DBRS: CA’s Q1 2014 Solid Results Confirm Business Model; Cost of Risk is Down

Summary
• CA’s franchise confirmed its strength in Q1 2014, as the Group generated a solid EUR 1.4 billion in net income group share in Q1 2014 up 38.5% year-on-year (YoY) pro-forma.
• Results show positive trends in various businesses, confirm CA’s further progress with cost reduction efforts, decline in cost of risk and CA’s overall sound asset quality profile.
• Retained earnings and reduced impact of CRD IV enabled CA to further increase its capital cushion over regulatory minimums with fully loaded Basel III Common Equity Tier 1 (CET1) ratio now at 11.7%.
• DBRS rates Crédit Agricole S.A.’s (CASA)’s Senior Long-Term Debt & Deposits at AA (low) with 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.

CA’s Q1 2014 results confirm its strong franchises in retail banking and bancassurance in France which support its revenue generation capabilities, and also showed good performances in its Corporate and Investment Bank (CIB). Success in expense control is also contributing. The Group generated gross operating income, or income before provisions and taxes (IBPT), of EUR 3.1 billion in Q1 2014 on a consolidated basis. This is up 16.3% from Q1 2013 on a comparable basis and provided ample resources to absorb provisioning expenses of EUR 0.9 billion. Provisions, down 21.0% vs. Q1 2013, absorbed 29.6% of IBPT in Q1 2014, below 43.7% in Q1 2013. DBRS, Inc. (DBRS) views positively the sustained reduction in this ratio. Specific items in this quarter only had a marginal impact.

The Group’s overall results in Q1 2014 were supported by good performance in French Retail Banking at the Regional Banks level in Q1 2014, as in 2013. In spite of good momentum in home loans and life insurance, LCL was negatively impacted by lower margins and also commissions, primarily due to the impact of new Consumer Protection Act provisions. Within Savings Management, Amundi reported positive net inflows of EUR 6.3 billion in Q1 2014; its net income group share remained stable YoY. Insurance remains on a positive trend, revenues were up 3.4% YoY and net income group share up 2.4% YoY. Revenues from Corporate and Investment Banking (ongoing) were up 2.0%, supported by financing activities and capital markets, with net income group share up along with lower provisions in the CIB. While still limited contributors to earnings, Specialized Financial Services (SFS) improved on the back of a lower cost of risk and International Retail Banking (IRB) maintained positive net income group share.

The Group’s ongoing efforts on cost reduction are having an impact on its cost-to-income ratio, which was down to 60.5% in Q1 2014 from 64.1% in Q1 2013 and 63.2% in 2013. Given this positive trend, CA’s cost-to-income ratio below 60% by 2016 seems achievable.

DBRS expects the cost of risk to remain flat in France, CA’s main market. Over the past three years, the cost of risk at the Regional banks and LCL has been consistently below 35 basis points (bps) on an annual basis. In Q1 2014, provisions were down 21.0% YoY at Group level. At the Regional Banks level, the non-performing loans ratio remains at just 2.5%, unchanged from 2013, with a coverage ratio of 66.2% excluding collective reserves, or 106.2% including collective reserves. CASA reported a non-performing loan ratio of 3.8%, down from 3.9% at end-2013 with a coverage ratio of 53.4% excluding collective reserves, or 71.1% including collective reserves. Positively, in Italy, the cost of risk at Agos (CA’s consumer finance entity) has been improving since Q4 2013; and Cariparma’s impaired loans ratio was 11.6% with a coverage ratio of 44.7%.

CA continues to increase its capital cushion over regulatory minimums through retained earnings. In Q1 2014, reduced CRD IV impacts also contributed to improved capital levels. The Group’s CET1 ratio under fully loaded Basel III is estimated at 11.7% in Q1 2014, up 40 bps since January 2014 pro-forma.

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