DBRS: CA Group’s 3Q14 Net Income Up; Provisions Decline Further

Summary:
• CA Group’s 3Q14 net income group share up 2.1% YoY to EUR 1.5 billion
• Cost of risk continues to improve from already low levels, driven by France, CA’s main market
• CRD IV Fully Loaded CET1 at 12.9%, up 55 bps QoQ supported by retained earnings and decrease in risk
• DBRS rates Groupe Crédit Agricole at AA (low) with a Stable trend

In DBRS Inc. (DBRS) view, CA’s 3Q14 results demonstrate the strength of its revenue generation capabilities and expense control. Combined with a continued decline in provisions, net income group share is up 2.1% year-on-year (YoY) to EUR 1.5 billion and 3.5% quarter-on-quarter (QoQ) (after adjusting for the write-down to zero of CA’s stake in BES in 2Q14) .

The French retail market (the Regional Banks and LCL) is being negatively affected by the low interest rate environment, and a challenging regulatory climate, resulting in lower revenues and net income group share. By comparison, 3Q13 benefitted from home loan repurchases and early repayments. In the quarter, however, the French retail banking delivered on expenses control and cost of risk, particularly at the Regional Banks’ level where impairments declined by approximately half, both YoY and QoQ, to EUR 98 million, while operating expenses were contained YoY. Outside of France, the International Retail Banking (IRB) grew revenues by 4.3% to EUR 630 million, and despite a negative impact from an increased cost of risk in Italy, IRB reported a pre-tax income up 26%. The Specialised Financial Services unit continued to benefit from the improvement at Agos-Ducato, which returned to profitability this year. Ukraine is not a drag for CA, as it is still making profits and reporting NPL provision coverage of 185%. In Savings Management, net income group share was up 3.8% driven by a good performance of Amundi. In Corporate and Investment Banking (CIB), when adjusted for DVA running, loan hedges and impacts of brokers in 2013, revenues were up 5.6% to EUR 949 million and net income was up 83.9% to EUR 245 million.

Positively from a risk perspective, the recently released ECB stress-test results based on year-end 2013 data indicated that CA has the ability to withstand a severe stress scenario. Since then, the cost of risk has continued to improve at Group level, and in particular, in France.

Both the Regional Banks and LCL reported levels that are historically low, respectively at 10 basis points (bps) and 17 bps. This is down from 19 bps and 25 bps in 3Q13. At the Regional Banks level, the non-performing loans ratio remains at just 2.5%, with a coverage ratio of 65.9% excluding collective reserves, or 105.6% including collective reserves. CASA, the listed entity, reported a non-performing loan ratio at 3.9%, stable from end-2013, with a coverage ratio that increased to 55.3% excluding collective reserves, or 72.2% including collective reserves. At Cariparma, however, reflecting the still weak economy in Italy, the impaired loans ratio was up to 12.6% from 11.9% in the previous quarter with a coverage ratio of 44.2% including collective reserves.

In DBRS view, CA has the ability to adjust to the more demanding regulatory environment, given its proven ability to generate capital. As in recent quarters, the Group continued to improve its capitalization. Its Basel III fully loaded CET1 ratio was up 55 bps QoQ to 12.9%, mostly on retained earnings and mutual shares (25 bps) and organic changes (32 bps). The CRD IV leverage ratio was reported at 4.1% based on total Tier 1 capital at 3Q14, stable from end-June. The Group reported a Liquidity Coverage ratio above 110%, which is in excess of the end-2014 target (>100%), and indicated it was in the process of meeting the NSFR requirements. At end-September 2014, the Group had completed its funding plan for the year.

DBRS rates Crédit Agricole S.A.’s (CASA) Senior Long-Term Debt & Deposits at AA (low) with a Stable trend. DBRS views CASA’s credit risk as intertwined with the Group’s and rates them at the same level. For reference, DBRS uses Crédit Agricole (CA or the Group) to refer to the organisation as a whole when discussing its franchise, operations, and strategies.

Notes:
All figures are in EUR unless otherwise noted.