DBRS Confirms Crédit Agricole Ratings – Sr Long-Term Debt at AA (low); Negative Trend

DBRS, Inc. (DBRS) has today confirmed all ratings for Groupe Crédit Agricole (Crédit Agricole, CA, or the Group) and Crédit Agricole S.A. (CASA) including the Group’s Issuer Rating of AA (low) as well as the Group’s and CASA’s AA (low) Senior Long-Term Debt & Deposits ratings and R-1 (middle) Short-Term Debt & Deposits ratings. All long-term ratings have a Negative trend. DBRS views CASA’s credit risk as intertwined with the credit risk of the Group 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. Crédit Agricole’s fundamentals are reflected in DBRS’s intrinsic assessment (IA) of A (high) for the Group. The ratings incorporate DBRS’s expectation of some form of timely systemic support for Crédit Agricole in the event of a highly stressed scenario, which is reflected in the SA2 Support Assessment. Accordingly, the final rating of AA (low) is one notch above the Group’s IA.

The Negative Trend reflects the downside risks inherent in the economic slowdown and still stressed financial markets, combined with the challenges the Group faces in improving its operating efficiency, including in its international operations, and adapting its investment banking activities, while making more effective use of its balance sheet and coping with regulatory and legislative uncertainty.

In maintaining the Group’s IA at A (high), DBRS considers Crédit Agricole’s strong franchise that is diversified by business and geography with a strong domestic base that has resilient earnings power. The current environment has tested the resiliency of this franchise, especially in IRB, CIB and SFS, as the Group coped with write-downs and other adverse impacts of the stressed environment. Nevertheless, CA’s results have demonstrated the strength of its underlying revenue generation capabilities and expense control that helped it to remain profitable on an annual basis, except in 2012 due to revaluation of Group’s own debt, goodwill impairments, losses related to Greece and other one-time items. At the same time, excluding the Group’s revaluation of its own debt and goodwill impairments, net income group share was EUR 1.1 billion versus EUR 1.7 billion in 2011 according to DBRS estimates. Important for improving CA’s earnings, ongoing efforts in cutting costs are essential. DBRS recognises efforts CA is making to enhance its operational capabilities, which include programs at both the Regional Banks and CASA, as well as staff reductions in various businesses. While CA reported improved results in 1Q13, posting EUR 1.3 billion net income group share, excluding the revaluation of the Group’s own debt, DBRS sees CA as still exposed to a weakening in the recovery in Europe and the ongoing fragile capital markets.

In DBRS’s view, Crédit Agricole’s core strength is in its very strong position in French retail banking with its extensive footprint, its complementary networks, and its ability to leverage this position through its other business segments. This well-entrenched domestic banking franchise provides the Group with a large stable deposit base supported by its leading market shares of 25% in deposits and 22% in loans in France. Providing earnings stability, the Regional Banks together with LCL typically generate more than half of the Group’s banking revenues excluding the Corporate Center. Diversifying its business mix and leveraging the reach of its retail network, Savings Management, which includes CA’s Insurance operations (CAA), Asset management businesses and Asset Servicing, generated 16% of total Group banking revenues. This expanding business segment is providing growth opportunities in Europe.

The Group has undertaken significant adjustments in its three other business segments, IRB, SFS and CIB. In the IRB, the Group succeeded in divesting its subsidiary, Emporiki, in 2012, a year when the transaction impacted the net loss group share by EUR 3.75 billion in CA Group’s 2012 consolidated financial statements. In 1Q13, the IRB, relying on Cariparma, was again able to generate sufficient IBPT to absorb still elevated credit losses in the overall IRB division. In SFS, the plan was to reduce business and diversify refinancing sources. A less significant contributor than for some universal banking peers, CA’s corporate and investment banking (CIB) operations contributed approximately 10% of Group’s revenues in 2012. In response to future regulatory changes and new capital requirements, the Group started to adapt its business model at the end of 2011. After exiting several businesses and selectively scaling back in CIB, CA now faces the challenge of stabilising its CIB contribution, with a smaller CIB that is more focused on serving client needs and leveraging those areas where it has competitive strengths and strategic customers

Reflecting CA’s substantial retail banking foundations and its business mix that has relatively moderate involvement in higher risk activities, the Group has a relatively low risk profile that has been enhanced by its actions in response to the financial crisis. At the Regional Banks level, non-performing loan ratio was 2.4% with a coverage ratio of 107.6% and only 15 bps of cost of risk on outstanding loans in 2012. CASA, that includes some higher risk businesses, reported a non-performing loan ratio of just 3.5% at end-2012; Consumer Credit’s cost of risk reached 467bps in 4Q12, while the cost of risk in IRB excluding Greece was contained 148 bps in 4Q12. Exposures to EU peripheral bonds have been much reduced. More than 90% of remaining bank Sovereign risk exposure is to Italy, where total banking exposure of EUR 4.5 billion as of 2012 is partly owned through Cariparma, the Group’s Italian bank subsidiary. Market risk contributes only 4.5% of regulatory risk weighted assets (RWA).

The Group’s franchise strength and adaptability have enabled it to adjust to the stress on its funding in 2011. At 1Q13, CA’s excess of stable funding reached EUR 47 billion. Covering 168% of EUR 137 billion short-term debt, CA’s liquidity buffer totaled EUR 230 billion including EUR 53 billion of Central Banks deposits at 1Q13.

Given CA’s continued progress in strengthening its capital and streamlining its risk profile, DBRS views the Group’s capitalization levels as solid. CA accelerated its balance sheet adjustment in 2012, with the sale of loans, discontinued activities, and the sale of Emporiki. The Group’s core Tier 1 ratio under Basel 2.5 criteria was 11.9% (pro-forma post completion of Emporiki’s disposal at 31 December 2012), which compares well with peers. DBRS anticipates that Crédit Agricole has the ability to adjust to Basel III requirements and maintain appropriate capital levels based on its potential to retain earnings at Group level. Given the Group’s cooperative nature, DBRS views the retention of earnings as the critical source of capital for the Group to maintain solid levels of capitalisation. CA reported a fully loaded core tier 1 ratio under Basel III fully loaded of 9.6% at 1Q13 (CRD4 as expected by CA without the application of the transitional method), targeting 10% at end-2013.

Negative ratings pressure could arise, if CA were to have significant difficulties in achieving its targeted gains in efficiency and maintaining an adequate level of profitability, especially if these difficulties were accompanied by deterioration in CA’s franchise that reduced its capacity to generate capital and renewed pressure on CA’s liquidity and funding, or material weaknesses in its operations outside of France that impact its capitalisation. Alternatively, if CA continues to make progress in improving the efficiency of its businesses and strengthening its earnings, while further enhancing its balance sheet profile, negative ratings pressure could be reduced. A return to a Stable trend could be foreseen, if this progress were accompanied by less fragility in financial markets, economic recovery and reduced regulatory uncertainty.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/methodologies.

[Amended on January 12, 2015 to reflect actual methodologies used.]

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

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

Lead Analyst: Roger Lister
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 18 January 2011
Most Recent Rating Update: 21 December 2011

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