DBRS: Crédit Agricole Ratings Unchanged Following 3Q12 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 3Q12 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 continued to hold up in French Retail Banking, as well as in Asset Management, Insurance and Private Banking, but struggled in Specialized Financial Services (SFS) and contracted in Corporate and Investment Banking (CIB) in this quarter reflecting a reshaping of this business line together with the negative impact of the revaluation of own debt. Overall results were considerably impacted by the signed sale agreement of its Greek subsidiary, Emporiki, but also by the impairments of goodwill in Consumer Credit, the deconsolidation of Bankinter, and the sale of Chevreux. As a result, the Net Income Group share was a net loss of EUR (2,207) million in 3Q12, as compared to a net positive Net Income Group share of EUR 863 million in 2Q12, and EUR 930 million in 3Q11. Excluding one-off items in 3Q12, however, CA reported Net Income Group share of EUR 1,378 million. This suggests that the Group is having some success in maintaining its underlying earnings capability during its restructuring.

With ongoing restructuring and the negative debt revaluation of about EUR 1 billion in total, CA’s revenues stood at EUR 7.0 billion in 3Q12, down from EUR 8.4 billion in 2Q12, and EUR 8.8 billion in 3Q11. At the same time, the Group’s operating costs slightly increased relative to 3Q11 (up 2.3%, adjusted for the reclassification of Emporiki and Chevreux), as CA incurs one-off charges. The Group’s cost-to-income ratio would have been 64.1% as of September 2012 if the negative debt revaluation is excluded, according to DBRS estimates. In 2Q12, the Group’s cost-to-income ratio was 63.3% as compared to 61.6% at end-2011. While CA is maintaining its cost-to-income ratio, DBRS views the Group’s progress on improving its efficiency as an important element for sustaining the earnings power of CA’s franchise.

With reduced revenues but controlled expenses in the context of its adjustment plan, the Group generated gross operating income, or income before provisions and taxes (IBPT), of EUR 1.9 billion in 3Q12, down from EUR 3.1 billion in 2Q12, and from EUR 3.6 billion in 3Q11. Yet, even this reduced level was sufficient to absorb provisioning expenses of EUR 1.1 billion, down from EUR 1.4 billion in 2Q12. Provisions absorbed 59.8% of IBPT in 3Q12, vs. 45.3% of IBPT in 2Q12, and 56.5% in 3Q11. DBRS views this 3Q12 ratio as manageable for the Group.

Reflecting the stagnating French economy, the Regional Banks (RBs) delivered Net Income Group share of EUR 210 million, as compared to EUR 218 million in 3Q11 and up from EUR 173 million in 2Q12. Demonstrating the strength of the Group’s retail banking franchise, the RBs generated 3.8% growth in deposits and 1.7% in loans year-on-year (YoY). Results slowed down in 3Q12 in CA’s other domestic retail banking business, LCL, which generated lower Net Income Group share of EUR 146 million in 3Q12, down from EUR 165 million in 3Q11 and well below EUR 190 million in 2Q12. While LCL posted growth in home lending (up 2.0% YoY) and improved lending margins, commissions and fee income retreated (down 4.6% YoY).

Unlike CA’ operations in France, International Retail Banking (IRB) reported a weak quarter with a negative Net Income Group share of EUR (1,899) million in 3Q12, after a negative Net Income Group share of EUR (285) million in 3Q11 and a negative Net Income Group share of EUR (271) million in 2Q12, principally reflecting the burden of CA’s former Greek Subsidiary, Emporiki. However, this quarter is expected to be the last one reflecting the drag from this subsidiary, as the Group signed a sale agreement with Alpha Bank. Given the reclassification of Emporiki’s losses under Net Income From Held-for-Sales Operations, the level of provisions is now below IRB’s IBPT, allowing room for profitability going forward. In Italy, the Group’s main subsidiary, Cariparma, remains profitable with a contained cost of risk relative to peers.

While the SFS business’ cost of risk remains elevated since end-2011 albeit diminishing, this business is managed down, and is impacted by goodwill impairments in 3Q12. SFS generated negative Net Income Group share of EUR (564) million in 3Q12. Excluding EUR 572 million in goodwill impairments for the Italian Consumer Finance activities, SFS posted a small EUR 8 million in Net Income Group share, relative to EUR 56 million in 2Q12, and EUR 126 million in 3Q11. While revenues decreased by 14.2% YoY (restated for the impacts of the adjustment plan and additional provisions for consumer finance businesses in Italy in 1Q12 and 2Q12), the cost of risk somewhat stabilised to EUR 423 million.

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 406 million in Net Income Group share in 3Q12, relatively stable from EUR 413 million in 2Q12, and up from a negative Net Income Group share of EUR (24) million in 3Q11. This was achieved with lower revenues than in 3Q11, combined with stable expenses overall vs. 3Q11.

The Group appears to be having some success with its refocusing of CIB on a model concentrated on servicing its major clients and originating-to-distribute. While CIB posted losses in 3Q12, as opposed to 3Q11 and 2Q12, excluding reevaluation of own debt issues, loan hedges, and adjustment plan impacts, CIB generated a positive Net Income Group share of EUR 325 million in 3Q12. This was similar to a level of EUR 324 million in 3Q11. Including one-time items, CIB posted a negative Net Income Group share of EUR (302) million as compared to a gain of EUR 296 million in 2Q12, and relative to a gain of EUR 647 million in 3Q11.

DBRS views the Group as having strengthened its funding profile and its liquidity position in the past quarters, which is an important improvement from a year ago. CA’s EUR 201 billion available reserves buffer, including EUR 38 billion in overnight deposits at Central banks, is well above EUR 133 billion of gross short-term debt. Of EUR 12 billion in MLT CASA’s target market programme for 2012 (down from EUR 22 billion MLT market programme in 2011), EUR 17.1 billion was completed at end-October 2012, exceeding the target as opportunities arose. This was achieved through senior unsecured public issues (22.4%), private placements (50.3%), and covered public issues (27.3%). 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 117% as of September 2012 from 120% as of December 2011. The Group’s residual funding for Emporiki is limited to EUR 600 million pro-forma, which will be fully collateralized with non-Greek quality Alpha Bank’s assets, and will be repaid in three installments (the last one being scheduled for the end of 2014).

Maintaining solid capital levels, the Group’s core Tier 1 ratio under EBA criteria was 11.3% under Basel 2.5, stable relative to June 2012, and up 110bps since end-2011. 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 applicable methodologies are Global Methodology for Rating Banks and Banking Organisations and DBRS Criteria – Intrinsic and Support Assessments, which can be found on our 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.