Crédit Agricole Ratings Unchanged Following 2Q12 Results, Senior at AA (low), Trend Negative

DBRS, Inc. (DBRS) has today commented that its ratings of Groupe Crédit Agricole (Crédit Agricole, CA, or the Group) and Crédit Agricole S.A. (CASA) are unchanged following 2Q12 results. DBRS rates the Group’s and CASA’s Senior Long-Term Debt & Deposits at AA (low) and Short-Term Debt & Deposits at R-1 (middle). All long-term ratings have a Negative trend. DBRS views CASA’s credit risk as intertwined with the Group’s and rates them at the same level. For reference, we use Crédit Agricole, or CA, to refer to the organisation as a whole when discussing its franchise, operations, and strategies.

Results held up in French retail banking in particular for LCL, performed well in Asset management, insurance and private banking, and retreated in CIB in this quarter reflecting a reshaping of this business line. Overall results, however, were still considerably impacted by the continued deterioration in Greece and by the impairment of equity investments (mostly in Intesa Sanpaolo as of June 2012). The Net Income Group share (net income) was EUR 863 million in 2Q12, below EUR 881 million in 2Q11, while slightly up from EUR 804 million in 1Q12. CA’s revenues (or net revenues) were also lower at EUR 8.4 billion, down 8.1% from EUR 9.1 billion in 2Q11 and EUR 9.1 billion in 1Q12. As a result, while the Group’s operating costs were flat relative to 2Q11, the Group’s cost-to-income ratio increased to 63.3% as of June 2012 relative to 58.2% a year ago (as of June 2011) and higher than 61.6% at end-2011.

With lower revenues and controlled expenses in the context of an adjustment plan within a difficult environment, the Group generated gross operating income, or income before provisions and taxes (IBPT), of EUR 3.1 billion in 2Q12, down 19.5% from EUR 3.8 billion in 2Q11, and down 20.4% from EUR 3.9 billion in 1Q12. Yet, this level was sufficient to absorb provisioning expense of EUR 1.4 billion. Provisions absorbed 45.3% of IBPT in 2Q12, down from 54.6% of IBPT in 1Q12 (vs. 80.3% of IBPT in 4Q11; 41.6% in 2Q11). DBRS views positively that the 2Q12 level is back at a manageable threshold.

Reflecting the weaker French economy, the Regional Banks (RBs) delivered a lower quarter with net income of EUR 173 million, the lowest since end-2009, down from EUR 200 million in 2Q11 and EUR 372 million in 1Q12. Demonstrating the strength of the Group’s retail banking franchise though, the RBs generated growth in deposits (6.4% year-on-year (YoY)) and loans (2.8% YoY). Results were good in 2Q12 in CA’s other domestic retail banking business, LCL, which generated improved Net Income Group share of EUR 190 million in 2Q12, up from EUR 184 million in 2Q11 and slightly down from EUR 204 million in 1Q12. LCL also increased its loans in 1H12 relative to 1H11, up 0.8% YoY, with growth in home lending (3.1% YoY). Unlike its operations in France, IRB continues to struggle with the difficult environment in some countries outside France, reporting a net loss of EUR 271 million in 2Q12, although this was improved from a net loss of EUR 695 million in 2Q11 and a net loss of EUR 846 million in 1Q12. Again in 2Q12, net losses reflected elevated levels in the cost of risk (EUR 502 million in 2Q12, EUR 437 million in 2Q11, EUR 944 million in 1Q12;). These levels continue to exceed the IRB’s IBPT (EUR 184 million in 2Q12, EUR 237 million in 2Q11, EUR 239 million in 1Q12), a pattern that has been generally evident since 2009. CA’s Greek subsidiary, Emporiki, is the main driver of this elevated cost of risk. The Group is making progress with its strategy to sell the Greek subsidiary, with current binding offers subject to negotiations. On the other hand, Cariparma, the Group’s main subsidiary in Italy, remains profitable with a contained cost of risk relative to peers.

As the Specialized Financial Services (SFS) business is managed down and the cost of risk remains elevated since end-2011, SFS generated lower net income of EUR 56 million in 2Q12 relative to EUR 138 million in 2Q11, but improved from negative EUR 28 million in 1Q12. While revenues decreased by 11.2% YoY, the cost of risk grew 23.3% to EUR 444 million YoY, but remained stable when excluding additional provisions for Agos - which reflects deterioration in the consumer finance business in Italy.

Sustaining healthy business growth, CA’s asset gathering businesses, which include Asset Management, Insurance and Private Banking, are a source of recurring earnings that generated EUR 413 million Net Income Group share in 2Q12, up from EUR 347 million in 2Q11, achieved with lower revenues than in 2Q11, as assets on average are lower than in 2Q11, combined with lower expenses overall vs. 2Q11.

As a result of difficult markets in 2Q12, CIB delivered lower results in 2Q12 than in 1Q12, when it benefited from very good momentum in fixed income. The impact of the adjustment plan supporting CIB’s refocusing on a model concentrated on servicing its major clients and originating to distribute was limited in 2Q12. CIB generated net income of EUR 296 million in 2Q12 (including reevaluation of debt issues and loan hedges and adjustment plan impacts, EUR 135 million excluding these one-offs) as compared to EUR 321 million in 2Q11 and relative to net losses of EUR 1.1 billion in 4Q11. The Group continued the sale of loans in its Financing Activities, achieving sales with limited slowdown in revenues and at low discounts. As expected, the drag on earnings from discontinuing operations, which included CA’s exposure to CDOs, ABS and CLOs, as well as its correlation business, became marginal in this quarter.

DBRS views the Group as having bolstered its funding profile and strengthened its liquidity position in the past quarters. CA’s EUR 151 billion available reserves buffer, net of deposits at Central banks (EUR 17 billion in overnight deposits with Central banks), is well above EUR 110 billion of net short-term debt (vs. EUR 144 billion available reserves buffer, net of deposits at Central banks, as of March 2012 relative to EUR 107 billion of net short-term debt). As a result of the adjustment plan implemented across CA’s main business lines and other measures, net short-term debt has been significantly reduced by EUR 60 billion since June 2011, with reductions linked to the adjustment plan of EUR 38 billion, as well as the substitution of medium- and long-term (MLT) debt for EUR 5 billion of short-term debt at end-June 2012 and use of liquidity reserves (repos and access to central banks). Of EUR 12 billion in MLT market refinancing needs in 2012 (down from EUR 22 billion MLT market programme in 2011), 138% was completed at end-June 2012. This was achieved through senior unsecured issuances (15%), other unsecured borrowings, and secured borrowings. The Group’s retail network is well positioned to raise deposits with a domestic market share of 25% in deposits and 22% in loans at end-March 2012; it reduced its loan-to-deposit ratio in retail banking to 123.7% as of June 2012 from 128.8% as of June 2011. The Group has lowered its financing for Emporiki to EUR 4.6 billion as of June 2012 (vs. EUR 5.5 billion at end-2011 and EUR 11.4 billion as of March 2011), then down to EUR 2.3 billion after a EUR 2.3 billion capital increase at the end of July 2012. Positively, Emporiki got granted access to ELA funding in June 2012.

Maintaining solid capital levels, the Group’s core Tier 1 ratio under EBA criteria was 10.7% under Basel 2.5 (with the sovereign buffer) as of June 2012, relative to 10.4% as of March 2012, and 9.6% as of December 2011. The Group’s core Tier 1 ratio under Basel 2.5 was 11.3% as of June 2012. DBRS anticipates that Crédit Agricole has the ability to adjust to Basel III requirements and maintain appropriate capital levels. The Group targets a 10% core Tier 1 ratio under Basel III fully loaded at end-2013.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the European Banking Authority, and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This commentary was disclosed to the issuer and no amendments were made following that disclosure.

This is an unsolicited rating. This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: 18 January 2011
Most Recent Rating Update: 22 December 2011

For additional information on this rating, please refer to the linking document under Related Research.