — ————59859859820 20 TOTAL TRADING ACCOUNT 294 241 424 269 63 598 1,889 1,889 1,033 1,033 $ 3,500 $ 3,569 $ 4,400 $ 3,000 $ 3,534 $ 2,003 $ 20,006 $ 20,770 $ 19,461 $ 20,163

Yields are calculated based on the carrying value of the securities at end of year adjusted to take into account any amortization of premiums and discounts. DESJARDINS GROUP 119 COMBINED FINANCIAL STATEMENTS

Note 4 SECURITIES (CONTINUED)

Total securities held for investment purposes includes an amount of CAD$1,200M (CAD$1,596M in 2003), of which CAD $976M (CAD$1,405M in 2003) was denominated in U.S. dollars.

Securities of the venture capital investments of subsidiaries in the capital investment segment include unrealized appreciation of $4M (depreciation of $10M in 2003). The changes in unrealized appreciation in the combined statement of income total $14M (depreciation of $39M in 2003 and $7M in 2002).

UNREALIZED GAINS AND LOSSES ON INVESTMENT ACCOUNT SECURITIES

2004 2003 Unrealized Unrealized Unrealized Unrealized Carrying gross gross Fair Carrying gross gross Fair value gains losses value value gains losses value SECURITIES ISSUED OR GUARANTEED BY Canada $ 2,099 $ 62 $ — $ 2,161 $ 1,892 $ 75 $ — $ 1,967 Provinces or municipal corporations in Canada 10,291 582 — 10,873 9,719 531 9 10,241 School or public corporations in Canada 276 20 — 296 415 22 — 437 Government institutions abroad 37 2 — 39 87 3 — 90 OTHER SECURITIES IN CANADA Financial institutions 1,739 10 2 1,747 2,359 7 1 2,365 Other issuers 1,971 61 7 2,025 2,353 75 13 2,415 Equity securities 593 17 3 607 736 50 18 768 SECURITIES FROM FOREIGN ISSUERS Financial institutions 107 3 — 110 664169 Other issuers 616 11 3 624 637 5 11 631 Equity securities 388 11 — 399 164 2 19 147 $ 18,117 $ 779 $ 15 $ 18,881 $ 18,428 $ 774 $ 72 $ 19,130

Note 5 LOANS

LOANS AND IMPAIRED LOANS

2004 2003 Gross Net Gross Net Gross impaired Specific General impaired Gross impaired Specific General impaired loans loans provisions provision loans loans loans provisions provision loans Residential mortgages $ 43,199 $ 79 $ 19 $ — $ 60 $ 38,380 $ 109 $ 30 $ — $ 79 Consumer, credit card and other personal loans 13,372 70 36 — 34 12,466 73 41 — 32 Business and government 20,093 237 93 — 144 19,274 402 176 — 226 General provision for credit risk — — — 605 (605) — — — 600 (600) $ 76,664 $ 386 $ 148 $ 605 $ (367) $ 70,120 $ 584 $ 247 $ 600 $ (263)

As at December 31, 2004 and 2003, net impaired loans included $11M and $36M, respectively, of foreclosed assets acquired before May 1, 2003. Specific provisions for repossessed real estate property amounted to $5M ($30M in 2003).

CUMULATIVE PROVISION FOR CREDIT LOSSES

2004 2003 Balance at beginning of year $ 847 $ 903 Provisions for credit losses 94 75 Write-offs and recoveries (188) (131) Balance at end of year $ 753 $ 847 COMBINED FINANCIAL STATEMENTS 120 DESJARDINS GROUP

Note 6 LAND, BUILDINGS AND EQUIPMENT

2004 2003 Accumulated Net carrying Net carrying Cost depreciation value value Land $94$— $94 $97 Buildings 1,199 446 753 778 Computer equipment 481 379 102 88 Furniture, fixtures and other 553 404 149 147 Leasehold improvements 180 96 84 73 $ 2,507 $ 1,325 $ 1,182 $ 1,183

Depreciation for the year amounted to $135M ($130M in 2003 and $136M in 2002). As at December 31, 2003, cost and accumulated depreciation were $2,471M and $1,288M.

Note 7 OTHER ASSETS

2004 2003 Real estate investments $ 358 $ 413 Goodwill 151 151 Premiums receivable 601 551 Future income tax assets (Note 16) 476 520 Accrued benefit assets (Note 18) 155 173 Accounts receivable and other assets 1,402 1,047 $ 3,143 $ 2,855

The fair value of real estate investments was $401M ($436M in 2003).

Goodwill from the “Insurance, trust services and asset management” segment amounts to $144M ($144M in 2003), and $7M from the “Securities brokerage, venture capital and other” segment ($7M in 2003).

Following an impairment test, no amortization of goodwill was recognized during 2004, 2003 and 2002.

As at December 31, 2004 and 2003, accounts receivable and other included $5M and $2M, respectively, of foreclosed assets held for resale.

Note 8 DEPOSITS

Payable on demand Payable after notice Payable on a fixed date Total 2004 2003 2004 2003 2004 2003 2004 2003 Individuals $ 13,568 $ 12,192 $ 3,059 $ 2,892 $ 38,144 $ 36,993 $ 54,771 $ 52,077 Businesses and government 7,626 7,026 228 203 7,497 6,818 15,351 14,047 Deposit-taking institutions and other 38 53 — — 6,827 6,042 6,865 6,095 $ 21,232 $ 19,271 $ 3,287 $ 3,095 $ 52,468 $ 49,853 $ 76,987 $ 72,219

Deposits payable on demand, interest-bearing or non-interest bearing, are usually deposits held in chequing accounts. Desjardins Group does not have the right to demand withdrawal notice with respect to these deposits. Deposits payable after notice are interest-bearing deposits, usually held in savings accounts. Desjardins Group does have the legal right to demand a withdrawal notice with respect to these deposits. Term deposits are interest-bearing deposits usually held in fixed-term deposit accounts, guaranteed investment certificates or similar instruments with terms generally varying between one day and seven years, and maturing on a predetermined date. DESJARDINS GROUP 121 COMBINED FINANCIAL STATEMENTS

Note 9 POLICY AND RELATED LIABILITIES

Policy and related liabilities are as follows:

2004 2003 Policy liabilities $ 7,721 $ 7,291 Claims and adjustment expenses 1,091 946 Unearned premiums 670 621 Policyholder deposits 279 261 Provisions for participating policyholders’ dividends and experience refunds 60 32 $ 9,821 $ 9,151

COMPOSITION OF POLICY LIABILITIES As at December 31, policy liabilities and related matched assets included the following amounts:

2004 Personal Group insurance insurance Savings Total Gross policy liabilities $ 2,885 $ 1,565 $ 3,687 $ 8,137 Amounts transferred under reinsurance agreements (265) (135) (16) (416) NET POLICY LIABILITIES $ 2,620 $ 1,430 $ 3,671 $ 7,721 COMPOSITION OF ASSETS MATCHED TO POLICY LIABILITIES Bonds $ 2,176 $ 1,098 $ 2,043 $ 5,317 Mortgage loans 104 180 1,393 1,677 Real estate property 95 — — 95 Shares 101 31 5 137 Other 144 121 230 495 $ 2,620 $ 1,430 $ 3,671 $ 7,721

2003 Personal Group insurance insurance Savings Total Gross policy liabilities $ 2,669 $ 1,446 $ 3,572 $ 7,687 Amounts transferred under reinsurance agreements (250) (127) (19) (396) NET POLICY LIABILITIES $ 2,419 $ 1,319 $ 3,553 $ 7,291 COMPOSITION OF ASSETS MATCHED TO POLICY LIABILITIES Bonds $ 2,183 $ 1,105 $ 1,973 $ 5,261 Mortgage loans 78 55 1,431 1,564 Real estate property 11 — — 11 Shares 19 42 5 66 Other 128 117 144 389 $ 2,419 $ 1,319 $ 3,553 $ 7,291

Policy liabilities include an allowance of $169M ($148M in 2003) that is used to protect the life and health insurance subsidiary against the risk of underperforming assets. This allowance does not include the allowance presented in assets for non-productive investments.

The fair value of assets matched to policy liabilities was $8,219M ($7,731M in 2003). Any change in the value of the assets matched to policy liabilities would be offset by a similar change in these provisions and would not have a significant impact on Desjardins Group’s income. COMBINED FINANCIAL STATEMENTS 122 DESJARDINS GROUP

Note 9 POLICY AND RELATED LIABILITIES (CONTINUED)

ACTUARIAL ASSUMPTIONS AND SENSITIVITY OF ASSUMPTIONS TO CHANGES The nature and method of determining the most significant assumptions used in the computation of policy liabilities comply with industry practice. The actuarial assumptions deal with mortality and morbidity, cancellation of contracts, investment income, operating expenses and participating policyholders’ dividends.

The process of determining policy liabilities necessarily involves risks of adverse deviation from best estimates that vary in relation to the length of the estimation period and the potential volatility of each component. Due to these uncertainties, best estimate assumptions are adjusted by margins for adverse deviation, which increase policy liabilities and reduce the amount of gross income that would otherwise be recognized at inception of the policies. On participating policies, margins for adverse deviation are reduced, since future adverse experience would result in a reduction in the amount of policyholders’ dividends paid. With the passage of time and the resulting reduction in estimation risk, these margins are released to income. If estimates of future conditions change throughout the life of a policy, the present value of those changes is recognized in income immediately. For the life and health insurance subsidiary, the assumptions that are most likely to change in the year are related to policy lapse rates on Term-to-100 life insurance policies and future investment yields.

RISK MANAGEMENT In addition to the risks related to actuarial assumptions, the life and health insurance subsidiary is exposed to the following credit risks:

INSURANCE AND REINSURANCE RISK The life and health insurance subsidiary enters into reinsurance agreements for, among other types of policies, policies with coverage in excess of certain maximum amounts that vary in relation to business activities.

The life and health insurance subsidiary also underwrites catastrophe insurance to mitigate this risk. Catastrophe insurance covers claims in excess of $5M per event up to a maximum liability of $100M. The coverage includes more restricted protection related to terrorism, which includes any loss resulting from a nuclear, biological, chemical or radioactive attack (NBCR) up to a maximum of $50M.

In order to reduce the risk related to reinsurance, the life and health insurance subsidiary deals with many different registered reinsurers who meet stringent credit standards and are subject to the same regulatory control as the subsidiary. These reinsurance agreements do not release the life and health insurance subsidiary from its obligations to policyholders.

CREDIT RISK Future investment income is affected by the level of credit losses. In addition to allowances for impairment applied as reductions to the carrying value of assets, the life and health insurance subsidiary included a provision in its projections of investment income to cover the risk of underperforming assets.

INTEREST RATE RISK In the normal course of business, the life and health insurance subsidiary is exposed to risks arising from future changes in interest rates. Under more or less favourable economic environments, mismatched asset and liability cash flows must be reinvested or disinvested. To manage this risk, a matching policy specifying acceptable cash flow gaps has been established for assets and their related liabilities. The life and health insurance subsidiary regularly examines these duration gaps to ensure they are within specified limits.

When determining policy liabilities, consideration is given to the uncertainty related to interest rate projections on reinvested future cash flows in relation to the non-compliance of cash flows considering a series of economically unfavourable scenarios.

LIQUIDITY RISK The life and health insurance subsidiary takes the necessary measures to avoid having difficulty meeting its obligations as they become due. A number of these obligations may be terminated at short notice, thereby increasing liquidity risk. To manage this risk, the life and health insurance subsidiary has adopted stringent rules governing cash flow matching of assets and liabilities, and established standards for liquidity.

The first one, called operating liquidity, covers potential cash flows over a span of one month. The second one, called strategic, is based on panic scenarios that cover three-month to one-year timeframes. The liquid assets of the life and health insurance subsidiary must be sufficient to cover potential requests for withdrawals and redemptions.

RISK RELATED TO SEGREGATED FUNDS Policy liabilities also include an amount that is sufficient to pay the minimum segregated fund guarantees. This amount is calculated using stochastic models as defined by the Canadian Institute of Actuaries. These models are based on the nature of the guarantees and on investment income, mortality and cancellation contract rate assumptions. Deferred acquisition costs, that is, expenses incurred on the sale of individual segregated fund contracts, are recorded in policy liabilities and amortized over the same period as is applicable to surrender charges. Policy liabilities recognize the fact that future revenues are available to recover unamortized purchase fees. DESJARDINS GROUP 123 COMBINED FINANCIAL STATEMENTS

Note 9 POLICY AND RELATED LIABILITIES (CONTINUED)

CHANGES IN POLICY LIABILITIES Changes in policy liabilities during the year were due to business activities and the following changes in actuarial estimates:

2004 2003 Balance at beginning of year $ 7,291 $ 6,657 Normal change due to the update of actuarial assumptions 53 79 Normal change due to the passage of time 379 521 Increase in policy liabilities due to the recognition of future income tax assets — 40 Other changes (2) (6) Balance at end of year $ 7,721 $ 7,291

CLAIMS AND ADJUSTMENT EXPENSES Claims and adjustment expenses consist of a $920M provision for general insurance claims and adjustment expenses as at December 31, 2004 ($785M as at December 31, 2003) and a $171M provision for life and health insurance benefits as at December 31, 2004 ($161M as at December 31, 2003).

The amounts related to reported claims are uncertain since some information is available at the reporting date, and, consequently, the claims cost could increase or decrease thereafter. Moreover, since certain claims are not reported immediately, the value of incurred but unreported claims is estimated at the end of the year. In order to set up the provision adequately, the general insurance subsidiary uses assumptions based on characteristics of the lines of business, settlement history and other relevant factors. The methods used produce reasonable results given data currently known.

To reduce the risk related to extensive claims, the general insurance subsidiary has a policy of underwriting and reinsuring insurance policies, which, for the most part, limits its exposure to a maximum amount of $3M per policy. The subsidiary also has a catastrophe reinsurance program in place under which its maximum liability is $25M. These reinsurance agreements do not release the subsidiary from its obligations towards its policyholders.

The inability of reinsurers to honour their commitments could result in losses for this subsidiary. It examines the creditworthiness of the companies to which it cedes a portion of the risks. It has no knowledge of any information that could lead it to believe that a reinsurer with which it currently does business is insolvent; consequently, no allowance for doubtful accounts has been made. In addition, the subsidiary does business with several reinsurers.

The provision for claims and adjustment expenses for the general insurance subsidiary, by risk category, was as follows:

2004 2003 Gross Ceded Gross Ceded amount amount amount amount Property $ 151 $ 7 $ 126 $ 8 Automobile 695 18 595 35 Other 74 — 64 — $ 920 $ 25 $ 785 $ 43 COMBINED FINANCIAL STATEMENTS 124 DESJARDINS GROUP

Note 10 BORROWINGS

2004 2003 Series C sinking fund bonds with a par value of $90M, redeemable by the member entity, with a fixed interest rate of 9.18%, payable monthly and at maturity, which is 2013(1) $82 $84 Mortgage debt bearing interest at rates ranging from 4.74% to 11.00% (average rate of 7.12% as at December 31, 2004 and 6.90% as at December 31, 2003), maturing on various dates through 2014 44 70 Other borrowings 1 1 $ 127 $ 155

(1) These bonds were secured by real estate mortgages on assets of the subsidiary. These assets include buildings and equipment with a carrying value of $288M ($290M in 2003).

The annual principal repayments on borrowings over the next five years are as follows:

2005 $3 2006 3 2007 4 2008 4 2009 4

Note 11 OTHER LIABILITIES

2004 2003 Capital shares and preferred shares $44 $47 Deferred net gains realized on disposal of investments 529 512 Future income tax liabilities (Note 16) 193 132 Accrued benefit liabilities (Note 18) 544 512 Commitment under repurchase agreements 276 431 Accounts payable and other liabilities 3,733 3,116 $ 5,319 $ 4,750

Client loyalty program Through the client loyalty program, cardholders who are registered to the program receive a percentage of “BONUSDOLLARS” for each dollar of purchases charged to their account. These “BONUSDOLLARS” may be exchanged primarily for Desjardins services, gift certificates or trips paid with their card.

The allowance is established during the period in which the “BONUSDOLLARS” are issued. This liability is valued based on an estimate of the cost of the services or goods offered in exchange and on an estimate of the number of points that will be exchanged in the future by the cardholders. This estimate factors in the current and past consumption habits of the cardholders. The costs and the future liabilities from the client loyalty program are recorded, respectively, under “Non-interest expenses - Other” in the Combined Statement of Income and under “Other liabilities – Other” in the combined balance sheet. DESJARDINS GROUP 125 COMBINED FINANCIAL STATEMENTS

Note 12 SUBORDINATED DEBENTURES

The debentures are unsecured bonds subordinated in right of payment to claims of depositors and certain other creditors, and are included in regulatory capital. Redemption and cancellation of subordinated debentures are subject to the consent and approval of the various regulatory authorities.

2004 2003 Debenture, par value of 76,224,509 Euros, bearing interest at the annual rate of 5.50%, payable annually until March 18, 2008; thereafter payable quarterly at the rate of Euribor plus 1.40%, maturing on March 18, 2013. With the prior consent of the Autorité des marchés financiers, the subsidiary may call the subordinated debentures on March 18, 2008 or at any time in the event of changes in the tax system applicable to it $ 124 $ 124 Senior Series “A” bonds of US$179M, bearing interest at an annual rate of 7.37%, maturing in 2005 215 230 Senior Series “B” bonds, maturing in June 2012, bearing interest at an annual rate of 5.552% for the first five years, and for the following five years, at an annual rate equal to the 90-day bankers’ acceptance rate plus 1%, redeemable at the option of Desjardins Group 500 500 Senior Series “C” bonds, maturing in June 2017, bearing interest at an annual rate of 6.322% for the first ten years, and for the following five years, at an annual rate equal to the 90-day bankers’ acceptance rate plus 1%, redeemable at the option of Desjardins Group 300 300 Senior Series “D” bonds, maturing in March 2014, bearing interest at an annual rate of 3.887% for the first five years, and for the following five years, at an annual rate equal to the 90-day bankers’ acceptance rate plus 1%, redeemable at the option of Desjardins Group 450 — $ 1,589 $ 1,154

The subordinated debentures and bonds issued in foreign currencies totalled $339M ($354M in 2003). For these debentures, Desjardins Group uses hedging operations to reduce foreign exchange risks.

For the next five years, the aggregate sinking fund requirements and maturities of the debentures, assuming the earliest maturity dates under the terms of the contracts, are as follows:

2005 $ 215 2006 — 2007 — 2008 — 2009 —

Note 13 NON-CONTROLLING INTERESTS

2004 2003 NON-CONTROLLING INTERESTS INCLUDE: Participating policyholders of the life and health insurance subsidiary $ 180 $ 178 Preferred shareholders of subsidiaries, including $21M, redeemed in 2004 2 23 Common shareholders of subsidiaries 53 46 $ 235 $ 247

2004 2003 2002 EARNINGS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS INCLUDE: Earnings attributable to participating policyholders of the life and health insurance subsidiary $ 2 $9 $8 Dividends to preferred shareholders of subsidiaries — 11 13 Earnings attributable to common shareholders of subsidiaries 16 53 $18 $25$24 COMBINED FINANCIAL STATEMENTS 126 DESJARDINS GROUP

Note 14 SHARE CAPITAL

AUTHORIZED The share capital is composed of qualifying shares, capital shares and permanent shares.

The caisses may issue an unlimited number of qualifying shares with a par value of $5, payable on demand under certain conditions stipulated by law. Members have only one vote each, no matter how many qualifying shares they own.

A subsidiary of Desjardins Group may issue an unlimited number of capital shares.

Capital shares can only be issued to auxiliary members of the subsidiary and have a par value of $1,000 each. The Board of Directors has the discretionary power to determine the payment of remuneration and the terms of repayment on these shares. These shares may be transferred among the members, with the Board’s authorization, and their repayment, possible only in the event of the subsidiary’s liquidation, insolvency or wind-up, is subordinated to deposits and other debt of the subsidiary. The shares are redeemable by the subsidiary, in part or in whole, with the authorization of the Autorité des marchés financiers. They are convertible by the subsidiary, with the Board’s authorization, into shares of other categories issued for this purpose.

The by-laws of the caisses authorize the issue of permanent shares with a par value of $10. The Autorité des marchés financiers first must approve the prospectus of each caisse issuing permanent shares. These shares do not carry any voting rights and cannot be redeemed, except under certain conditions stipulated by law. Their interest rate is determined annually at the general meeting of each caisse.

Issued and fully paid share capital is as follows:

2004 2003 Qualifying shares $32 $31 Capital shares 21 21 Permanent shares 798 796 $ 851 $ 848

Note 15 CAPITAL STOCK

AUTHORIZED An unlimited number of Class “A” preferred shares, offered to members only, non-voting, redeemable by the issuer, the Fédération des caisses populaires de l’Ontario and the caisses populaires of Ontario, at the paid-up amount plus declared and unpaid dividends, non-participating with a non-cumulative dividend.

An unlimited number of Class “B” preferred shares, non-voting, redeemable by the issuer, the Fédération des caisses populaires de l’Ontario and the caisses populaires of Ontario, at the paid-up amount plus declared and unpaid dividends, non-participating with a non-cumulative dividend. These shares may be issued in one or more series.

An unlimited number of Class “C” preferred shares, non-voting, redeemable by the issuer, the Fédération des caisses populaires de l’Ontario, at the paid-up amount plus declared and unpaid dividends, non-participating with a non-cumulative dividend. These shares may be issued in one or more series.

Number Number of shares 2004 of shares 2003 ISSUED AND PAID Class A preferred shares 700,000 $ 7 700,000 $ 7 Class B preferred shares – Series 2000 127,228 1 127,228 1 Class B preferred shares – Series 2002 300,000 3 300,000 3 Class B preferred shares – Series 2003 700,000 7 700,000 7 Class C preferred shares – Series 1996 3,375,000 34 3,235,000 33 Class C preferred shares – Series 2002 2,720,000 27 2,607,000 26 7,922,228 $ 79 7,669,228 $ 77

Dividends were paid in the form of preferred shares, i.e. $1M for Class C – Series 1996 (2003: $1M) and $1M for Class C – Series 2002 (2003: $1M). DESJARDINS GROUP 127 COMBINED FINANCIAL STATEMENTS

Note 15 CAPITAL STOCK (CONTINUED)

CHARACTERISTICS OF PREFERRED SHARES Class B preferred shares – Series 2000, 2002 and 2003 The dividend rate will be equal to the higher of the average interest rate for the year on non-redeemable term deposits of 5 years plus 0.50% or 6.00%, Series 2000, of 1.00% or 5.25%, Series 2002 and 1.00% or 4.00%, Series 2003, i.e. the minimum rate. In case the issuer cannot pay the dividend in full, a partial dividend may be declared. The dividend may be declared every time the issuer’s surplus earnings allow it and that all regulatory requirements in terms of funding and cash have been met. The issuer may redeem, upon the holder’s request and the Board of Directors’ approval, up to a maximum of 10% of the issued and outstanding shares of the prior year. These shares are redeemable by the issuer effective September 30, 2005 for Series 2000, July 1, 2007 for Series 2002, and March 1, 2008 for Series 2003. Redemption of shares can be made only if the issuer does not or will not violate Section 84 of the Credit Union and Caisses Populaires Act of Ontario (1994), regarding capital adequacy.

Class C preferred shares – Series 1996 and 2002 The dividend rate will be equal to the higher of the average interest rate for the year on non-redeemable term deposits of 5 years plus 0.50% or 5.75%, Series 1996 and 5.25%, Series 2002, i.e. the minimum rate. In case the issuer cannot pay the dividend in full, a partial dividend may be declared. The dividend may be declared every time the issuer’s earnings allow it and that all regulatory requirements in terms of funding and cash have been met. The issuer may redeem, upon the holder’s request and the Board of Directors approval, up to a maximum of 10% of the issued and outstanding shares of the prior year. These shares are redeemable since May 1, 2003 for Series 1996 and effective May 1, 2008 for Series 2002. Redemption of shares can be made only if the issuer does not or will not violate Section 84 of the Credit Union and Caisses Populaires Act of Ontario (1994), regarding capital adequacy.

Note 16 INCOME TAXES ON SURPLUS EARNINGS

Income taxes on surplus earnings reported in the Combined Financial Statements are as follows:

2004 2003 2002 COMBINED STATEMENT OF INCOME Income taxes on surplus earnings $ 418 $ 314 $ 377 Tax recovery on patronage allocations to members (106) (143) (158) 312 171 219 COMBINED STATEMENT OF CHANGES IN EQUITY Income taxes recovered following payment of remuneration on permanent shares (8) (7) (9) TOTAL INCOME TAXES ON SURPLUS EARNINGS $ 304 $ 164 $ 210

Income taxes on surplus earnings include the following amounts:

2004 2003 2002 Current $ 199 $ 247 $ 202 Future 105 (83) 8 $ 304 $ 164 $ 210

The provision for income taxes on surplus earnings in the combined statement of income differs from the provision obtained by applying the Canadian statutory rate for the following reasons:

2004 2003 2002 Income taxes at the statutory rate $ 349 31.2 % $ 234 33.2 % $ 261 34.4 % Deduction for eligible small businesses taken by certain Desjardins Group entities (57) (5.1) (54) (7.6) (41) (5.4) Non-taxable investment income and other non-taxable items (4) (0.4) (4) (0.5) — — Impact of new tax rates (1) (0.1) — — 1 0.2 Previously unrecognized future income tax assets — — (13) (1.8) — — Other 25 2.2 8 1.0 (2) (0.3) $ 312 27.8 % $ 171 24.3 % $ 219 28.9 % COMBINED FINANCIAL STATEMENTS 128 DESJARDINS GROUP

Note 16 INCOME TAXES ON SURPLUS EARNINGS (CONTINUED)

Future income tax assets and liabilities are as follows:

2004 2003 FUTURE INCOME TAX ASSETS Buildings and equipment $43 $74 Policy and related liabilities 105 127 Cumulative provision for credit losses 161 155 Unused tax losses 12 18 Accrued benefit liabilities 155 146 $ 476 $ 520 FUTURE INCOME TAX LIABILITIES Buildings and equipment $66 $66 Securities 14 11 Accrued benefit assets 43 48 Other 70 7 $ 193 $ 132

Note 17 PATRONAGE ALLOCATIONS TO MEMBERS

Desjardins Group recorded a total of $266M ($300M in 2003 and $334M in 2002) in patronage allocations to caisse members, after the recovery of related income taxes. The annual expense is evaluated based on the patronage allocations paid out during the year and an estimate of allocations that will be paid out in 2005 for the year ended December 31, 2004. The distribution base takes into consideration interest on loans and deposits as well as various service charges collected from members. The caisses may pay out patronage allocations when legal and regulatory requirements have been met.

Note 18 EMPLOYEE FUTURE BENEFIT PLANS

Desjardins Group offers its employees a multi-employer defined benefit pension plan. For the Desjardins Group Pension Plan, 65% is financed by employers and 35% by participants. Benefits are calculated based on the number of years of participation in the plan and take into consideration the average salary for the employee’s five most highly-paid years.

Desjardins Group also allows its retired employees to maintain certain insurance coverage, also within a multi-employer defined benefit plan. The retiree pays a portion of the total premium based on years of service.

TOTAL CASH PAYMENTS Total cash payments on future employee benefits for 2004, which comprise contributions from Desjardins Group to funded pension plans and amounts paid directly to employees, to their beneficiaries or their estate as other non-funded plans totals $127M ($77M in 2003). DESJARDINS GROUP 129 COMBINED FINANCIAL STATEMENTS

Note 18 EMPLOYEE FUTURE BENEFIT PLANS (CONTINUED)

The following table contains information on these plans:

As at December 31

2004 2003 Pension Other Pension Other plans plans plans plans CHANGE IN ACCRUED BENEFIT OBLIGATION Accrued benefit obligation at beginning of year $ 4,005 $ 469 $ 3,429 $ 421 Service cost for the year 209 18 175 17 Interest cost 249 29 222 27 Benefits paid (140) (12) (129) (11) Transfers from other plans 1 — 2— Transfers to other plans (2) — (1) — Actuarial losses 122 28 307 15 ACCRUED BENEFIT OBLIGATION AT VALUATION DATE $ 4,444 $ 532 $ 4,005 $ 469 CHANGE IN FAIR VALUE OF PLAN ASSETS Fair value of plan assets at beginning of year $ 3,357 $ — $ 3,037 $ — Actual return on plan assets 320 — 353 — Employers’ contributions 115 — 66 — Participants’ contributions 64 — 35 — Benefits paid (140) — (129) — Transfers from other plans 1 — 2— Transfers to other plans (2) — (1) — Other changes (5) — (6) — FAIR VALUE OF PLAN ASSETS AT VALUATION DATE $ 3,710 $ — $ 3,357 $ — FUNDED STATUS Funding deficit at year-end $ (734) $ (532) $ (648) $ (469) Unamortized net losses (gains) 850 (12) 804 (43) Employers’ contributions after valuation date 39 — 17 — ACCRUED BENEFIT ASSETS (LIABILITIES) AT YEAR-END $ 155 $ (544) $ 173 $ (512) WEIGHTED AVERAGE ASSUMPTIONS Discount rate 5.75 % 5.75 % 6.00 % 6.00 % Expected rate of return on plan assets 7.00 — 7.00 — Rate of increase in future compensation 3.50 3.50 3.75 3.75

For valuation purposes, the assumed average annual rate of increase in health care cost per participant was set at 9.6% for 2005. According to the assumption chosen, this rate should gradually decline to 5.3% in 2009 and remain approximately at this level thereafter. As at December 31, 2004, the plans held investments totalling $12M ($7M in 2003) in Desjardins Group entities.

The valuation of the Plan’s assets and the accrued benefit obligations was carried out on September 30, 2004. The most recent actuarial valuation for funding purposes was carried out on January 1, 2004. The next actuarial valuation required for funding purposes is expected to take place on January 1, 2007.

The fair value of plan assets is detailed as follows as at December 31:

(as a percentage)

2004 2003 PRIMARY ASSET CATEGORIES Shares 51.9 % 51.6 % Bonds 24.3 27.7 Real estate 6.3 6.8 Other 17.5 13.9 COMBINED FINANCIAL STATEMENTS 130 DESJARDINS GROUP

Note 18 EMPLOYEE FUTURE BENEFIT PLANS (CONTINUED)

ELEMENTS OF DEFINED BENEFIT COST RECOGNIZED IN THE YEAR As at December 31

2004 2003 2002 Pension Other Pension Other Pension Other plans plans plans plans plans plans Service cost for the year, net of participants’ contributions $ 145 $ 18 $140$15$145$19 Interest cost 249 29 222 27 209 29 Actual return on assets (320) — (353) — 115 — Actuarial losses (gains) 122 28 307 15 (192) (91) Plan amendments — — — — — (51) Elements of employee future benefit costs before adjustments to recognize their long-term nature 196 75 316 57 277 (94) Adjustments to recognize the long-term nature of employee future benefit costs: Difference between the expected return and the actual return of plan assets 65 — 106 — (362) — Difference between the amount of the actuarial loss (gain) recognized for the year and the actual amount of the actuarial loss (gain) on accrued benefit obligations recognized for the year (111) (28) (307) (15) 192 91 Difference between the amortization of cost for past services for the year and the effective plan amendments for the year — (3) 6 (3) 11 51 DEFINED BENEFIT COSTS $ 150 $ 44 $121$39$118$48

There are significant uncertainties surrounding the assumptions retained, because like employee future benefits, they are long-term. The following table shows the impact of a percentage point on the key assumptions:

SENSITIVITY OF KEY ASSUMPTIONS IN 2004

Change Change in in defined obligation benefit costs PENSION PLANS Discount rate 1% increase $ (714) $ (83) 1% decrease 945 141 Rate of future compensation increase 1% increase 295 69 1% decrease (255) (58) Rate of compensation increase 1% increase — (38) 1% decrease —38 OTHER PLANS Discount rate 1% increase (83) (5) 1% decrease 109 12 Rate of future compensation increase 1% increase 51 1% decrease (4) (1)

The effect of a one percentage point increase or decrease in the assumed health care cost trend would have increased or decreased the defined benefit costs for the year by $7M and increased the benefit obligation by $77M or reduced the benefit obligation by $60M, respectively. DESJARDINS GROUP 131 COMBINED FINANCIAL STATEMENTS

Note 19 DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments are contracts whose value is derived from an underlying asset, interest rate, exchange rate or other financial index. They are used to transfer, modify or reduce actual or expected risks related to market risk. Derivative financial instruments can be traded over the counter or on regulated exchanges. Derivative financial instruments are mainly used for trading purposes, to manage interest rate and exchange rate risk, and to meet the needs of members and clients.

Interest rate derivatives include swaps, forward rate agreements, futures contracts and options. Interest rate swaps are transactions in which two parties 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. A forward rate agreement is an instrument that requires both parties to settle in cash at a later date any difference between a contracted interest rate and the market interest rate, based on a notional amount. Futures contracts are commitments to buy or sell commodities or financial instruments on a future specified date at a specified price. Futures are standardized contracts transacted on regulated exchanges and are subject to daily cash margining.

Foreign exchange contracts include over-the-counter spot and forward exchange contracts and currency swaps. Over-the-counter forward exchange contracts are commitments to exchange, at a future specified date, a given quantity of one currency for another at a rate of exchange determined by the two parties when the contract is signed. Spot transactions are similar to over-the-counter forward exchange contracts, except that delivery must be made within two business days following the contract date. Currency swaps are transactions in which two parties exchange fixed interest payments on notional amounts in different currencies. In a cross-currency interest rate swap, the parties exchange fixed and floating interest payments on notional amounts in different currencies. Desjardins Group utilizes currency swaps and cross-currency interest rate swaps to manage its foreign- currency denominated asset and liability exposures.

Options are contractual agreements under which the seller grants the purchaser the right but not the obligation to buy (call option) or sell (put option) a specified amount of a financial instrument at a specified price, on or before a specified date. The seller receives a premium from the purchaser in exchange for this right. Desjardins Group deals in options primarily to meet its clients’ needs and to manage its own asset and liability exposures.

The other derivative instruments used are related to financial index transactions and include options and swaps.

The table “Derivative Financial Instruments – Credit Risk” gives an overview of the portfolio of derivative financial instruments at Desjardins Group and the related credit risk.

NOTIONAL AMOUNT Notional principal amount of a contract to which a rate or price is applied in order to calculate the exchange of cash flows.

REPLACEMENT COST Cost of replacing, at the current market rates, all contracts having a positive market value, without factoring in the impact of master netting agreements or any collateral which may be obtained.

FUTURE CREDIT EXPOSURE Potential for future changes in replacement value over the remaining life of the contracts based on a formula prescribed by the Bank for International Settlements (BIS).

CREDIT RISK EQUIVALENT Total of the replacement cost and future credit exposure, except for certain items prescribed by the BIS, i.e., the replacement cost of forward exchange contracts with an original maturity of less than 14 days and exchange-traded derivatives subject to daily cash margining.

RISK-WEIGHTED BALANCE Risk related to the creditworthiness of the counterparty, calculated at the rates prescribed by the BIS. COMBINED FINANCIAL STATEMENTS 132 DESJARDINS GROUP

Note 19 DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

DERIVATIVE FINANCIAL INSTRUMENTS – CREDIT RISK

2004 2003 Notional Risk- Risk- principal Replacement Future credit Credit risk weighted Replacement Credit risk weighted amount cost exposure equivalent balance cost equivalent balance INTEREST RATE CONTRACTS Swaps $ 37,812 $ 605 $ 173 $ 778 $ 155 $ 616 $ 723 $ 178 Forward rate agreements 5,311 1121—31 Futures contracts 9,998 ———— 1—— Options purchased 230 1 — 1 — 22— Options written 1,440 ——————— 54,791 607 174 781 156 619 728 179 FOREIGN EXCHANGE CONTRACTS Forward contracts 7,638 123 74 195 43 109 174 39 Swaps 4,346 286 183 469 107 232 422 112 Options purchased 136 3362——— Options written 130 ——————— 12,250 412 260 670 152 341 596 151 OTHER CONTRACTS(1) Swaps 4,657 70 293 363 79 64 303 64 Futures contracts 33 ——————— Options purchased 2,063 267 151 418 142 176 333 114 Options written 1,984 ——————— 8,737 337 444 781 221 240 636 178 TOTAL DERIVATIVE FINANCIAL INSTRUMENTS $ 75,778 1,356 $ 878 $ 2,232 529 1,200 $ 1,960 508 Impact of master netting agreements(2) 814 280 535 218 TOTAL DERIVATIVE FINANCIAL INSTRUMENTS AFTER MASTER NETTING AGREEMENTS $ 542 $ 249 $ 665 $ 290

(1) Includes contracts related to indexed term savings products. (2) Impact of offsetting credit exposure when Desjardins Group holds master netting agreements without intent to settle net or simultaneously. DESJARDINS GROUP 133 COMBINED FINANCIAL STATEMENTS

Note 19 DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

The following table presents the maturities of the notional amounts of derivative financial instruments:

Maturity 2004 2003 Under From 1 to From 3 to Over 1 year 3 years 5 years 5 years Total Total INTEREST RATE CONTRACTS Swaps $ 10,525 $ 12,751 $ 10,865 $ 3,671 $ 37,812 $ 27,629 Forward rate agreements 5,076 235 — — 5,311 1,306 Futures contracts 8,584 1,414 — — 9,998 3,487 Options purchased 230 — — — 230 517 Options written 1,340 100 — — 1,440 877 25,755 14,500 10,865 3,671 54,791 33,816 FOREIGN EXCHANGE CONTRACTS Forward contracts 7,453 185 — — 7,638 6,533 Swaps 1,145 520 2,506 175 4,346 4,231 Options purchased 95 41 — — 136 — Options written 89 41 — — 130 — 8,782 787 2,506 175 12,250 10,764 OTHER CONTRACTS(1) Swaps 1,476 2,853 271 57 4,657 3,765 Futures contracts 33 — — — 33 — Options purchased 716 911 422 14 2,063 2,058 Options written 640 908 422 14 1,984 2,052 2,865 4,672 1,115 85 8,737 7,875 TOTAL DERIVATIVE FINANCIAL INSTRUMENTS $ 37,402 $ 19,959 $ 14,486 $ 3,931 $ 75,778 $ 52,455

(1) Includes contracts related to indexed term savings products.

The following table presents the derivative financial instruments according to the credit risk rating and the type of counterparty:

As at December 31

2004 2003 Replacement Risk-weighted Replacement Risk-weighted cost balance cost balance Credit risk rating(1) AAA, AA $ 871 $ 316 $ 766 $ 290 A 461 183 399 198 Not rated 24 30 35 20 Total 1,356 529 1,200 508 Impact of master netting agreements(2) 814 280 535 218 Total after master netting agreements $ 542 $ 249 $ 665 $ 290 Type of counterparty Financial institutions $ 1,232 $ 454 $ 904 $ 302 Other 124 75 296 206 Total 1,356 529 1,200 508 Impact of master netting agreements(2) 814 280 535 218 Total after master netting agreements $ 542 $ 249 $ 665 $ 290

(1) Credit risk ratings are established by recognized rating agencies. Non-rated counterparties are mainly members or clients of Desjardins Group. (2) Impact of offsetting credit exposure when Desjardins Group holds master netting agreements without intent to settle net or simultaneously. COMBINED FINANCIAL STATEMENTS 134 DESJARDINS GROUP

Note 20 INTEREST RATE SENSITIVITY AND MATURITY MATCHING

The following table illustrates Desjardins Group’s interest rate sensitivity position as at December 31:

Non-interest Immediately Under 3 From 3 to From 6 to From 1 to Over sensitive and 2004 rate-sensitive months 6 months 12 months 5 years 5 years liabilities Total ASSETS Cash and deposits with financial institutions $ — $ — $ — $ — $ — $ — $ 1,325 $ 1,325 Securities 245 4,389 292 552 6,002 7,000 1,526 20,006 Effective interest rate 2.68 % 5.31 % 5.52 % 4.29 % 5.69 % Loans 10,965 10,489 10,787 12,411 29,533 1,413 313 75,911 Effective interest rate 6.41 % 5.08 % 5.34 % 5.98 % 6.32 % Other assets — —————6,332 6,332 $ 11,210 $ 14,878 $ 11,079 $ 12,963 $ 35,535 $ 8,413 $ 9,496 $103,574 LIABILITIES AND EQUITY Deposits $ 9,904 $ 8,895 $ 5,347 $ 10,256 $ 23,391 $ 1,525 $ 17,669 $ 76,987 Effective interest rate 2.66 % 2.64 % 2.25 % 3.51 % 3.82 % Subordinated debentures and borrowings — — — 214 6 1,496 — 1,716 Effective interest rate 7.37 % 5.17 % 5.45 % Policy and related liabilities — —————9,821 9,821 Other liabilities — —————7,890 7,890 Equity — —————7,160 7,160 $ 9,904 $ 8,895 $ 5,347 $ 10,470 $ 23,397 $ 3,021 $ 42,540 $103,574 On-balance sheet gap $ 1,306 $ 5,983 $ 5,732 $ 2,493 $ 12,138 $ 5,392 $(33,044) $ — Derivative financial instruments gap according to notional amount — (5,108) (4,668) (2,894) 12,567 103 — — TOTAL GAP $ 1,306 $ 875 $ 1,064 $ (401) $ 24,705 $ 5,495 $(33,044) $ —

Non-interest Immediately Under 3 From 3 to From 6 to From 1 to Over sensitive and 2003 rate-sensitive months 6 months 12 months 5 years 5 years liabilities Total Total assets $ 9,409 $ 15,889 $ 10,247 $ 11,834 $ 32,865 $ 7,704 $ 8,322 $ 96,270 Total liabilities and equity $ 9,273 $ 8,300 $ 7,207 $ 10,010 $ 20,446 $ 2,408 $ 38,626 $ 96,270 On-balance sheet gap $ 136 $ 7,589 $ 3,040 $ 1,824 $ 12,419 $ 5,296 $(30,304) $ — Derivative financial instruments gap according to notional amount — (8,411) (863) 56 8,991 227 — — TOTAL GAP $ 136 $ (822) $ 2,177 $ 1,880 $ 21,410 $ 5,523 $(30,304) $ —

The determination of the interest rate gap, which is based on the earlier of the repricing or maturity date of assets, liabilities and derivative financial instruments used to manage interest rate risk, relies on various assumptions.

The interest rate gap may change significantly in subsequent periods based on member and client preferences, and the application of the Group’s asset and liability management policy. DESJARDINS GROUP 135 COMBINED FINANCIAL STATEMENTS

Note 20 INTEREST RATE SENSITIVITY AND MATURITY MATCHING (CONTINUED)

The main assumptions used are:

NON-INTEREST SENSITIVE INSTRUMENTS LIABILITIES Some balance sheet items, such as equity securities and equity, are not sources of interest rate risk. These items are indicated in the Non-interest sensitive instrument column.

In addition, policy and related liabilities are presented in this column. During the normal course of business, the life and health insurance subsidiary has adopted a policy of matching assets and liabilities which clearly defines acceptable differences in order to prevent mismatched cash flows. Compliance with the policy is strictly monitored on a regular basis by the life and health insurance subsidiary. One of the controls is to test the difference between the duration of liabilities and the duration of the assets matching them. The duration measures the sensitivity of the market value of assets and liabilities to changes related to interest rates. This test is performed for savings products and insurance products separately, because they have different matching policies stipulating different acceptable targets, and because savings products are more interest-sensitive than insurance products. For the savings product segment as at December 31, 2004, the duration of assets was higher than the duration of liabilities by 0.20 years (the duration of assets was lower than the duration of liabilities by 0.10 years in 2003 and higher by 0.12 years in 2002). Since the valuation method required for savings already recognizes the impact of possible changes in interest rates, a sudden increase or decrease in interest rates would not have a material impact on the life and health insurance subsidiary.

ASSETS Assets such as loans are reported based on the scheduled repayment date.

DEPOSITS OR LIABILITIES Liabilities such as deposits are reported based on the scheduled payment date. However, non-interest-bearing deposits and non-maturity deposits with an interest rate that does not move on a specific rate basis, such as the prime rate, are considered non-interest sensitive.

EFFECTIVE INTEREST RATE The effective interest rates indicated represent the historical rates for fixed-rate instruments carried at unamortized cost, and the current market rates for variable-rate instruments or for instruments carried at fair value.

Note 21 FAIR VALUE OF FINANCIAL INSTRUMENTS

FINANCIAL INSTRUMENTS Although estimated fair value is used to determine the approximate value at which these financial instruments could be traded in a current transaction between willing parties, a number of these financial instruments have no trading market. As a result, their fair value is based on estimates using net present value and other valuation methods which are strongly influenced by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates, which reflect varying degrees of risk. Furthermore, the estimated fair values presented do not reflect the value of assets and liabilities that are not considered financial instruments, such as land, buildings, equipment, and intangible assets. Also, the value of other non-financial assets and liabilities has been excluded. Given the role of judgment in applying many of the accepted estimation and valuation techniques for calculating fair value, fair values are not necessarily comparable among financial institutions. Estimated fair value reflects market conditions on a given date, and for this reason cannot be representative of future fair values. They also cannot be considered as being realizable in the event of immediate settlement of these instruments.

The following methods and assumptions were used to estimate the fair values of the financial instruments:

FINANCIAL INSTRUMENTS VALUED AT CARRYING VALUE The fair value of certain financial instruments presented in the “Financial instruments” table that are maturing in the short term was assumed to be approximately equal to their carrying value. These financial instruments include the following items: “Cash and deposits with financial institutions”, “Other financial assets”, and “Other financial liabilities”.

SECURITIES The estimated fair value of the securities is disclosed in Note 4 to the financial statements as a function of quoted market prices, when available. When quoted market prices are not available, the estimated fair value is determined using the market rates for similar securities.

LOANS The fair value of loans is estimated using a discounted cash flow calculation method that uses market interest rates currently charged for similar new loans as at December 31, applied to expected maturity amounts. For impaired loans, the fair value is equal to the carrying value in accordance with the valuation techniques described in Note 1 to the financial statements.

DEPOSITS The fair value of deposits with no stated maturity is assumed to be equal to their carrying value. The estimated fair value of fixed rate deposits is determined by discounting the contractual cash flows using market interest rates currently being offered for deposits with relatively the same remaining terms.

POLICY AND RELATED LIABILITIES The fair value of policy liabilities is based on the fair value of the related assets hedging them, given the interrelationship existing between these two balance sheet items. COMBINED FINANCIAL STATEMENTS 136 DESJARDINS GROUP

Note 21 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

SUBORDINATED DEBENTURES AND BORROWINGS The fair value of subordinated debentures and borrowings is based on the market rates for similar issues or borrowings, or on the rates currently offered to Desjardins Group for debt securities with the same remaining terms.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS WITH CONTRACTUAL AMOUNTS REPRESENTING A CREDIT RISK As credit commitments are primarily assigned variable interest rates, they do not present an interest rate risk.

DERIVATIVE FINANCIAL INSTRUMENTS The fair value of derivative financial instruments is calculated using pricing models that incorporate current market prices and the contractual prices of the underlying instruments, the time value of money and yield curves. The fair value of derivative financial instruments is presented without taking into account the impact of legally binding master netting agreements.

FINANCIAL INSTRUMENTS (EXCLUDING DERIVATIVE FINANCIAL INSTRUMENTS)

2004 2003 Fair Carrying Fair Carrying value value Difference value value Difference ASSETS Cash and deposits with financial institutions $ 1,325 $ 1,325 $ — $ 1,389 $ 1,389 $ — Securities 20,770 20,006 764 20,163 19,461 702 Loans 76,377 75,911 466 69,718 69,273 445 Other financial assets 2,469 2,469 — 2,568 2,568 — LIABILITIES Deposits 77,649 76,987 662 73,404 72,219 1,185 Policy and related liabilities 10,319 9,821 498 9,590 9,151 439 Borrowings 145 127 18 172 155 17 Subordinated debentures 1,656 1,589 67 1,295 1,154 141 Other financial liabilities 5,394 5,394 — 5,196 5,196 —

DERIVATIVE FINANCIAL INSTRUMENTS(1)

2004 2003 Positive Negative Net fair Positive Negative Net fair value value value value value value INTEREST RATE CONTRACTS Swaps $ 605 $ 218 $ 387 $ 616 $ 218 $ 398 Forward rate agreements 1 2 (1) — 2 (2) Futures contracts — — — 1— 1 Options purchased 1 — 1 2— 2 Options written — 4 (4) ——— FOREIGN EXCHANGE CONTRACTS Forward contracts 123 153 (30) 109 128 (19) Swaps 286 713 (427) 232 450 (218) Options purchased 3 — 3 ——— Options written — 3 (3) ——— OTHER CONTRACTS(2) Swaps 70 45 25 64 14 50 Futures contracts — — — ——— Options purchased 267 — 267 176 — 176 Options written — 266 (266) — 175 (175) 1,356 1,404 (48) 1,200 987 213 Impact of master netting agreements(3) 814 814 535 535 TOTAL DERIVATIVE FINANCIAL INSTRUMENTS AFTER MASTER NETTING AGREEMENTS $ 542 $ 590 $ (48) $ 665 $ 452 $ 213

(1) The balances that appear in the table include derivative financial instruments recorded under “Securities - Investment account” for an amount of $82M in 2004 ($54M in 2003). (2) Includes contracts related to indexed term savings products. (3) Impact of offsetting credit exposure when Desjardins Group holds master netting agreements without intent to settle net or simultaneously. DESJARDINS GROUP 137 COMBINED FINANCIAL STATEMENTS

Note 22 COMMITMENTS, GUARANTEES AND CONTINGENCIES

COMMITMENTS Financial instruments with contractual amounts representing a credit risk The primary purpose of these instruments is to ensure that members and clients have funds available when necessary for variable terms to maturity and under specific conditions. The collateral security requirements of Desjardins Group with respect to these credit instruments are generally the same as for loans.

Guarantees and standby letters of credit are irrevocable undertakings by Desjardins Group to make payments for a member or client that cannot meet its financial obligations toward third parties, and represent the same credit risk as loans.

In securities lending transactions, Desjardins Group acts as an agent for the owner of a security who agrees to lend it to a borrower for a fee under the terms of a pre-arranged contract. Securities loans must at all times be guaranteed by the borrower.

Credit commitments represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit.

The total amount of credit instruments does not necessarily represent future cash requirements since many of these instruments will expire or terminate without being funded. The following table represents the contractual amounts:

2004 2003 Guarantees and standby letters of credit $ 482 $ 352 Securities lending(1) 4,025 4,149 Credit commitments Original term of one year or less 26,180 23,683 Original term of over one year 2,970 2,124 $ 33,657 $ 30,308

(1) Secured by marketable securities, generally issued by the federal and provincial governments, representing 105% of the contractual amount.

COMMITMENTS UNDER LEASES AND SERVICE CONTRACTS The minimum future commitments as at December 31, 2004 under building and equipment leases and service contracts were as follows:

Information technology Premises and equipment and telecommunications 2005 $ 88 $ 288 2006 66 288 2007 55 288 2008 32 204 2009 23 204 2010 and thereafter 146 271 $ 410 $ 1,543

Building lease expenses, net of rental income, included in non-interest expenses for the year ended December 31, 2004 were $45M ($40M in 2003 and $35M in 2002).

GUARANTEES A guarantee is a contract or an indemnification agreement that contingently requires the Desjardins Group entities to make payments to the guaranteed party based on changes in i) an interest rate, an exchange rate, a security price or commodity price, or a price or rate index or the occurrence or non-occurrence of a specified event, ii) a third party’s failure to perform under an obligating agreement or iii) a third party’s failure to repay its debt when it becomes due and payable.

Desjardins Group entities have issued the following guarantees to third parties:

GUARANTEES AND STANDBY LETTERS OF CREDIT Guarantees and standby letters of credit represent an irrevocable commitment by Desjardins Group to make payments in the event that a member or client cannot meet its obligations to third parties. These instruments are generally collateralized in accordance with the same policy Desjardins Group has with respect to loans. The term of these products does not exceed five years.

The general provision for credit losses covers all the credit risks including guarantees and standby letters of credit. COMBINED FINANCIAL STATEMENTS 138 DESJARDINS GROUP

Note 22 COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)

DERIVATIVE FINANCIAL PRODUCTS Some Desjardins Group subsidiaries have performed credit default swaps with bank counterparties. These subsidiaries have made an irrevocable commitment to the counterparties to assume the credit risk for the bonds that constitute the underlying assets for the swaps. The guarantee given by these subsidiaries is to provide partial or total payment for one security or a group of securities following an unfavourable credit event leading to default on payment.

The maximum amount of the guarantee comprises the notional amount of the swap. The amounts disbursed will depend on the nature of the default and the recovery rates of the securities in collection.

The underlying assets for the swaps are corporate bonds or tranches within high-quality securitization structures. All underlying securities are rated by credit agencies as equal to or greater than A as at December 31, 2004. The swap contracts expire through September 2016.

SECURITIES LENDING AND BORROWING In securities lending transactions, entities of Desjardins Group act as agents for the owner of a security who agrees to lend it to a borrower for a fee under the terms of a pre-arranged contract. Securities loans must at all times be secured by the borrower (secured by marketable securities generally issued by the federal and provincial governments). There is a risk of loss if the borrower defaults to honour its commitments and the value of the collateral is not adequate to cover the amount of the loan. The credit risk related to these transactions is considered to be minimal since the entities deal only with reputable stock brokerage firms and financial institutions. Furthermore, the borrower pledges securities of a value at least equivalent to the amount of the loan adjusted on a daily basis. For purposes of securities lending transactions, Desjardins Group concludes agreements that guarantee the value of the borrowed securities.

OTHER INDEMNIFICATION COMMITMENTS In the normal course of its operations, Desjardins Group enters into a number of agreements containing indemnification provisions such as those normally related to the sale of assets, purchase agreements, service delivery agreements, outsourcing agreements, lease agreements, compensation agreements and transfer of assets or shares. Under these agreements, Desjardins Group may be liable for indemnifying the counterparty if certain events occur, such as, amendments to statutes and regulations (including tax rules) as well as to declared financial situations, the existence of undeclared liabilities and losses resulting from third-party activities or as a result of third-party litigation. The indemnification provisions vary from one contract to the next. In several cases, no predetermined amount or limit appears in the contract, and future events that trigger a payment are difficult to foresee. Therefore, Desjardins Group is not in a position to provide a reasonable estimate of the maximum amount that it could be required to pay counterparties. Historically, payments made under these commitments have been negligible.

OTHER GUARANTEES A Desjardins Group subsidiary gave an irrevocable joint and several guarantee for the obligations assumed by Desjardins Credit Union Inc. (DCU), until April 1, 2006 under the terms of a contract signed between the Government of Ontario and DCU regarding the acquisition of assets of the Province of Ontario Savings Office. The agreement contains several conditions, including minimum standards for personnel and the operation of branches. The Desjardins Group subsidiary is not in a position to make a reasonable estimate of the maximum amount that it could be required to pay under this agreement.

No amount was presented for each of these guarantees in the combined balance sheet as at December 31, 2004 and 2003.

Maximum potential amount of future payments as guarantees:

2004 2003 Guarantees and standby letters of credit $ 367 $ 342 Derivative financial instruments 195 100 Securities lending(1) 2,810 4,149

(1) Net of the risk transfer to clients. DESJARDINS GROUP 139 COMBINED FINANCIAL STATEMENTS

Note 22 COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)

PLEDGED ASSETS Assets pledged by Desjardins Group in the normal course of business are presented in the following table:

2004 2003 Assets pledged to the following counterparties: Bank of Canada $ 137 $ 110 Clearing systems, payment systems and depositories 159 224 Regulated entities — 9 Assets pledged for the following transactions: Transactions on derivative financial instruments 1,214 1,142 Securities borrowing and lending 46 102 Obligations related to securities sold under repurchase agreements — 22 $ 1,556 $ 1,609

CONTINGENCIES Over the past several years, legal actions have been filed against a number of insurance companies operating in the United States and Canada related to the sale of vanishing premium life insurance policies. In certain cases, these actions have resulted in substantial payments for these companies. A Desjardins Group subsidiary has been named in a class action suit related to such policies in Canada. This case is in the preliminary stages, but based on a 2004 Supreme Court of Canada ruling on a case involving several similarities, the risk of this authorization being granted and the class action suit being unfavourable for the subsidiary is minimal.

In addition, other Desjardins Group entities are engaged in various lawsuits arising in the normal course of business. Many of these suits are in connection with measures taken by the entities to collect past-due loans and exercise their rights in respect of assets given as collateral for a loan. In Management’s opinion, the total amount of contingent liability resulting from these lawsuits will not have a material impact on the financial position of Desjardins Group.

Note 23 CONCENTRATION OF CREDIT RISK

A concentration of credit risk exists when a certain number of borrowers or counterparties engaged in similar activities are located in the same geographical region or have similar characteristics. The evolution of economic, political or other conditions may compromise their abilities to meet their contractual obligations. By far most of the securities, loans and deposits of Desjardins Group are related to the Québec market.

Note 24 SEGMENTED INFORMATION

Desjardins Group is a cooperative financial group. Under the authority of the Board of Directors of the Fédération des caisses Desjardins du Québec, the President of Desjardins Group manages the cooperative network and the subsidiary companies. The cooperative network, whose main activity is financial intermediation, mainly groups together the caisses, the Fédération des caisses Desjardins du Quebec, the Fédération des caisses populaires de l’Ontario, Caisse centrale Desjardins and Fonds de sécurité Desjardins. The activities of the network of subsidiaries are primarily in the areas of insurance, trust services and asset management, which are grouped into Desjardins Financial Corporation. The activities of the network also include securities brokerage, venture capital investment, and other activities that are mainly grouped under the subsidiaries Desjardins Securities Inc. and Desjardins Venture Capital.

The activities of the two networks complement each other. Transactions between them in the normal course of business are valued at the exchange value, which corresponds to the amount of consideration agreed to and accepted by the partners. The results of the main segments reflect internal financial reporting systems and are compatible with the rules used in preparing the Combined Financial Statements of Desjardins Group. The accounting policies of the segments are the same as those described in Note 1 to the Combined Financial Statements. COMBINED FINANCIAL STATEMENTS 140 DESJARDINS GROUP

Note 24 SEGMENTED INFORMATION (CONTINUED)

Insurance, Securities trust services brokerage, Financial and asset venture capital 2004 intermediation management and other Combined (1) Net interest income $ 2,896 $ 608 $ (15) $ 3,488 Other income 1,066 3,781 346 4,953 Provisions for credit losses (111) 17 — (94) Non-interest expenses (2,822) (3,935) (324) (6,840) OPERATING SURPLUS EARNINGS FROM CONTINUING OPERATIONS 1,029 471 7 1,507 Income taxes on surplus earnings (266) (151) (1) (418) Non-controlling interests — (18) — (18) Discontinued operations and operations held for sale — 1 — 1 SURPLUS EARNINGS BEFORE PATRONAGE ALLOCATIONS TO MEMBERS 763 303 6 1,072 Patronage allocations to members, net of income taxes 266 — — 266 SURPLUS EARNINGS FOR THE YEAR AFTER PATRONAGE ALLOCATIONS TO MEMBERS $ 497 $ 303 $ 6 $ 806 SEGMENT ASSETS $ 87,418 $ 13,482 $ 2,674 $103,574

Insurance, Securities trust services brokerage, Financial and asset venture capital 2003 intermediation management and other Combined (1) Net interest income $ 2,872 $ 558 $ (22) $ 3,451 Other income 814 3,527 233 4,280 Provisions for credit losses (82) 7 — (75) Non-interest expenses (2,586) (3,883) (271) (6,489) OPERATING SURPLUS (DEFICIT) EARNINGS FROM CONTINUING OPERATIONS 1,018 209 (60) 1,167 Income taxes on surplus earnings (305) (17) 8 (314) Non-controlling interests — (25) — (25) Discontinued operations and operations held for sale —426 SURPLUS EARNINGS (DEFICIT) BEFORE PATRONAGE ALLOCATIONS TO MEMBERS 713 171 (50) 834 Patronage allocations to members, net of income taxes 300 — — 300 SURPLUS EARNINGS (DEFICIT) FOR THE YEAR AFTER PATRONAGE ALLOCATIONS TO MEMBERS $ 413 $ 171 $ (50) $ 534 SEGMENT ASSETS $ 80,975 $ 13,004 $ 2,291 $ 96,270

Insurance, Securities trust services brokerage, Financial and asset venture capital 2002 intermediation management and other Combined (1) Net interest income $ 2,808 $ 490 $ (21) $ 3,267 Other income 747 2,934 268 3,643 Provisions for credit losses (113) 2 — (111) Non-interest expenses (2,366) (3,191) (284) (5,525) OPERATING SURPLUS (DEFICIT) EARNINGS FROM CONTINUING OPERATIONS 1,076 235 (37) 1,274 Income taxes on surplus earnings (296) (82) 1 (377) Non-controlling interests — (24) — (24) Discontinued operations and operations held for sale — 2 (13) (11) SURPLUS EARNINGS (DEFICIT) BEFORE PATRONAGE ALLOCATIONS TO MEMBERS 780 131 (49) 862 Patronage allocations to members, net of income taxes 334 — — 334 SURPLUS EARNINGS (DEFICIT) FOR THE YEAR AFTER PATRONAGE ALLOCATIONS TO MEMBERS $ 446 $ 131 $ (49) $ 528 SEGMENT ASSETS $ 72,708 $ 11,920 $ 2,018 $ 86,646

(1) The difference between the total of results and the sum of the operating segment results presented above is due to intersegment transactions. DESJARDINS GROUP 141 COMBINED FINANCIAL STATEMENTS

Note 25 BUSINESS ACQUISITIONS

2003 On September 30, 2003, a subsidiary of Desjardins Group concluded an agreement to acquire all common shares of Northwest Asset Management Inc. and its subsidiary Northwest Mutual Funds Inc., a mutual fund manager and distributor. This acquisition was accounted for using the purchase method. The purchase price totalled $23M, which is comprised of $20M paid in cash in 2003; $2M was paid in 2004 and $1M will be paid in 2005. The excess of the purchase price over the fair value of net liabilities assumed, an amount of $42M, was at the outset attributed to management contracts and to the Northwest trademark as intangible assets in the amounts of $10M and $3M, respectively. The balance of $29M was attributed to goodwill and will be tax deductible and recognized in full in the “Insurance, Trust Services, and Asset Management” sector. The intangible assets acquired have indefinite useful lives and are not amortized.

The details of the purchase price are as follows:

Tangible assets acquired Cash $3 Other assets 12 $15 Liabilities assumed Accounts payable $2 Borrowings 30 Non-controlling interests 2 $34 Net liabilities assumed $19 Intangible assets with indefinite useful lives 13 Goodwill 29 Purchase price $23

Note 26 DISCONTINUED OPERATIONS AND OPERATIONS HELD FOR SALE

2004 In 2003, the life and health insurance subsidiary of Desjardins Group received an offer to purchase its Bahamas division that it operates under the name Imperial Life Financial. In 2004, discussions took place in an effort to conclude this transaction, but it did not occur. The subsidiary’s Board of Directors authorized the plan to withdraw its operations from the Bahamas through the sale of its division. On December 31, 2004, the Bahamas regulatory authorities approved this transaction (see Note 29). As at December 31, 2004, the assets, liabilities, operating income, and cash flows were presented in the Combined Financial Statements as operations held for sale.

The tables below summarize the Bahamas division’s financial data (insurance, trust services and asset management segment) as at December 31, 2004 and 2003, whose operations are held for sale.

BALANCE SHEET ITEMS HELD FOR SALE

2004 2003 Securities $99 $90 Loans 54 57 Other assets 16 19 TOTAL ASSETS FROM OPERATIONS HELD FOR SALE $ 169 $ 166 Commitment to insurees $ 146 $ 143 Other liabilities 1 2 TOTAL LIABILITIES FROM OPERATIONS HELD FOR SALE $ 147 $ 145

RESULTS OF OPERATIONS HELD FOR SALE

2004 2003 2002 Net interest income $12 $11$12 Other income 64 66 63 TOTAL INCOME 76 77 75 Non-interest expense 75 73 73 SURPLUS EARNINGS FROM OPERATIONS HELD FOR SALE $1 $4 $2 COMBINED FINANCIAL STATEMENTS 142 DESJARDINS GROUP

Note 26 DISCONTINUED OPERATIONS AND OPERATIONS HELD FOR SALE (CONTINUED)

CASH FLOWS OF OPERATIONS HELD FOR SALE

2004 2003 2002 Cash flows from operating activities $ 13 $ (2) $ 22 Cash flows from investing activities (12) 2 (31) $1 $ — $ (9)

2003 On September 28, 2003, Sécur, a subsidiary of the Desjardins Group, sold assets related to securities transportation and automated service for a cash consideration of $5M and a $5M balance of sale including interest payable in instalments until September 2010.

The breakdown of discontinued operations in the combined statement of income is presented in the following table for the year ended December 31:

2003 2002 Loss on disposal of assets $ (1) $ — Operating surplus earnings (deficit) until date of sale 3 (13) $ 2 $ (13)

Note 27 RESTRUCTURING

On May 12, 2004, the Board of Directors of the Fédération des caisses Desjardins du Québec approved an action plan that provides for, among other initiatives, the repositioning of certain operations of subsidiaries within the Fédération itself.

As a result, Desjardins Trust’s (the Trust) manufacturing and investment fund distribution operations will be transferred to the Fédération on January 1, 2005. With respect to the fiduciary nature of the Trust, these operations will be maintained in a trust company related to the Fédération.

Furthermore, the operations of Desjardins Financial Corporation, which heads the insurance, trust services, and asset management segment, is limited to the holding of the capital stock of its subsidiaries.

Note 28 RELATED PARTY TRANSACTIONS

Desjardins Group carries out transactions with related entities. These transactions are recorded at the exchange value.

The transactions with these entities resulted, in 2004, in revenues of $30M ($22M in 2003 and $6M in 2002) and expenses of $17M ($23M in 2003 and $7M in 2002), whereas the combined balance sheet includes assets of $172M ($157M as at December 31, 2003) as well as liabilities of $347M ($641M as at December 31, 2003).

Note 29 SUBSEQUENT EVENT

In January 2005, negotiations took place between the Desjardins Group life and health insurance subsidiary and a prospective purchaser in an effort to conclude the sale of its Bahamas division. On January 19, 2005, these parties finally agreed to the conditions of an agreement, signed the sales contract, and concluded the transaction. The operations of this division are presented as operations held for sale (see Note 26). The resulting gain from the transaction, the measurement of which will require various work and estimates that have not yet been performed, will be recognized in 2005. DESJARDINS GROUP 143 ADDITIONAL INFORMATION

FIVE-YEAR STATISTICAL REVIEW OF DESJARDINS GROUP

COMBINED BALANCE SHEET

As at December 31 (in millions of dollars)

2004 2003(1) 2002(1) 2001(1) 2000(1) ASSETS Cash and deposits with financial institutions $ 1,325 $ 1,389 $ 1,392 $ 1,339 $ 1,078 Securities Investment account 18,117 18,428 16,002 15,751 15,106 Trading account 1,889 1,033 774 383 200 20,006 19,461 16,776 16,134 15,306 Loans Residential mortgages 43,199 38,380 34,941 32,107 30,365 Consumer, credit card and other personal loans 13,372 12,466 11,272 10,416 10,055 Business and government 20,093 19,274 17,680 17,331 16,698 76,664 70,120 63,893 59,854 57,118 Cumulative provision for credit losses (753) (847) (903) (943) (866) 75,911 69,273 62,990 58,911 56,252 Other assets 6,332 6,147 5,488 5,474 5,478 TOTAL ASSETS $103,574 $ 96,270 $ 86,646 $ 81,858 $ 78,114 LIABILITIES AND EQUITY LIABILITIES Deposits Individuals $ 54,771 $ 52,077 $ 48,431 $ 46,627 $ 44,686 Business and government 15,351 14,047 12,345 11,193 9,130 Deposit-taking institutions and other 6,865 6,095 3,811 4,353 5,186 76,987 72,219 64,587 62,173 59,002 Policy and related liabilities 9,821 9,151 8,208 7,920 7,698 Borrowings 127 155 238 271 245 Subordinated debentures 1,589 1,154 1,208 444 494 Other liabilities 7,890 7,219 6,566 5,730 5,763 19,427 17,679 16,220 14,365 14,200 EQUITY Share capital 851 848 835 828 802 Capital stock 79 77 74 38 36 Undistributed surplus earnings 553 535 493 336 292 Reserves 5,677 4,912 4,437 4,118 3,782 7,160 6,372 5,839 5,320 4,912 TOTAL LIABILITIES AND EQUITY $103,574 $ 96,270 $ 86,646 $ 81,858 $ 78,114

PRIMARY FINANCIAL MEASURES

As at December 31 (millions of dollars and as a percentage)

2004 2003(1) 2002(1) 2001(1) 2000(1) Tier 1 capital ratio – BIS 13.58 % 12.97 % 12.78 %(3) 12.95 %(3) 12.26 %(3) Total capital ratio 13.70 13.08 13.34(3) 11.86(3) 11.33(3) Return on equity 15.8 13.7 15.5 11.8 10.5 Productivity ratio(2) 66.1 67.9 65.1 68.4 74.4 Impaired loans coverage ratio 195.1 145.0 140.4 123.3 97.1 Net impaired loans as a percentage of gross loans (0.48) (0.38) (0.41) (0.30) 0.05 Average assets $ 99,878 $ 91,452 $ 84,252 $ 79,986 $76,571 Average loans 72,597 66,117 60,951 57,582 55,561 Average deposits 74,350 68,094 63,380 60,588 58,312

(1) Data restated to reflect the presentation adopted in 2004. (2) The productivity ratio is established according to the financial intermediation segment and includes the share of earnings generated by caisse investments in the subsidiaries. (3) The ratio is not restated to take into account the caisses of Ontario and the Fédération des caisses populaires de l’Ontario. The addition would not have had a significant impact on these ratios. ADDITIONAL INFORMATION 144 DESJARDINS GROUP

COMBINED STATEMENT OF INCOME

For the year ended December 31 (in millions of dollars)

2004 2003(1) 2002(1) 2001(1) 2000(1) INTEREST INCOME Loans $ 4,378 $ 4,296 $ 4,135 $ 4,396 $ 4,156 Securities 821 848 783 802 1,014 5,199 5,144 4,918 5,198 5,170 INTEREST EXPENSE Deposits 1,616 1,609 1,573 2,257 2,383 Subordinated debentures and borrowings 95 84 78 53 49 1,711 1,693 1,651 2,310 2,432 NET INTEREST INCOME 3,488 3,451 3,267 2,888 2,738 OTHER INCOME Net premiums 3,267 3,016 2,563 2,329 2,016 Deposit and payment service charges 402 393 370 373 357 Lending fees and card service revenues 229 190 161 142 135 Trust services and securities dealings 317 234 189 181 188 Other 738 447 360 413 421 4,953 4,280 3,643 3,438 3,117 TOTAL INCOME 8,441 7,731 6,910 6,326 5,855 PROVISIONS FOR CREDIT LOSSES 94 75 111 240 130 NON-INTEREST EXPENSES Claims, benefits, annuities and changes in insurance provisions 2,975 2,983 2,299 2,204 2,079 Salaries and fringe benefits 1,951 1,766 1,606 1,478 1,466 Premises, equipment and furniture, including depreciation 340 340 330 347 457 Communications 212 198 199 209 191 Other 1,362 1,202 1,091 1,030 885 6,840 6,489 5,525 5,268 5,078 OPERATING SURPLUS EARNINGS FROM CONTINUING OPERATIONS 1,507 1,167 1,274 818 647 Income taxes on surplus earnings 418 314 377 184 118 SURPLUS EARNINGS FROM CONTINUING OPERATIONS BEFORE NON-CONTROLLING INTERESTS AND PATRONAGE ALLOCATIONS TO MEMBERS 1,089 853 897 634 529 Non-controlling interests 18 25 24 23 30 SURPLUS EARNINGS FROM CONTINUING OPERATIONS BEFORE PATRONAGE ALLOCATIONS TO MEMBERS 1,071 828 873 611 499 Discontinued operations and operations held for sale 1 6 (11) (9) (4) SURPLUS EARNINGS BEFORE PATRONAGE ALLOCATIONS TO MEMBERS 1,072 834 862 602 495 Patronage allocations to members 372 443 492 272 145 Tax recovery on patronage allocations to members (106) (143) (158) (79) (42) SURPLUS EARNINGS FOR THE YEAR AFTER PATRONAGE ALLOCATIONS TO MEMBERS $806 $ 534 $ 528 $ 409 $ 392

(1) Data restated to reflect the presentation adopted in 2004. DESJARDINS GROUP 145 ADDITIONAL INFORMATION

PRINCIPAL QUARTERLY INFORMATION OF DESJARDINS GROUP

COMBINED STATEMENT OF INCOME (unaudited, by quarter and in millions of dollars)

2004 2003(1) Q4 Q3(1) Q2(1) Q1(1) Q4 Q3 Q2 Q1 Net interest income $ 873 $ 888 $ 862 $ 865 $ 888 $ 904 $ 870 $ 789 Other income 1,272 1,293 1,158 1,230 1,207 1,048 1,010 1,015 Total income 2,145 2,181 2,020 2,095 2,095 1,952 1,880 1,804 Provisions for credit losses (recoveries) 22 12 31 29 10 (8) 38 35 Non-interest expenses 1,819 1,690 1,626 1,705 1,913 1,553 1,513 1,510 OPERATING SURPLUS EARNINGS ON CONTINUING OPERATIONS 304 479 363 361 172 407 329 259 Income taxes on surplus earnings 94 133 89 102 5 132 101 76 Non-controlling interests 26556874 Discontinued operations and operations held for sale 2 (2) — (1) (7) — — 1 SURPLUS EARNINGS BEFORE PATRONAGE ALLOCATIONS TO MEMBERS 206 342 269 255 168 267 221 178 Patronage allocations to members, net of taxes recovered 68 64 72 62 75 96 64 65 SURPLUS EARNINGS FOR THE PERIOD AFTER PATRONAGE ALLOCATIONS TO MEMBERS $ 138 $ 278 $ 197 $ 193 $ 93 $ 171 $ 157 $ 113

COMBINED BALANCE SHEET (unaudited, at quarter-end and in millions of dollars)

2004 2003(1) Q4 Q3(1) Q2(1) Q1(1) Q4 Q3 Q2 Q1 ASSETS Cash and deposits with financial institutions $ 1,325 $ 1,121 $ 1,362 $ 1,001 $ 1,389 $ 1,155 $ 1,399 $ 926 Securities – investment account 18,117 17,914 17,696 17,787 18,428 17,575 18,163 15,410 Securities – trading account 1,889 1,477 1,342 1,145 1,033 1,062 653 748 Residential mortgages 43,199 42,160 41,057 39,121 38,380 37,458 36,733 35,291 Consumer, credit card, and other personal loans 13,372 13,305 12,977 12,736 12,466 12,299 11,858 11,523 Loans to business and government 20,093 19,644 19,314 19,965 19,274 18,838 18,469 18,536 Cumulative provision for credit losses (753) (780) (847) (852) (847) (867) (902) (914) Other assets 6,332 6,719 6,918 7,264 6,147 6,311 6,333 6,289 TOTAL ASSETS $103,574 $101,560 $ 99,819 $ 98,167 $ 96,270 $ 93,831 $ 92,706 $ 87,809 LIABILITIES AND EQUITY Deposits by individuals $ 54,771 $ 53,556 $ 53,430 $ 52,015 $ 52,077 $ 50,634 $ 50,724 $ 48,794 Deposits by business and government 15,351 14,913 14,849 14,165 14,047 13,819 14,435 12,099 Deposits by deposit-taking institutions and other 6,865 7,041 6,270 6,304 6,095 5,463 3,897 3,801 Policy and related liabilities 9,821 9,936 9,731 9,575 9,151 8,702 8,521 8,331 Subordinated debentures and borrowings 1,716 1,722 1,748 1,761 1,309 1,332 1,300 1,324 Other liabilities 7,890 7,361 7,033 7,787 7,219 7,598 7,713 7,512 Equity 7,160 7,031 6,758 6,560 6,372 6,283 6,116 5,948 TOTAL LIABILITIES AND EQUITY $103,574 $101,560 $ 99,819 $ 98,167 $ 96,270 $ 93,831 $ 92,706 $ 87,809

PRIMARY FINANCIAL MEASURES (unaudited, by quarter or at quarter-end, as a percentage and in millions of dollars)

2004 2003(1) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Return on equity 11.5 % 19.7 % 16.3 % 15.9 % 10.6 % 17.1 % 14.8 % 12.3 % Productivity ratio(2) 72.3 60.1 67.3 65.2 73.6 64.2 65.7 68.5 Impaired loans coverage ratio 195.1 175.7 158.9 145.6 145.0 146.0 150.3 147.2 Net impaired loans as a percentage of gross loans (0.48) (0.45) (0.43) (0.37) (0.38) (0.40) (0.45) (0.45) Average assets $102,567 $100,690 $ 98,993 $ 97,219 $ 95,051 $ 93,269 $ 90,258 $ 87,228 Average loans 75,120 73,415 71,736 70,122 68,501 66,943 65,297 63,713 Average deposits 76,249 75,030 73,517 72,352 71,068 69,486 66,875 64,641

(1) Data restated to reflect the presentation adopted on December 31, 2004. (2) The productivity ratio is established according to the financial intermediation segment and includes the share of earnings generated by caisse investments in the subsidiaries. ADDITIONAL INFORMATION 146 DESJARDINS GROUP

PRINCIPAL STATISTICS BY BUSINESS SEGMENT

FINANCIAL INTERMEDIATION

As at December 31 (in millions of dollars)

2004 2003(1) 2002(1) 2001(1) 2000(1)

CAISSES AND FÉDÉRATION (unaudited) Assets $ 82,923 $ 75,280 $ 69,025 $ 64,216 $ 59,684 Securities 8,899 8,562 7,527 7,584 7,281 Loans 69,662 63,356 57,571 52,789 48,820 Deposits 67,712 63,589 59,819 56,640 52,046 Equity 6,951 6,053 5,528 4,986 4,621 Surplus earnings before patronage allocations to members 681 641 702 453 338 Patronage allocations to members 372 443 492 272 145 CAISSE CENTRALE DESJARDINS Assets $ 14,770 $ 13,518 $ 10,799 $ 10,357 $ 10,761 Securities 2,843 3,619 3,868 3,132 3,203 Loans 10,187 8,122 5,087 5,501 5,527 Deposits 11,242 10,122 7,788 7,505 7,674 Net income 44 40 35 40 35 FONDS DE SÉCURITÉ DESJARDINS Assets $ 534 $ 497 $ 465 $ 434 $ 411 Net fund value 523 485 453 409 392 Net surplus earnings 38 32 43 17 25 CAPITAL DESJARDINS Assets $ 1,515 $ 1,076 $ 1,137 $ 330 $ 312 Senior bonds 1,490 1,058 1,116 319 300

(1) Data restated to reflect the presentation adopted on December 31, 2004 DESJARDINS GROUP 147 ADDITIONAL INFORMATION

INSURANCE, TRUST SERVICES AND ASSET MANAGEMENT

As at December 31 (unaudited, in millions of dollars and as a percentage)

2004 2003 2002 2001 2000 DESJARDINS FINANCIAL SECURITY Insurance and annuity premiums $ 2,090 $ 2,013 $ 1,704 $ 1,561 $ 1,517 In-force life insurance (insured capital) 131,896 126,386 122,645 113,815 111,346 In-force pension contracts (funds held) 3,670 3,553 3,255 3,380 3,500 Return on equity 19.6 % 14.1 % 10.8 % 10.5 % 10.5 % Segregated funds $ 4,677 $ 4,384 $ 4,025 $ 4,505 $ 4,855 DESJARDINS GENERAL INSURANCE GROUP Gross premiums written $ 1,370 $ 1,270 $ 1,068 $ 936 $ 672 Growth in number of in-force policies 4.2 % 5.9 % 4.4 % 2.0 % 5.6 % Combined ratio 89.4 97.9 96.8 98.2 96.9 Return on equity 29.7 13.4 10.5 8.7 13.6 DESJARDINS SPECIALIZED FINANCIAL SERVICES MANAGEMENT Fee income $ 111 $90$91$89$87 Return on equity 23.5 % 13.5 % 22.6 % 23.9 % 22.6 % Investment funds outstanding $ 8,003 $ 6,230 $ 4,810 $ 5,023 $ 4,434 Assets under administration 195,840 167,181 143,432 145,675 148 630 DESJARDINS ASSET MANAGEMENT Fee income $ 61 $48$48$45$33 Assets under management 26,329 25,515 17,263 16,288 15,038

SECURITIES, VENTURE CAPITAL AND OTHER

As at December 31 (unaudited, in millions of dollars and as a percentage, unless otherwise stated)

2004 2003 2002 2001 2000 DESJARDINS SECURITIES Total revenues $ 226 $ 170 $ 116 $ 104 $ 116 Number of clients (in thousands) 280 266 254 223 212 Return on equity 0.0 % (8.6)% (11.0)% 11.8 % 40.9 % Assets under administration $ 16,478 $ 13,827 $ 9,822 $ 8,244 $ 7,158 DESJARDINS VENTURE CAPITAL(1) Assets $ 154 $ 154 $ 191 $ 183 $ 156 Investments, at cost 136 144 176 170 120 Equity 147 138 174 78 151 Net earnings (net loss) 8 (51) (26) 4 18

(1) At the beginning of 2002, a reorganization took place that divided the operations of Investissement Desjardins into two legal entities. The two new entities are: Desjardins Venture Capital Inc. and Desjardins Venture Capital, Limited Partnership. For the purpose of compiling statistics for the above table, the results of the two entities were added together. ADDITIONAL INFORMATION 148 DESJARDINS GROUP

PRINCIPAL FINANCIAL RESULTS OF THE CAISSES AND FEDERATIONS OF MANITOBA AND NEW BRUNSWICK

The Manitoba and New Brunswick federations, comprising 40 caisses, are auxiliary members of the Fédération des caisses Desjardins du Québec. They are governed by their own legislation, regulations and by-laws.

COMBINED BALANCE SHEET (unaudited)(1)

As at December 31 (in millions of dollars)

2004 2003(2) ASSETS Cash and securities $ 438 $ 440 Loans 2,096 1,968 Land, buildings and equipment 42 39 Other assets 32 30 TOTAL ASSETS $ 2,608 $ 2,477 LIABILITIES AND EQUITY Deposits $ 2,303 $ 2,193 Other liabilities 121 116 Equity Capital stock 27 23 Undistributed surplus earnings 12 10 Reserves 145 135 TOTAL LIABILITIES AND EQUITY $ 2,608 $ 2,477

COMBINED STATEMENT OF INCOME (unaudited)(1)

For the year ended December 31 (in millions of dollars)

2004 2003(2) Interest income $ 151 $ 151 Interest expense 64 66 Net interest income 87 85 Other income 33 29 Total income 120 114 Provisions for credit losses 2 2 Non-interest expenses 99 93 OPERATING SURPLUS EARNINGS 19 19 Income taxes on surplus earnings 4 3 SURPLUS EARNINGS BEFORE PATRONAGE ALLOCATIONS TO MEMBERS 15 16 Patronage allocations to members 6 8 Tax recovery on patronage allocations to members (2) (2) SURPLUS EARNINGS FOR THE YEAR AFTER PATRONAGE ALLOCATIONS TO MEMBERS $11 $10

(1) The combined balance sheet and combined statement of income include data from the caisses and federations in Manitoba and New Brunswick, after eliminating the transactions and balances of the caisses and federations among themselves. Because the financial years of the caisses do not coincide, the undistributed surplus earnings do not correspond to the surplus earnings presented in the statement of income. (2) Data published in 2003 were adjusted in order to exclude the federation and caisses of Ontario. DESJARDINS GROUP 149 CORPORATE GOVERNANCE

The Fédération des caisses Desjardins du Québec has been developing CORPORATE GOVERNANCE POLICY its corporate governance program since 1998 and provides leadership OF THE FÉDÉRATION to Desjardins caisses and Desjardins Group subsidiaries in order to promote ongoing, continuous and thorough improvement of their The corporate governance policy adopted by the Fédération describes governance system. what it must do to respect the industry guidelines on corporate governance, while adapting these guidelines to the cooperative nature Although the following information is specific to the Fédération, it has of Desjardins. a broader application as well, since Caisse centrale Desjardins (CCD), Desjardins Venture Capital (DVC) and Desjardins Securities also rely The first difference is a fundamental one because it relates to the on governance systems aligned with that of the Fédération. By using very purpose behind the Board of Directors’ decisions with respect to a single strategic management structure, whose purpose is to ensure corporate governance. Ultimately, the purpose of these decisions is coherence and consistency of Desjardins Group’s main orientations, to enable the Fédération to carry out its mission, which is to contribute the Fédération, CCD, and Desjardins Venture Capital all share the to improving the economic and social well-being of individuals and same directors. communities. It is guided by long-term objectives and is focused on creating economic value for its owner-users, i.e., caisse members, who thus benefit from: HIGHLIGHTS • a competitive, comprehensive, integrated and accessible The main improvements made or initiatives taken in 2004 with respect service offering; to the governance program consisted of the following: • individual and collective patronage allocations; • active contribution to local and regional development with an eye • The strengthening of the procedures used in the strategic on sustainable development. management of Desjardins Group through the creation of strategic functions as well as procedures for the guiding, coordination, To attain these objectives, Desjardins gives itself the means to ensure monitoring and governance of the entire Group; sufficient profitability, which allows it to ensure its longevity and • The adoption of a single Code of Ethics and Professional Conduct respect its cooperative difference. that applies to all components of the Group; • The implementation by the Board of Directors of a Risk Management Commission for the Fédération and CCD; APPLICATION OF CORPORATE • The implementation of projects aimed at ensuring Desjardins’ GOVERNANCE GUIDELINES compliance with the Keeping the Promise of a Strong Economy Act, 2002 (chapter 22) (formerly known as Bill 198), in terms of the MANDATE OF THE BOARD OF DIRECTORS financial disclosure and internal controls of its regulations; 1) Management of the Fédération The Board of Directors assumes • The adoption of the Charter of Audit Commissions and Committees full managerial responsibility of the Fédération by administering its by the Fédération, CCD, and Desjardins Venture Capital, as well as business in a sound and prudent manner. It ensures that procedures by the subsidiaries of the Fédération; and structures are established in line with its role of oversight and • The adoption of the Compliance Policy for the Fédération and control. Periodically, it reviews its operations from the standpoint of the Group; continued improvement and safeguards the assets of Desjardins Group • The adoption of the Group Policy on the Nomination of Officers and and its 5.5 million members and its clients. Employees to External Posts; • A provincial meeting of some 600 caisse presidents and 600 caisse It plays a dual role since its responsibilities apply both to the Fédération general managers, which was an intense time of building awareness as a business and to Desjardins Group as an integrated cooperative to the major trends in the financial-services industry and to the financial group. The Fédération is in fact the organization which guides, importance of risk management; plans, coordinates, and monitors all Desjardins Group operations. • Continued work on the succession plan for top-ranking officers. The Board exercises all the powers of the Fédération except for those which it may delegate from time to time to its commissions and committees. The Board assumes the following responsibilities in particular:

a. A culture of integrity The Board of Directors is responsible for ensuring compliance with the five permanent values of Desjardins, which are “money in the service of human development, democratic operations, personal commitment, rigour and integrity and commitment in the community.”

(1) Draft rules 51-102, 52-101 and 52-201 issued by Canadian Securities Administrators. CORPORATE GOVERNANCE 150 DESJARDINS GROUP

In this context, the Board is also responsible for enforcing the Group’s d. Succession planning The Board of Directors oversees the Code of Ethics and Professional Conduct among the members of development of the succession planning program and is supported management, the employees, and the elected officers. A support in this task by Desjardins Group’s Human Resources and Operations structure for the activities of the Fédération’s Board of Ethics and Executive Division as part of a three-year human resources plan. Professional Conduct enables it to raise awareness, conduct training, The Human Resources Commission oversees the plan and reports and provide a consulting service in line with the Code, which provides to the Board of Directors or makes recommendations to it. for the possibility of imposing penalties for violations. It is worth noting that the Board of Directors will adopt, as of March 31, 2005, a policy Specifically, the Chairman and Chief Executive Officer of Desjardins aimed at the implementation of a procedure for the confidential reporting Group oversaw the execution of the following projects in 2004: of actions contrary to the regulatory structures and a policy for the signing of non-audit contracts that can be awarded to external • identification of competency profiles for top-ranking officers; auditing companies. • assessment of their potential; • development of a pool of candidates with great potential and The Group’s Code of Ethics and Professional Conduct is available to preparation of individual development plans; the public on its site, desjardins.com, and on its intranet. The Group • establishment of a generic competency profile that will apply invites all who are active within Desjardins to demonstrate ethics to all top-ranking officers of Desjardins Group; based on honesty, transparency, social responsibility, and altruism. • examination of the succession plans prepared by the subsidiaries. b. Strategic planning process The Board of Directors has implemented One of the hallmarks of Desjardins’ cooperative difference is that a continuous strategic planning process for Desjardins Group. The the successor to the Chairman and Chief Executive Officer is chosen Board is supported by the Group’s Strategic Management Structure by a 256-person electoral college that includes representatives from Committee; specifically, this committee helps the Board to ensure Québec and Ontario(3) caisses and the President and Chief Executive that strategic orientations and plans are incorporated throughout Officer of Desjardins Group. Although it does not have to appoint the the caisses and the subsidiaries and that business development incumbent, the Board of Directors oversees that succession is properly strategies are consistent and coherent, all while being mindful of planned by determining the major criteria for the Chair of Desjardins the risk involved. Group. The electoral process is governed by a Fédération by-law and is overseen by an election committee made up of independent elected Out of the strategic plan comes the cooperative network’s business officers from the Board of Directors. plan (known as PARC)(2) and an activity plan. Responsibility for implementing the Group’s strategic planning process rests with the e. Internal reporting system and integrity of control systems The Group Strategic Management Structure Committee, while for PARC Board of Directors, seconded by its Audit and Inspection Commission, this responsibility rests with the Management Committee of the ensures the implementation of effective control systems (accounting, Fédération. The Board’s role in this respect is one of follow-up, administrative and management) to safeguard the integrity of its monitoring and control and ensures that information is obtained operations and obtain the required accountability from managers. The to correct discrepancies. As for CCD, Desjardins Venture Capital Board is supported in this responsibility by Desjardins Group’s Internal and Desjardins Securities, their respective boards of directors adopt Auditor, who adopts an annual plan based on the recommendation of a triennial strategic and financial plan that is updated annually. its Audit and Inspection Commission. To satisfy the new requirements of Keeping the Promise for a Strong Economy Act, 2002, work is in c. Identification and management of main risks The Board is responsible progress to improve the documentation of the controls used during for identifying the main risks of the Fédération and Desjardins Group the production of financial information. In addition, these efforts are and ensures that the required systems are in place for integrated monitored by the Chief Financial Officer of Desjardins Group, who, management of the main risks. The Fédération has the support of together with the Chief Executive Officer, is responsible for the the Integrated Risk Management Executive Division, whose activities certification of the consolidated and Combined Financial Statements now cover the entire Desjardins Group. of the Group.

Following the various actions that it took in 2003 to reinforce its The Board also ensures that the Fédération’s Management Committee governance in the area of risk, the Board of Directors of the Fédération provides the Board and its commissions and committees with information launched its Risk Management Commission and coupled it to the that is reliable, timely, and adapted to the particular needs of the Audit and Inspection Commission, which remains responsible for risks Board members so that they may take advantage of opportunities connected to the process for disclosure of financial information. The as they arise and also measure the risks involved. From now on Board same applies to CCD. members will be asked to assess the quality of each file submitted, as they are submitted, that support decisions made. Also, management uses a trend chart by which it can more effectively monitor primary performance indicators; this benefits the Board, as they will now obtain decision-bearing data more expeditiously.

(2) PARC is a one-year business plan that consolidates the business plans of the 594 caisses and the Fédération and that incorporates the contribution of the subsidiaries to the integrated service offering for the owner-users. (3) Members of the Councils of Representatives. 10056_Mouv_2cAN 18/03/05 16:07 Page 151

DESJARDINS GROUP 151 CORPORATE GOVERNANCE

Board members receive a quarterly management information report 2) Composition of the Board of Directors The Fédération’s Board of that combines the main financial and non-financial indicators that will Directors has been composed of 22 members since January 1, 2004, enable them to assess Desjardins Group’s situation and the status of a majority of whom are unrelated parties. The criteria for membership the Fédération’s projects. The Board ensures that appropriate policies are listed in paragraph 3. and procedures are in place to facilitate the production and presentation of this information. The Vice-Chairs of the Councils of Representatives of the Abitibi- Témiscamingue—Nord et Ouest du Québec, and Bas-Saint-Laurent To effectively carry out its orientation and control duties, the Board et Gaspésie—Îles-de-la-Madeleine regions also serve on the Board meets regularly according to a predetermined schedule. Board members of Directors as Managing Directors. receive the agenda, along with any appropriate documentation, far enough in advance to ensure productive discussions and facilitate 3) Applying the definition of unrelated party The Board of Directors the decision-making process. includes five related officers one of which is the Chairman of the Board and Chief Executive Officer of Desjardins Group and the four caisse f. Strategic communication policy By specifying tasks to be completed general managers who serve on the Board. The first is related because and results to be measured, the Board of Directors has adopted strategic he is a member of the management of the Fédération, and the other orientations in communication in line with its strategic planning. The four are related because they are employees of companies—namely, Fédération has also adopted internal and external communication caisses—belonging to the Group. In addition, the directors have no policies in order to improve its relations with the caisses and their business or personal relationships with members of the Management members and shareholders, its employees, the subsidiaries and their Committee of the Fédération, or interests which, in the opinion of the clients, socio-economic and community organizations, opinion makers, Board, could significantly interfere with their ability to act in the best the public, the media, the rating agencies and the various levels of interests of the Fédération or Desjardins Group, or interests of another government. In view of the requirements resulting from the regulations nature which, again in the opinion of the Board, could reasonably be of the Keeping the Promise for a Strong Economy Act, 2002, the perceived as such. Fédération will be called upon in 2005 to adopt a communication policy for the entire Desjardins Group, which will incorporate in particular For guidance in these matters, the Board refers to the provisions the disclosure of financial information and of major changes that can of the Code of Ethics and Professional Conduct, which governs the affect the Group’s financial situation. actions of its directors and the declarations of interest filed annually by the directors. The Fédération uses different channels to communicate effectively with its various stakeholders, including its Communications and The list of Directors with their status (related or unrelated) appears Public Affairs Department, the Ombudsman, the Ethics and Professional on pages 12 and 13 of this Annual Report. Conduct support team of the Secretariat General, the complaint settlement process in the caisses (Your Satisfaction is Our Priority) 4) Nomination procedure Given the cooperative structure of Desjardins and in the Desjardins Group, the annual general meetings, the release Group and the principle of delegation which prevails within the Group, of Desjardins Group’s quarterly financial results (including its infoD the Fédération’s Board of Directors is composed of persons elected bulletins, its Annual Report, Social Responsibility Report, such publications by the delegates of the the Fédération’s member caisses, which, at as Mes Finances – Ma Caisse, Desjardins, Desjardins Entreprises and meetings in each region, directly elect 17 of the 22 Board members. Partenaires, as well as information bulletins distributed to employees), They assume the chairmanship of the Councils of Representatives(4). a toll-free telephone line, the Web site, including a section entitled Thus, it is the caisse delegates who must choose from among the “Relations with members” (desjardins.com) as well as member interested candidates, the candidates most apt to assume two roles, services at the Fédération (1-866-835-8444, ext. 8422). namely, that of director of the Fédération and Desjardins Group as a whole and that of regional representation. Once nominated, candidates In addition, the Fédération communicates with rating agencies are reminded of the responsibilities that attach to the position of and coordinates the relations of the Group with the various levels chairman of a Council of Representatives. Because they are at once of government. officers of a caisse, members of their Councils of Representatives and members of the Board of Directors of the Fédération, the Board benefits from directors with a profound knowledge of the activities of Desjardins Group who are nonetheless independent of management. This in-depth knowledge of the organization’s activities is a significant advantage resulting from the cooperative structure.

(4) The Councils of Representatives are democratically elected entities of the Fédération which are responsible for making decisions in each region or for the system of group caisses with regard to adopting the regional business plan, granting sponsorships and donations and designating the representatives of Desjardins with outside regional agencies. CORPORATE GOVERNANCE 152 DESJARDINS GROUP

It should be noted that the chairs of the Councils of Representatives 6) Orientation and training program for new directors The Fédération are responsible for ensuring that the orientations, as defined by the offers its directors orientation and ongoing training, and develops Board, are understood by the caisses and for communicating to the sessions tailored to their specific needs. New directors attend an Board the concerns of the caisses they represent. The dynamism and integration session that involves meeting with members of Management the participation of the officers of the caisses create a healthy tension and receiving a reference manual containing all the information they that requires members of the Board to make decisions for the common need to carry out their duties. Every director receives a document good of the members and other stakeholders of Desjardins Group. reminding him or her of the expectations and duties that come with the position. The four remaining positions filled by caisse general managers are determined at an election held at a meeting of representatives of the As needed and upon request, meetings with specialists from the Fédération, and the final position is reserved for the Chairman of the Fédération are also organized to give new directors a more complete Board and Chief Executive Officer of Desjardins Group. Consequently, picture of the company and of its main strategic projects. In 2004, the Corporate Governance Commission is not required to play a role the training sessions focused on integrated risk management, hedge in the selection of the Board of Directors of the Fédération, but is, funds, and the new accounting standards. however, in charge of the selection process of the directors of the Desjardins Group subsidiaries. The training program for directors is incorporated into the activities of the Desjardins Cooperative Institute, a new training institute created The process of electing the directors of the Fédération therefore for the volunteer officers and managers of Desjardins Group. The ensures the independence of the members of the Board vis-à-vis Institute’s mission is threefold: Desjardins Awareness, Desjardins the Chairman of the Board and Chief Executive Officer of Desjardins Governance and Management and Desjardins Innovation. Group since this individual has no influence on the nomination of these directors. 7) Size of the Board The Board of Directors is of a size that prioritizes adequate representation of the caisses in the 17 regions in the province The rules governing the composition of the Board foster a certain of Québec and in parts of Ontario. Moreover, the presence of four caisse stability and continuity in the corporate governance of Desjardins general managers ensures that the orientations adopted by the Board Group given that its members have three-year renewable terms and their implementation are adapted to the operational realities of and that each year one third of the Board members withdraw from the caisses. their positions. This affords the directors the time needed to deepen their understanding of issues and to make a valuable contribution The efficient running of meetings and good discipline among the to the Board. directors themselves compensate for the size of the Board. Furthermore, as the Chairman of the Board and Chief Executive Officer holds an The composition of the Board is balanced by the presence of informal gathering the day before every Board meeting, it ensures representatives from all regions of Québec, from the group caisses, that the discussion of the agenda remains on topic at the formal and from Ontario caisses populaires, but also by the skills and meeting the following day. The results of the performance evaluation experience they offer (among others, chartered accountants, of the Board of Directors reveal the very significant relevance of lawyers, notaries, managers, professional mediator, professor these meetings. of management, entrepreneur). 8) Remuneration policy for directors The Board has adopted a policy 5) Assessing the effectiveness of structures The Board of Directors and for the payment of remuneration to its directors, members of the its commissions and committees evaluate their performance annually Board of Ethics, and members of Councils of Representatives (CORE). by using quantifiable objectives set by the Board at the beginning of If all the responsibilities assumed by the Fédération, Caisse centrale the year. Areas for improvement and points to be monitored identified and Desjardins Venture Capital are taken into consideration, this policy during this evaluation are written into an action plan recommended is in line with industry trends and reflects the responsibilities, risks and to the Board by the Corporate Governance Commission (which also requirements inherent to directors’ functions. oversees the plan). The evaluation program for all Fédération structures also calls for a personal self-assessment followed by a meeting with the Chairman of the Board. In 2004, the Chairman of the Board individually met with seven members of the Board. The Chairman is responsible for the evaluation process, and the Corporate Governance Commission provides oversight. DESJARDINS GROUP 153 CORPORATE GOVERNANCE

The remuneration schedule is as follows:

REMUNERATION SCHEDULE OF BOARD MEMBERS OF THE FÉDÉRATION, CAISSE CENTRALE AND DESJARDINS VENTURE CAPITAL, AND MEMBERS OF THE BOARD OF ETHICS OF FÉDÉRATION AND CAISSE CENTRALE

Desjardins Caisse centrale Remuneration schedule Fédération Venture Capital Desjardins Subsidiaries Chairman of the Board None, as it is $50,000 paid to the $15,000 paid to the $15,000(5) of which assumed by the Fédération because it is Fédération because it is $10,000 is earmarked President and Chief assumed by the President assumed by the President for the director Executive Officer of and Chief Executive and Chief Executive and $5,000 for the the Group Officer of the Group Officer of the Group Chairman of the Board Annual retainer for the Chair of a commission $6,500 $6,500 $6,500 $6,500 Annual retainer for a member of the Board(6)(7) $6,670 $6,670 $6,670 $10,000 Attendance allowance for $1,000 $1,000 $1,000 $1,000 a Board meeting (maximum per day)(8) (maximum per day)(8) (maximum per day)(8) (maximum per day)(8) Attendance allowance for a $500 $500 $500 $500 commission or committee meeting (per half-day)(8) (per half-day)(8) (per half-day)(8) (per half-day)(8) Teleconference $200 $200 $200 $200 Attendance allowance for members of the Board of Ethics $1,500 for the President $500 $1,500 for the President $500 or the Ethics Committee $750 for members (per half-day) $750 for members (per half-day) Compensation for the Chair of Councils of Representatives $10,000 N/A N/A N/A Attendance allowance for members of Councils of Representatives $250 per meeting N/A N/A N/A

N/A: not applicable

For 2004, the chairs of the Councils of Representatives serving as Members of the Board of Ethics received an average of $9,600, including members of the Board of Directors of the Fédération, Caisse centrale remuneration that they collect as members of their respective and Desjardins Venture Capital received an average remuneration of Council of Representatives. $72,000(9). This amount also includes participation in meetings of the Councils of Representatives, commissions and committees, the Board It is worth mentioning that no member of the Board of Directors of Directors of the Fonds de sécurité and the Retirement Committee. of the Fédération received professional fees from the Fédération(11), Considering only remuneration as a director of the Fédération, this Caisse centrale, Desjardins Venture Capital or from a subsidiary. average decreases to $43,400. Moreover, in accordance with the Act respecting financial services The four general managers serving on the same boards have received cooperatives, the global budget allowance for the payment of an average remuneration of $45,000(10); this average is reduced to attendance allowances for members of the Board of Directors, $22,700 if only their status as director of the Fédération is considered. Councils of Representatives and the Board of Ethics and Professional Conduct is authorized by the Fédération’s General Meeting. Despite Members of the Board of Directors who assume the responsibilities the preceding comments, it is the total remuneration budget, not of the President of the Board of a subsidiary received an additional only the attendance allowances, that the General Meeting approves. average remuneration of $28,200. The Meeting receives a report on the changes in the remuneration budget from one year to the next. The budget allowance went from $1,491,000 in 2002 to $1,525,00 in 2003, then $1,692,000 in 2004.

(5) The responsibility of Chair of the Board of subsidiaries is generally assumed by a member of the Board of Directors of the Fédération. (6) A member of the Board of the Fédération receives $20,000 (3 x $6,670) as an annual retainer to serve as director of the Fédération, Caisse centrale and Desjardins Venture Capital. This bonus amounts to $15,500 for the two Managing Directors, to which an amount of $5,000 is added for their role as vice-chairs of their respective Councils of Representatives. (7) Concerning the four general managers who are members of Boards of Directors, the policy stipulates that the Board of Directors for their caisse is responsible for deciding if they keep all their remuneration. (8) Regardless of the number of Board, commission and committee meetings held on the same day, the maximum daily retainer is $1,000 because every effort is made to concentrate meetings in a single day to drive costs down as much as possible. (9) As for managing directors, their average remuneration is $50,400. (10) This amount was restated to account for the remuneration paid to the two general managers who served from January to April. (11) With the exception of some directors who received professional fees from the Fédération for their role of facilitator and instructor as part of the activities offered by the Desjardins Cooperative Institute in line with the orientations adopted by the Board of Directors for this purpose. CORPORATE GOVERNANCE 154 DESJARDINS GROUP

9) Composition of commissions and committees The Board has 3) informal meetings of the directors the day before each meeting of created a number of commissions and committees and defined their the Board, of which the Chairman of the Board and Chief Executive mandates in order to support and streamline its orientation, planning, Officer informs the President and Chief Operating Officer, who is control and monitoring activities. These commissions and committees not present at these meetings. Both unrelated directors and related are comprised entirely or almost entirely of unrelated parties. The directors, however, are present at these meetings, provided that the mandate of these commissions and committees is reviewed annually. discussions pertain to matters that do not bear any risk of conflicts of interest for the related directors; 10) Responsibility for corporate governance The Board has given the Corporate Governance Commission the responsibility of applying 4) meetings behind closed doors, without the participation of and updating the corporate governance program in light of industry management (except for the Chairman of the Board and Chief trends. The commission reports on its observations and makes Executive Officer), at the end of each meeting of the Board of recommendations to the Board of Directors. Directors or of the Executive Committee;

11) Defining the authority of the management committee 5) the Chair of the Audit and Inspection Commission (AIC) is assumed The responsibilities of the Chairman of the Board and the Chief by an unrelated director; and Executive Officer of Desjardins Group are set out in the corporate governance by-law of the Fédération. The responsibilities of the 6) assigning responsibility to the Corporate Governance Commission President and Chief Operating Officer of the Fédération are also (of which only one member is a related party) for: defined in this by-law. In addition, the Board has set out in writing a clear distribution of responsibilities between the Board of Directors a) managing relations between the Board and the Management and the Management Committee. Committee of the Fédération; and b) ensuring that the Board fulfills its duties. In addition, the The annual objectives of the Chairman of the Board and Chief Executive responsibility of developing or supervising agendas for the Board Officer of Desjardins Group are recommended to the Board of Directors of Directors and its committees is assigned to the Chairman of by the Committee on the Aggregate Remuneration of the President the Board and the Chief Executive Officer of Desjardins Group; and Chief Executive Officer of Desjardins Group. The objectives of the President and Chief Operating Officer of the Fédération are established 7) the creation of the Committee on the Aggregate Remuneration of by the President and Chief Executive Officer as part of a profit-sharing the President and Chief Executive Officer of Desjardins Group on plan. The Human Resources Commission recommended to the which only unrelated directors serve; Board of Directors guidelines for setting objectives to ensure sound management of profit-sharing plans and an equitable application 8) ensuring that the members of the Human Resources Commission for all components of Desjardins. and the Committee on the Aggregate Remuneration of the President and Chief Executive Officer of Desjardins Group are seconded by The degree to which these objectives are achieved is measured an external consultant with respect to matters dealing with the through an annual review process. With respect to the performance aggregate remuneration of officers. of the Chairman of the Board and Chief Executive Officer of Desjardins Group, under the supervision of the aforementioned committee, each Note also that the Fédération has a Board of Ethics and Professional director participates anonymously in the review process using a model Conduct whose members are elected at the General Meeting. Its prepared in advance by this committee. members are all independent from senior management and the Board of Directors. 12) The Board’s independence from the management committee The Board has created different structures and procedures to safeguard its Position against separating the functions of the Chairman of the Board independence from the Management of the Fédération. These include and Chief Executive Officer Desjardins does not intend to separate the the following: functions of the Chairman of the Board and of the Chairman and Chief Executive Officer of Desjardins Group, for the following reasons: 1) having only one member of Management of the Fédération who is also an officer elected by representatives of members (Chairman • Unlike other companies, where the Chief Executive Officer is of the Board and Chief Executive Officer of Desjardins Group); appointed by the Board of Directors, Desjardins elects this officer through an electoral college of 256 representatives of the members. 2) the post of Vice-Chair of the Board of Directors, created by His primary responsibility is to protect the interests of the 5.5 million the General Meeting, whose occupant presides over the Board’s members of Desjardins. His interests are aligned with those of meetings when the issues being discussed require the withdrawal the members. of the Chairman of the Board and Chief Executive Officer. The internal • Unlike those of other companies, the Chairman and Chief Executive management by-laws specify that the Vice-Chair of the Board Officer of Desjardins has no influence over the choice of members replaces the Chairman of the Board when the latter cannot act; who serve on the Board of Directors, which is one of the justifications made in favour of the separation of the two functions. In fact, all the directors of the Fédération are elected at a regional general meeting or by group caisses or at a representatives’ meeting, as discussed in point 4 of this disclosure. DESJARDINS GROUP 155 CORPORATE GOVERNANCE

• The assignment of the Chief Executive Officer to the position MANDATES AND COMPOSITION OF THE of Chairman of the Board results from a decision of the General COMMISSIONS, COMMITTEES AND BOARD Meeting of the members (1,500 elected officers), which is outlined OF ETHICS AND PROFESSIONAL CONDUCT in the internal management by-laws. OF THE FÉDÉRATION • The General Meeting believes that, owing to the complex nature of management of the activities of Desjardins Group, the Chairman As at December 31, 2004 of the Board must possess in-depth knowledge about the activities N.B.: * means an unrelated person and affairs of both the Fédération and Desjardins Group in order **means managing director to effectively act as a leader, whether it be among elected officers, members, or the management teams of various Desjardins EXECUTIVE COMMITTEE (EC) (composed of 7 directors) This components. This position results from an experiment that led Committee has the same functions and powers as the Board of the General Meeting to decide, in the early 1990s, not to have Directors, with the exception of those which the Board may reserve “two-headed” management of the organization of orientation, for itself or assign to another committee or commission. Its mandate planning, coordination, and monitoring of Desjardins Group. The was drawn up by the Board of Directors. In 2004, it held 16 meetings. Board assigned the Chairman of the Board, in accordance with the by-law, the responsibility of being the authorized spokesperson Members: for the Fédération and Desjardins Group. Alban D’Amours, Chairman of the Board • The General Meeting created the position of President and Chief Madeleine Lapierre, Vice-Chair of the Board* Operating Officer of the Fédération to release the Chairman of the Pierre Tardif, Secretary of the Board* Board and Chief Executive Officer from operational considerations. André Gagné* Moreover, the Management Committee of the Fédération is chaired Olivier Lavoie* by the President and Chief Operating Officer; the Chairman of the Richard Sarrazin Board and Chief Executive Officer is a member of the committee Sylvie St-Pierre-Babin* to ensure that the orientations set by the Board are adequately reflected in the various projects. COOPERATIVE ORIENTATIONS COMMISSION (COC) (composed of 5 directors) This commission ensures compliance with cooperative 13) Audit and Inspection Commission – Mandate and Composition values and the elements of the cooperative difference. If required, it The Audit and Inspection Commission (AIC), established under the submits recommendations to the Board. In 2004, it held 9 meetings. Act respecting financial services cooperatives for its activities related to the inspection of caisses, acts as an audit committee for the Fédération. Members: It is composed entirely of unrelated directors; two of the members, Clément Samson, Chair* including the Commission Chair, have accounting expertise. Jacques Baril* Alain Dumas The roles and responsibilities of the AIC have been defined in such Norman Grant** a way so as to give its members a very clear understanding of their Benoit Turcotte** monitoring duties. The AIC has all the power and information it needs to fulfill its mandate. Its role is to review all financial information and AUDIT AND INSPECTION COMMISSION (AIC) (composed of supervise the implementation of an effective control process and the 5 directors) This commission oversees the internal audit activities of required rendering of accounts. It has direct communication channels Desjardins Group and the Desjardins Bureau for Financial Monitoring with the persons responsible for internal audit at Desjardins Group, and Enforcement, supports the Board in its monitoring and control with the Desjardins Bureau for Financial Monitoring and Enforcement(12) responsibilities for the Fédération and the Group, and examines in and with the external auditors in order to discuss and review certain detail all elements related to the disclosure of financial information. issues. The AIC may, as needed, discuss these issues without the In 2004, it held 18 meetings. managers responsible being present. Members: The AIC ensures the independence of the internal audit division of Andrée Lafortune, FCA, Chair* Desjardins Group and adopts its annual action plan. In 2004, this Jean-Guy Bureau* Commission gave itself a charter in compliance with the new regulatory Marcel Lauzon* requirements for audit committees. Pierre Leblanc, FCA* Jacqueline Mondy* 14) Hiring outside advisors A director may hire the services of an outside advisor at the expense of the Fédération. However, to ensure that such services are relevant, a request must be submitted to the Corporate Governance Commission.

(12) The Desjardins Bureau for Financial Monitoring and Enforcement provides independent opinions on caisses’ management and financial statements, and monitors, through inspections and audits, the risks associated with network activities and determines whether these risks are managed based on sound and prudent management practices in compliance with legislation, standards and the rules of conduct in force; moreover, it audits the caisses’ financial statements and co-audits the financial statements of Desjardins Group based on recognized audit standards, and expresses an opinion on these financial statements. CORPORATE GOVERNANCE 156 DESJARDINS GROUP

RISK MANAGEMENT COMMISSION (RMC) (composed of DESJARDINS GROUP RETIREMENT COMMITTEE (DGRC) 5 directors) This commission assists the Board of Directors in the (composed of representatives of employers, participants, and retirees, identification and tracking of major risks to the Fédération and plus one external member) By virtue of the powers vested in it by Desjardins Group. It held 4 meetings in 2004. the Supplemental pension plans Act and by the Plan's Regulation, the Retirement Committee is in charge of soundly administering the Members: Pension Plan, managing the Pension Fund and paying members and André Lachapelle, Chair* their survivors the promised benefits. The members representing the Thomas Blais* employees, employers and retirees share the role of Pension Fund Raymond Gagné* trustees. The Retirement Committee met 5 times in 2004. Pierre Tardif, Secretary of the Board* Andrée Lafortune, FCA, observer* The Fédération des caisses Desjardins du Québec (FCDQ) represents all Desjardins employers with respect to the Desjardins Group Pension HUMAN RESOURCES COMMISSION (HRC) (composed of Plan. The FCDQ Board of Directors has decision-making power in 5 directors) This commission has as a mandate the periodic review of certain areas, including the Plan Regulation, the nature and terms of the positioning of the global remuneration system of Desjardins Group benefit payments to members and retirees, contribution rates as well in order to enable the Group to maintain a competitive position in the as the use of surplus. Through its Board of Directors, the Fédération market. It ensures that the remuneration practices in effect within stands surety for the obligations (employee pensions) resulting from the Group comply with the Group’s policies and guiding principles. the participation of all Desjardins Group employers in the Plan. The mandate of this commission excludes the examination of issues concerning the conditions of employment of the Chairman of the Employer representatives are appointed by the FCDQ Board of Directors. Board and Chief Executive Officer. In 2004, it held 8 meetings. Members' representatives and retirees are elected democratically by the group that they represent. Members: Alban D’Amours, Chairman of the Board Members from the Board of Directors, representing the employers: Madeleine Lapierre, Vice-Chair of the Board* Madeleine Lapierre, Chair* Pierre Tardif, Secretary of the Board* Jacques Baril* Raymond Gagné* Thomas Blais* Denis Paré* Pierre Leblanc* Daniel Mercier* COMMITTEE ON THE AGGREGATE REMUNERATION OF THE Denis Paré* PRESIDENT AND CHIEF EXECUTIVE OFFICER OF DESJARDINS GROUP (CAR) (composed of 4 directors) This Committee, all of whose Representing the participants: members are unrelated parties, is mandated to make recommendations Odette Breton to the Board regarding the remuneration and working conditions, as Edgar Joly well as the annual objectives, of the President and Chief Executive Michel Michaud Officer. The Committee held 1 meeting in 2004. Clément Roberge

Members: External representative: Madeleine Lapierre, Vice-Chair of the Board* Reynald Harpin* Pierre Tardif, Secretary of the Board* Raymond Gagné* Representing the retirees and participants entitled Denis Paré* to a deferred pension: Normand Deschênes CORPORATE GOVERNANCE COMMISSION (CGC) (composed of 5 directors) This commission is mandated to support the Board of Observers representing the participants: Directors in applying and updating the corporate governance program. Johanne Rock It also oversees the process for recommending candidates for seats Yvon Lesiège on the boards of directors of Desjardins Group subsidiaries. In addition, it is responsible for supervising the performance review program for INVESTMENT COMMITTEE Under the responsibility of the Retirement members of the Board of Directors and its commissions and committees. Committee, which establishes investment policy, the Investment The Corporate Governance Commission held 5 meetings in 2004. Committee has the mandate to ensure the execution, respect and follow-up of the policy as well as coordinate the activities of the fund Members: managers to whom management mandates are entrusted. The Alban D’Amours, Chair Committee held 7 meetings in 2004. André Gagné* André Lachapelle* Members: Pierre Leblanc* Denis Paré, Chair* Daniel Mercier* Madeleine Lapierre* Jacques Baril* Pierre Leblanc* Clément Roberge Reynald Harpin* DESJARDINS GROUP 157 CORPORATE GOVERNANCE

AUDIT, PROFESSIONAL CONDUCT AND COMPLIANCE BOARD OF ETHICS AND PROFESSIONAL CONDUCT (BEPC) COMMITTEE This new committee was created on December 7, 2004. (composed of elected officers) Under the law, the Fédération has Under the responsibility of the Retirement Committee, it is answerable a Board of Ethics and Professional Conduct that is independent for overseeing the following activities: the financial information process, of the Board of Directors and whose members are elected officers rules governing professional conduct and ethics, complaint policy, of Desjardins. The Board of Ethics and Professional Conduct enjoys regulatory compliance management and governance. No meeting was the support of a team which reports to the Secretariat General of the held in 2004 but members attended a training session on ethics and Fédération. In 2004, it held 14 meetings, including one training session. professional conduct. One of the main responsibilities of the Board of Ethics and Professional Members: Conduct is to ensure independence and objectivity of the Fédération’s Pierre Leblanc, Chair* inspection and audit services (Desjardins Bureau for Financial Monitoring Normand Deschênes, Secretary and Enforcement – see footnote on page 145) with respect to caisses Daniel Mercier* and to make recommendations to the President and Chief Executive Officer of the Group for the appointment of the person responsible for DESJARDINS GROUP STRATEGIC MANAGEMENT STRUCTURE managing these services. COMMITTEE (DCSMS) (composed of 13 members of management) This committee supports the Chairman of the Board and Chief In addition to the responsibilities mentioned above, the role of the Executive Officer of Desjardins Group and the Board of Directors in Board of Ethics and Professional Conduct is to adopt the rules of their responsibility of providing Desjardins Group with a single direction. conduct applicable to the officers of Desjardins Group and to the To achieve this, it helps the Board to incorporate the strategic orientations employees of the Fédération, caisses and subsidiaries (officers only), of the cooperative network and the subsidiaries and to implement present them for approval to the Board of Directors and ensure that business development strategies. It held 7 meetings in 2004. they are respected by the caisses and the Fédération, support the caisses and the Fédération in applying the rules of conduct, issue Members: opinions, make observations and recommendations with respect to Alban D’Amours Chairman of the Board and Chief Executive ethical issues (especially in circumstances of misconduct), and notify Officer of Desjardins Group the Board thereof, and, if the Fédération violates the provisions of Bertrand Laferrière President and Chief Operating Officer the Act respecting financial services cooperatives and regulations of the Fédération governing restricted party transactions and conflicts of interest, Pierre Brossard Senior Executive Vice-President to ensure that the complaints regarding the Fédération originating from the Management of Desjardins Group the caisses or other members of the Fédération (Caisse centrale, Jean-Pierre De Montigny President and Chief Operating Officer holding companies, subsidiaries). of Desjardins Securities Jacques Dignard Senior Vice-President, Human Resources, Members: Desjardins Group Hélène Lee-Gosselin, Chair* L.-Daniel Gauvin Senior Vice-President and Head of Integrated Claire Sarrazin, Secretary* Risk Management, Desjardins Group Éric Béchard* Gérard Guilbault President and Chief Operating Officer, Isabelle Bourgeois* Desjardins Asset Management Marcel Cardinal* François Joly President and Chief Operating Officer, Nathalie Dumais* Desjardins Financial Security Marc Méthot* Jean-Guy Langelier President and Chief Operating Officer, Jacques St-Aubin* Caisse centrale Desjardins Louis L. Roquet President and Chief Operating Officer, Desjardins Venture Capital Monique F. Leroux Senior Executive Vice-President and Chief Financial Officer, Desjardins Group Jude Martineau President and Chief Operating Officer, Desjardins General Insurance Group Marcel Pepin Senior Vice-President, Strategic Planning and Canadian Business Development of Desjardins Group

With a view to adopting a Group-wide coordination perspective, this committee combines the following committees: Asset/Liability, Integrated Risk Management, Information Technology, Real Estate and Image. CORPORATE GOVERNANCE 158 DESJARDINS GROUP

RECORD OF ATTENDANCE OF THE OFFICERS OF THE FÉDÉRATION

IC APCCC Name BD EC COC AIC RMC HRC CAR GC DGRC DGRC DGRC CORE Baril, Jacques 18/18 6/6 6/6 7/8 1/1 9/9 Blais, Thomas 17/18 4/4 4/5 6/7 Bureau, Jean-Guy 18/18 18/18 11/11 Charbonneau, Louise 18/18 8/9 D’Amours, Alban 18/18 15/15 9/9 5/5 Dumas, Alain* 12/14 5/6 9/9 Gagné, André 18/18 16/16 5/5 9/10 Gagné, Raymond 18/18 3/3 4/4 9/9 2/2 13/13 Lachapelle, André 18/18 4/4 5/5 13/13 Lafontaine, Daniel* 14/14 8/10 Lafortune, Andrée 16/18 18/18 4/4 11/11 Lapierre, Madeleine 18/18 16/16 9/9 2/2 6/6 8/8 1/1 11/11 Lauzon, Marcel 18/18 18/18 10/10 Lavoie, Olivier 17/18 16/16 14/14 Leblanc, Pierre 17/18 18/18 5/5 9/9 Mercier, Daniel 15/18 3/3 4/5 8/10 Mondy, Jacqueline 18/18 18/18 10/10 Paré, Denis 17/18 9/9 2/2 6/6 8/8 10/10 Samson, Clément 17/18 9/9 9/9 Sarrazin, Richard 17/18 9/9 8/9 St-Pierre Babin, Sylvie 18/18 15/16 3/3 13/14 Tardif, Pierre 18/18 16/16 4/4 9/9 2/2 2/2 12/12 Grant, Norman** 16/18 6/6 13/13 Turcotte, Benoît** 17/18 8/9 6/8

* Replaced Mrs. Frances Carrier and Mr. André Shatskoff in April 2004 ** Managing Director

The rate of attendance for the Board of Directors was 92%. Members of the Councils of Representatives:

The absences of the directors were due to professional duties or Considering that 255 people are involved, the Board of Directors to the illness of relatives. In addition, when they are absent, the chairs has chosen to show the rate of attendance at the 17 Councils of Councils of Representatives are replaced by the vice-chairs in the of Representatives: capacity of Managing Directors, thus assuring a continuous presence in the region. The rates of attendance for all the Councils of Representatives were as follows:

Rate of Number of attendance meetings Ontario 87% 7 Bas Saint-Laurent et Gaspésie—Îles-de-la-Madeleine 95% 13 Kamouraska—Chaudières-Appalaches 92% 10 Québec-Est 86% 10 Québec-Ouest-Rive Sud 90% 9 Saguenay—Lac St-Jean-Charlevoix —Côte Nord 88% 14 Centre du Québec 88% 10 Mauricie 92% 9 Estrie 88% 10 Richelieu-Yamaska 91% 11 Lanaudière 91% 13 Rive Sud de Montréal 91% 12 Laval—Laurentides 91% 10 Ouest de Montréal 83% 11 Est de Montréal 90% 9 Abitibi-Témiscamingue—Nord** et Ouest du Québec* 85% 8** 13* Group caisses 92% 11 DESJARDINS GROUP 159 GLOSSARY OF FINANCIAL TERMS

Acceptances Short-term debt securities that can be traded in the Cumulative provision for credit losses An amount that management money market, which a financial institution guarantees for a borrower deems sufficient to cover the anticipated credit losses related to the in exchange for a stamping fee. portfolio of loans and other on-balance sheet and off-balance sheet assets and liabilities. Specific provisions and the general provision are Appointed actuary The actuary appointed by an insurance company’s added to the cumulative provision for credit losses, and write-offs and board of directors, in accordance with the federal and provincial laws recoveries are deducted from it. governing insurance matters. Defined benefit pension plan Pension plan that guarantees each Assets under administration and assets under management Assets member a defined level of retirement income, often based on a administered or managed by a financial institution that are beneficially formula set by the plan in terms of the member’s salary and number owned by members and clients and therefore do not appear on the of years of service. financial institution’s balance sheet. The services provided in respect of assets under administration are administrative in nature, such as Derivative financial instrument A contract whose value is “derived” custodial services, collection of investment income and settlement primarily from interest or exchange rates. Derivative financial of buy and sell transactions, while the services provided in respect of instruments are used to transfer, modify or reduce current or expected assets under management include selecting investments and offering risks, including risks related to interest and exchange rates and other investment advice. The assets may also be administered by the risks arising from financial indicators. financial institution. Forward exchange contract A commitment to buy or sell a fixed Autorité des marchés financiers An organization whose mission is amount of foreign currency at a future specified date and at a set to administer all the laws governing the supervision of the financial rate of exchange. industry, notably in the areas of insurance, deposit institutions and financial product and service distribution, as well as securities. Gross premiums written In general insurance, premiums stipulated On February 1, 2004, it replaced the current supervisory institutions, in insurance contracts entered into during the year. namely the Commission des valeurs mobilières du Québec, the Bureau des services financiers, the Régie de l’assurance-dépôts du Québec, Guarantees and standby letters of credit Essentially, an irrevocable and the Fonds d’indemnisation des services financiers. The Autorité undertaking by a financial institution to make payments for a member replaced the Inspector General of Financial Institutions for the or client who cannot meet his or her financial obligations towards supervision of the financial industry. third parties.

Beneficiary A person, other than the underwriter, designated to receive Hedging Risk management technique used to offset or manage risk benefits under an insurance policy. related to interest rates, foreign currency and stock market indices.

Benefit Amount paid by the insurer under life-insurance, salary Hedging relationship A relationship established between a hedged insurance or accident-health insurance protection. As applicable, item and a hedging item that satisfied all the conditions issued by the the benefit is paid to the underwriter, to the policyholder or to the Canadian Institute of Chartered Accountants. A hedging item (generally insurance beneficiary. In a pension plan, this term refers to the rights a derivative instrument) is used to compensate for an identified risk a member has acquired under his participation in the plan. associated with interest rates, foreign currency and other financial indicators to which a hedged item (generally an asset or liability Bonds A certificate which is evidence of a debt on which the issuer recorded on the balance sheet) exposes Desjardins Group. promises to pay the holder a specified amount of interest for a specified period of time, and to repay the loan on its maturity. Generally, the Impaired loans Loans are classified as impaired when, in the opinion assets are pledged as security for the loan, except in the case of of management, timely collection of principal and interest is almost government or corporate bonds, aside from debentures. This term certain to be impossible. Loans, except for credit card balances, are is often used to describe any debt security. generally accounted for on a cash basis when a payment has been past due for 90 days or more, unless they are adequately secured and in Claims experience In general insurance, the costs of claims recorded the process of being collected. All loans more than 180 days past due as a percentage of the net premiums earned. Net premiums earned are classified as impaired. represent the premiums earned in relation to the elapsed time, a deduction taken on reinsurance premiums. In-force business Portfolio of in-force life insurance policies, that is, all insurance policies underwritten by clients of an insurance company Combined ratio In general insurance, total claims and operating that have neither expired nor terminated. expenses expressed as a percentage of net premiums acquired. Investment account Securities held until maturity or until the market Company subject to significant influence A company in which offers more attractive investment opportunities. Desjardins Group holds between 20% and 50% of the capital stock. Investment funds Funds comprised of amounts pooled together Credit instruments Credit facilities offered to members and clients by investors for purposes of a collective investment. A third party in the form of loans and other financing vehicles appearing on the manages this fund and must, on request, redeem the shares at their balance sheet, or in the form of off-balance sheet products such as net asset value (or at their redemption value). guarantees, letters of credit and securities lending. Matching The process of adjusting asset and liability maturities as well as off-balance sheet items in order to minimize risks related to interest rates, currency, and other financial indicators. Matching is used in asset and liability management. GLOSSARY OF FINANCIAL TERMS 160 DESJARDINS GROUP

Measurement of fair value Estimate of securities and financial Provisions for credit losses An amount added to the cumulative instruments at the market rate and end of year. When the price of provision for credit losses. Specific provisions are established to reduce a security is unavailable, fair value is measured using market prices the carrying value of some assets (especially loans) to an estimated of similar securities. realizable value. The general provision is established for losses anticipated in regard to total loans, particularly in sectors of activity Member A person who participates in a group insurance policy through where loan losses may not be estimated on an individual basis. his employer, an association or another group. See also Policyholder. Reinsurance agreement An agreement whereby one insurer assumes Morbidity rate Likelihood that a person of a given age will suffer from all or part of a risk undertaken by another insurer. The original insurer an illness or infirmity. The health insurance premium that a person remains fully liable to policyholders for the insurance obligations. belonging to this particular age group is based on this group’s morbidity rate. Risk-weighted off-balance sheet assets and financial instruments An integral part of calculating risk-based capital ratios. The face value Mortality rate The frequency of death in a given population. The life of low-risk assets is adjusted using risk weighted factors to take into insurance premium that a person belonging to this age group is based account a comparable risk among all types of assets. The inherent on this group’s mortality rate. risk of off-balance sheet financial instruments is also taken into consideration, first by adjusting the notional values to balance sheet Moving average market method In life and health insurance, the (or credit) equivalents, and then by applying the appropriate risk method that reflects changes in market values of portfolio investments weighting factors. in the balance sheet and earnings statement over a period of years. Securities lending Operations by which a financial institution acts Net interest income The difference between what a financial institution as the authorized agent of a security owner, who agrees to lend receives on assets such as loans and securities and what it pays out the security to a borrower in exchange for a commission paid under on liabilities such as deposits and subordinated debentures. the terms and conditions of a pre-established contract.

Net premiums acquired In general insurance, premiums earned on Segregated funds A fund category offered by insurance companies the basis of elapsed time, net of reinsurance premiums. via individual variable contracts that offer purchasers a number of guarantees, such as capital repayment upon death. Segregated funds Notional amount Reference amount used to calculate payments for feature various investment objectives and securities categories. instruments like forward rate agreements and interest rate swaps. It is called “notional” because it does not change hands. Stock index option The right (but not the obligation) to buy (call option) or sell (put option) at or by a specific date a given quantity of a stock Off-balance sheet financial instruments A wide range of products index at a specific price (strike price). offered to members and clients. There are two categories (i) credit instruments, which offer members and clients liquid asset protection Subordinated debenture An unsecured bond subordinated in right and (ii) derivative financial instruments. of payment in the event of liquidation to the claims of depositors and certain other creditors. Operating unit A component of a unit in which separate and significantly important activities are carried out. An operating unit is generally Subsidiary or subsidiary company A company in which Desjardins synonymous with a business segment or subsidiary. Group holds the majority of the stock.

Patronage allocation A distribution of surplus earnings to members Swap A type of derivative financial instrument whereby two parties on the basis of their transactions with their caisse. agree to exchange interest rates or currencies for a set period according to a predetermined rate. Pension plan Contract under which the member receives a pension benefit based on certain conditions as of a specified age. The financing Trading account Short-term securities held for trading purposes. of such a plan is insured by contributions made by either the employer alone, or by the employer and the member. Underwriter An individual or a corporation that issues an insurance policy to an insurer. In life and health insurance, the name used can Permanent share Capital stock offered to caisse members. also be policyholder. In savings and group insurance, the underwriter is the organization that issues a pension plan or an insurance plan Policy Written document that accounts for the existence of a contract to an insurer. for insurance and that sets out the terms and conditions. Underwriting experience In life and health insurance, the difference Policyholder A person whose life or health is insured under an between the actual results and the actuarial assumptions used to insurance policy. See Member. determine the premium or the policy liabilities, as applicable.

Premium Payment that the policyholder is committed to make so its Underwriting profit In general insurance, the profit earned from insurance policy remains effective. This payment represents the cost insurance activities before investment income. of his insurance and can sometimes include a savings component. The premium is directly linked to the amount of risk taken by the insurer. THE LARGEST COOPERATIVE FINANCIAL GROUP IN CANADA

VERSION FRANÇAISE A HIGHLY ACCESSIBLE DISTRIBUTION NETWORK COMPRISING: La version française de ce Rapport annuel peut être obtenue sur demande.

• A combined total of 114 points of service in Manitoba and This annual report is made from paper containing recycled pulp.

• 28 Desjardins Credit Union points of service in Ontario PRINTED IN CANADA

• Some 20 subsidiaries, many of which are active across the country

• Two Desjardins Bank service centres in Florida and Desjardins Commercial Lending, also in the United States

• A state-of-the-art virtual network

WE HAVE EVERY REASON TO BE PROUD! THE LARGEST COOPERATIVE FINANCIAL GROUP IN CANADA Annual Report

2004 And proud of it.

www.desjardins.com 1 800 CAISSES

Commemorative $5 coin issued by the Royal Canadian Mint in honour of the 150th anniversary of the birth of our founder, Alphonse Desjardins.

Desjardins 2004 Annual Report