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

DBRS, Inc. (DBRS) has today confirmed CASA’s AA (low) Senior Long-Term Debt & Deposits ratings and R-1 (middle) Short-Term Debt & Deposits ratings.

Concurrently, DBRS confirmed CA Group’s Issuer rating at AA (low), withdrew CA Group’s Senior Long-and Short-Term Debt & Deposits ratings, and assigned a Short-Term Obligations rating of R-1 (middle) with a Stable trend. The Issuer Rating and the Short-Term Obligations ratings represent the implied debt ratings based on the Group’s strengths as a whole.

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 SA-2 Support Assessment. Accordingly, the final rating of AA (low) is one notch above the Group’s IA.

The trend on all Long-Term ratings has been revised to Stable. In revising the trend to Stable, DBRS recognises the progress that CA has achieved in restructuring the Group. CA has demonstrated improvement in earnings, operating efficiency, asset quality, and adapting its investment banking activities, while making more effective use of its balance-sheet, funding and capital that now counterbalance the downside risks. Downside risks remain in the stagnating French economy, the slow recovery in Europe, and coping with final regulatory and legislative requirements, especially given the Group’s complex corporate structure.

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 continues to test the resiliency of this franchise, as illustrated by the Banco Espirito Santo (BES) write-down. Nevertheless, CA’s recent financial performance has demonstrated the strength of its underlying revenue generation capabilities and expense control that helped it to remain profitable on an annual basis during the crisis, except in 2012 when it was impacted by revaluation of the Group’s own debt, goodwill impairments, losses related to Greece and other one-time items. In order to maintain the improvement in CA’s earnings, DBRS considers that continued 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. This partly helped CA to restore its earnings in 2013/14 to a good level, reporting EUR 5.1 billion in net income for 2013, which was the highest that CA has attained during the crisis. Similarly CA still reported EUR 2.1 billion of net income in 1H14 despite a EUR 0.7 billion write-off related to BES.

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 21.2% in loans in France. The Regional Banks together with LCL typically generate more than half of the Group’s banking revenues excluding the Corporate Center and thus provide earnings stability. Savings Management, which includes CA’s Insurance operations (CAA), Asset management businesses and Asset Servicing, which generates 15% of total Group banking revenues and contributes to diversify the business mix, while leveraging the reach of its retail network. This expanding business segment is providing growth opportunities in Europe.

Since 2011, CA has undertaken significant adjustments. CA has refocused on its core businesses and reduced its risk profile in its three other business segments, International Retail Banking (IRB), Specialised Financial Services (SFS) and Corporate & Investment Banking (CIB). Following the sale of Emporiki and other small disposals in the IRB, the Group sold its remaining stake in Bankinter in 2013. Relying on Cariparma, the IRB was again able to generate sufficient IBPT in 2013 and 1H14 to absorb still elevated credit losses in the overall division and to reduce its cost-to-income to 57% in 1H14 from 61% in 2012. In SFSCA organically reduced business in CA Consumer Finance (CACF) and CA Leasing&Factoring (CAL&F). A now less significant contributor than for some universal banking peers, CA’s corporate and investment banking (CIB) operations contributed approximately 11% of Group’s revenues in 2013 excluding corporate center. Exiting from non-core businesses and those of non-critical size, it sold several businesses in 2013 and 1H14, such as its brokerage subsidiary Chevreux, its stake in Newedge, while also selectively scaling back some operations as illustrated by the discontinuation of its equity and commodity derivatives desk.

In line with 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, the non-performing loan ratio was 2.5% with a coverage ratio of 106% and only 22 bps of cost of risk on outstanding loans over 1H14. CASA, that includes some higher risk businesses, reported a non-performing loan ratio of 4% at June-2014; Consumer Credit’s cost of risk improved significantly dropping to 256 bps at June 2014 from a high of 467 bps in 4Q12, while the cost of risk in IRB decreased to 131 bps in June-2014. More than 90% of remaining bank EU peripheral Sovereign risk exposure is to Italy, out of total banking exposure of EUR 5.7 billion.

The Group’s franchise strength and adaptability have enabled it to readily cope with stressed environment such as the US dollar liquidity shortage in the financial market in 2011. At 2Q14, CA’s excess of stable funding defined as the surplus of Long-Term funding sources over Long-Term applications of funds) reached EUR 71 billion. CA has substantial short-term debt of EUR 132 billion, however DBRS notes that CA’s liquidity buffer totaled EUR 232 billion including EUR 63 billion of Central Banks deposits at 2Q14.

DBRS views the Group’s capitalization levels as solid. The Group’s fully loaded Common Equity Tier 1 ratio under Basel 3 criteria was 12.3% at 1H14 (CRD4 as calculated by CA without the application of the transitional method), which compares well with peers. 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 Group targets 14% Basel III fully loaded CET 1 ratio in 2016.

Upward pressure on the ratings is unlikely given their already high level and the need for CA to continue to deliver on its financial targets. Downward pressure could arise if the Group’s progress in improving its fundamentals were to weaken significantly or the French economy were to deteriorate such that CA’s financial fundamentals were impacted.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

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

Lead Analyst: Roger Lister
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 18 January 2011
Most Recent Rating Update: 20 October 2014

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