DBRS Maintains Crédit Agricole Intrinsic Assessment at A (high); Snr Ratings Remain Under Review Neg

In the DBRS press release maintaining Groupe Crédit Agricole’s Intrinsic Assessment at A (high), published on 24th August 2015, DBRS inadvertently included a comment that was incorrect in the last paragraph of the press release. Currently, CA has a support assessment of SA-2, which results in a one-notch uplift from CA’s IA of A (high) to the final rating of AA (low). The corrected version is as follows:

DBRS Ratings Limited (DBRS) has today maintained Crédit Agricole Group (CA or the Group)’s intrinsic assessment (IA) at A (high). The Group’s Issuer rating and Crédit Agricole S.A. (or CASA)’s Senior Long-Term Debt & Deposits ratings remain at AA (low) Under Review with Negative Implications (URN), with the URN reflecting the action taken on 20th May 2015 to review the systemic support assumptions of 38 European Banking Groups. The Short-Term Debt & Deposits rating remains 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, DBRS uses 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.

These actions followed DBRS’s detailed review of CA’s performance and outlook.

In maintaining the Group’s IA at A (high), DBRS considers that CA has been demonstrating its ability to cope with significant headwinds by adjusting to the difficult market conditions, an extended low growth environment and demanding regulatory requirements. In DBRS view, Crédit Agricole has a strong franchise that is diversified by business and geography with a strong domestic base that has resilient earnings power. CA’s recent financial performance has demonstrated the strength of its revenue generation capabilities and expense control. In 2014, CA reported EUR 4.9 billion net income group share, which was impacted by EUR 0.7 billion loss on Banco Espirito Santo (BES) stake, compared to EUR 5.1 billion net income group share for 2013. In 1H15, CA reported EUR 2.7 billion net income group share compared to EUR 2.0 billion in 1H14, which also included the EUR 0.7 billion loss on BES.

DBRS recognises the progress that CA has achieved in refocusing on its roots, as the Group 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 for a balance-sheet that focuses more on low risk activities, such as retail banking and savings management. Economic growth in France is projected to gain momentum in 2015 and 2016, as well as for the EU economy supported by the depreciation of the EUR vs. USD, the drop in oil price, and the ECB measures. Nevertheless, given the Group’s complex corporate structure, continued progress with expense control, managing risk and capital positioning remain important to enhance CA’s resiliency.

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 24.8% in deposits and 21.0% in loans in France at 4Q14. 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, Asset Servicing and Private Banking, which generated about 16% of total Group banking revenues in 2014 contributes to the diversity of the business mix and stability in earnings, while leveraging the reach of its retail network. This expanding business segment is providing growth opportunities in Europe and Asia.

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 stable year-on-year (YoY) at 2.5% with a coverage ratio of 100.3% including collective reserves, or 64.0% excluding collective reserves, and only about 20 basis points (bps) of cost of risk in 1H15. CASA, that includes businesses with higher yields that provide cushions to absorb higher credit cost, reported a non-performing loan ratio of 3.6% at 2Q15 down from 4.0% YoY. Of note, Consumer Credit’s cost of risk improved significantly dropping below 200 bps at 2Q15 from 256 bps at 2Q14 and a peak of 467 bps at 4Q12 (a spike that had been driven by the cost of risk of Agos, CA’s consumer finance entity in Italy), while the cost of risk in International Retail Banking (IRB) stabilized at 136 bps at 2Q15 vs. 131 bps at 2Q14.

The Group’s franchise strength and adaptability have enabled it to readily cope with the stressed environment. CA’s excess of stable funding defined as the surplus of long-term funding sources over long-term applications of funds is now above EUR 100 billion. While CA has substantial short-term debt of EUR 116 billion, DBRS notes that CA’s liquidity buffer is more than two times larger, totaling EUR 247 billion at 2Q15. Another indicator is the Liquidity Coverage Ratio (LCR) which was above 110% at both CA Group and CASA level at 2Q15.

While the Group carries on with its reflections on its organization to improve of the global coherence of the Group and better functioning of the Group, solid capital levels remain evident. The Group’s fully loaded Common Equity Tier 1 ratio under Basel 3 criteria was up to 13.2% at 1H15 from 12.3% at 1H14 (CRD4 as calculated by CA without the application of the transitional method), standing on the higher end of its global peer group even accounting for the impact of the Danish compromise and the inherent volatility of the available for sale (AFS) reserves. Given the Group’s cooperative nature, DBRS continues to view the retention of earnings as the critical source of capital for the Group to maintain solid levels of capitalisation.

While upward pressure on the ratings is unlikely given their already high level and due to continuing regulatory challenges, DBRS anticipates that CA’s strength would benefit if the Group maintains solid levels of earnings, while successfully executing its 2014-2016 Medium Term Plan and achieving financial targets. Downward pressure on the intrinsic assessment (IA) is not expected, but could result from notable deterioration in key segments of its franchise to the extent that it would impact the Group’s earning power, capitalization and financial profile, or if the French economy were to deteriorate such that CA’s financial fundamentals were impacted.

CA’s ratings remain Under Review with Negative Implications due to DBRS’s review of the systemic support assumptions for a number of European Banks initiated on 20th May 2015. The review reflects DBRS’s view that recent developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Currently, CA has a support assessment of SA-2, which results in a one-notch uplift from CA’s IA of A (high) to the final rating of AA (low). During the review period, DBRS is considering whether to change the support designation of a number of European banks from SA-2 to SA-3, which is the category for banks where DBRS has no expectation of systemic support or is not confident enough that timely systemic support would be forthcoming in times of need to add a notch for systemic support. Such a conclusion would lead to the removal of any uplift and a downgrade of the senior ratings for any affected banks. The review is expected to be completed in September.

Notes:
The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found can be found at: http://www.dbrs.com/about/methodologies

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

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Vitaline Vincent, Vice President Analyst, Global Financial Institutions Group
Rating Committee Chair: William Schwartz, Senior Vice President, Global Credit Policy
Initial Rating Date: 18 January 2011
Most Recent Rating Update: 20 May 2015