Crédit Agricole Ratings Unchanged Following 3Q13 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 3Q13 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.

After a year of adjustment and restructuring measures in 2012, CA’s overall results appear to be more stable, helped by ongoing efforts on cost reduction, although results vary across the business units. While revenues continued to hold up on a quarterly basis in French Retail Banking at the Regional Banks level, they weakened in LCL, on the back of lower house loan lending, and in Savings Management, and fell in Corporate and Investment Banking (ongoing) (CIB), a decline that was in line with industry trends. Lesser contributors to earnings, Specialized Financial Services (SFS), as well as International Retail Banking (IRB) are not a drag as compared to a year ago.

Overall, net income group share was EUR 1,433 million, as compared to a net loss group share of EUR 2,206 million in 3Q12, which included one-timers such as the negative impact of Emporiki. However, excluding one-off items in each quarter, i.e. adjusted for the reclassification of Emporiki and other items under IFRS 5, CA reported net income group share of EUR 1,322 million, down 6.7% compared to EUR 1,417 million on a comparable basis at 3Q12, reflecting lower revenues. With the impact of negative issuer spread of EUR 252 million in 3Q13, CA’s revenues stood at EUR 7.7 billion in 3Q13, up from EUR 6.9 billion in 3Q12 on a comparable basis. However, excluding the negative issuer spread, revenues would be lower than in 3Q12 on a comparable basis.

Importantly, given the pressures on revenues, the Group made progress on improving its efficiency levels in the businesses. This improvement was reflected in the reduction in the Group’s operating costs, down 1.5% relative to 3Q12 pro-forma. According to DBRS estimates, excluding the negative issuer spread and other one-timers, the Group’s cost-to-income ratio was 62.6% at 3Q13, stable from 3Q12. Illustrative of improved efficiencies, the Regional Banks and Cariparma, CA’s Italian retail bank subsidiary with 65% of IRB’s revenues, reported lower cost-to-income ratios, while LCL was largely flat. The achievement is important given that Retail banking represents 66% of CA’s business mix in revenues.

Helped by controlled operating expenses, the Group generated gross operating income, or income before provisions and taxes (IBPT), excluding one-timers, of EUR 2.9 billion in 3Q13. This is a similar level to that of 3Q12 on a comparable basis. It was sufficient to absorb provisioning expenses of EUR 0.8 billion, down from EUR 0.9 billion in 3Q12 still on a comparable basis. Provisions absorbed 29% of IBPT in 3Q13, vs. 31% of IBPT in 3Q12 excluding one-timers, or 59.2% of IBPT including them. DBRS views positively stabilization in this ratio at a more manageable level than a year ago.

The cost of risk continues to trend down in all businesses over the year. At the Regional Banks level, the non-performing loans ratio was just 2.5%, largely unchanged from 3Q12, with a coverage ratio of 105.7% including collective reserves. On the other hand, CASA reported a non-performing loan ratio of 4.1%, up from 3.4% at 3Q12 with a coverage ratio of 73.8% including collective reserves compared to 76.3% at 3Q12. It includes some higher risk businesses, including Consumer Credit, where the cost of risk was still elevated at 283 basis points (bps) in 3Q13, although down from 315 bps in 3Q12. This includes the cost of risk at Agos-Ducato, consumer finance in Italy, where the cost of risk stablised and where the coverage ratio is 98.8% including collective reserves as of September 2013.

The Group’s funding profile and liquidity position continue to improve. In 3Q13, CA’s EUR 252 billion available reserves buffer, including approximately 29% in deposits at central banks, is well above its EUR 150 billion of gross short-term debt. Indicative of CA’s access to the markets, CASA has already exceeded its initial target programme for medium to long term debt of EUR 12 billion in 2013 (similar to that of 2012), with EUR 13.4 billion completed by end-September 2013. This was mostly achieved through senior unsecured public issues (55%), but also private placements (26%) and covered public issues (19%). DBRS notes that the CA Group aims to be compliant with new regulatory liquidity ratios in 2014, with a LCR ratio above 100% at CA Group in 2014, and at CASA in 2013.

Maintaining solid capital levels, the Group’s common equity tier 1 ratio (CET1 ratio) under Basel III was 10.5%, up 120 bps from 9.3% at end-2012 when restated from the disposal of Emporiki. This was achieved mostly through retained earnings. The Group estimates its fully loaded Basel III leverage ratio at 3.5% under CRD4. Its goal is to reach 5% by 2018, a goal that is facilitated by the Group’s specific business model and organizational characteristics. This would put CA Group’s leverage ratios well above regulatory minimum of 3.0% set for 1 January 2018.

Notes:
All figures are in EUR unless otherwise noted.

[Amended on June 25, 2014 to remove unnecessary disclosures.]