DBRS: CA’s 4Q13 Solid Results Show Success of Refocusing in 2013

Summary
•CA’s franchise showed its strength in 2013, as the Group generated a solid EUR 1.3 billion in net income group share in 4Q13 and EUR 5.1 billion in 2013, up from a loss in 2012, and the highest generated in the past 5 years.
•Results confirm strength in the Regional Banks, CA’s sound overall asset quality profile and progress with ongoing cost reduction efforts.
•Positive results and reduced Risk Weighted Assets (RWA) are enabling CA to increase its capital cushion over regulatory minimums.
•DBRS rates the Group’s and Crédit Agricole S.A.’s (CASA) Senior Long-Term Debt & Deposits at AA (low). 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 (CA or the Group) to refer to the organisation as a whole when discussing its franchise, operations, and strategies.

Results in 2013 are reflective of CA’s strategic efforts to refocus on its core businesses. Overall, CA’s results demonstrate the strength of its revenue generation capabilities and also its success in expense control. The Group generated gross operating income, or income before provisions and taxes (IBPT), of EUR 11.5 billion in 2013 on a consolidated basis. This is up 7.6% from 2012 on a comparable basis and provided ample resources to absorb provisioning expenses of EUR 4.0 billion. Provisions absorbed 34.9% of IBPT in 2013, largely unchanged from 35.0% of underlying IBPT in 2012. DBRS, Inc. (DBRS) views positively the stabilization in this ratio.

With specific items offsetting each other, net income group share was a solid EUR 5.1 billion in 2013, much improved from a net loss group share of EUR (3.7) billion in 2012 that reflected significant exceptional items. This level is the highest CA has attained over the five past years. In 4Q13, net income was EUR 1.3 billion, also up from a loss in 4Q12.

Illustrating CA’s successful refocusing on its core activities, the Group’s overall results in 2013 were supported by good performance in French Retail Banking at the Regional Banks level in 4Q13 as in 2013. Performance in other business lines was less evident, as earnings within LCL and Savings Management (incl. Insurance) were overall negatively impacted by the increase in the French corporate tax rate. Within Savings Management, Amundi’s results continued to improve. Excluding restatements for loan hedges, impact of CVA/DVA Day 1, adjustment of CVA Day 1 valuation parameters, DVA running and 2012 adjustment plan impacts, revenues from Corporate and Investment Banking (ongoing) (CIB) were up 9.4% quarter-on-quarter (QoQ) supported by structured finance activities and commercial banking, but results are down as provisions in the CIB increased, reflecting specific files in 4Q13. While still limited contributors to earnings, Specialized Financial Services (SFS) and International Retail Banking (IRB) are less of a constraint on results.

The Group’s efforts on cost reduction are starting to have an impact on its cost-to-income ratio, which was down to 63.2% in 2013 from 65.2% in 2012. CA completed an important program (NICE) that reduced five IT systems across the Regional Banks to a single system.

Lower provisions and still very manageable levels of impaired receivables in 4Q13 show CA’s sound overall asset quality profile. Provisions related to the cost of risk are down 15.1% QoQ and 13.1% year-on-year (YoY) at Group level. At the Regional Banks level, the non-performing loans ratio remains at just 2.5%, largely unchanged from 2012, with a coverage ratio of 66.9% excluding collective reserves versus 67.6% in 2012. Reflecting increases in CIB, CASA reported a non-performing loan ratio of 3.9%, an increase from 3.6% at end-2012 with a coverage ratio of 53.3% excluding collective reserves compared to 57.3% at end-2012. Cariparma in Italy reported a cost of risk down 20.5%, as 2012 included additional provisions requested by the Bank of Italy, but provisions were up only 3.1% from 2012 after restatement recorded in the Corporate Center in 4Q12 and in Cariparma’s contribution in 1Q13.

CA continues to increase its cushion over regulatory minimums. The Group’s common equity tier 1 ratio (CET1 ratio) under fully loaded Basel III is estimated at 11.2% in January 2014, up 120 bps from 10.0% as of June 2013 largely through retained earnings, and the reduction of RWA (notably at Cariparma).

DBRS rates the Group’s and CASA’s Senior Long-Term Debt & Deposits at AA (low). 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 to refer to the organisation as a whole when discussing its franchise, operations, and strategies.

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: Support Assessment for Banks and Banking Organisations. 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 rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: January 18, 2011
Most Recent Rating Update: July 30, 2013

For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.