DBRS Confirms Crédit Agricole at A (high), Trend Revised to Positive

DBRS Ratings Limited (DBRS) has today confirmed the Issuer Rating of Groupe Crédit Agricole (CA or the Group) and the Issuer Rating and Senior Long-Term & Deposits Rating of Crédit Agricole SA (CASA) at A (high). The trend on the long term ratings was changed to Positive from Stable. Short-term ratings of CA and CASA were also confirmed at R-1 (middle) with Stable Trends. The Group’s intrinsic assessment (IA) is maintained at A (high). The support assessment remains SA3 and as such, the Senior Long-Term Debt and Deposits rating of CASA is positioned in line with the Group’s IA. 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.

The change in the trend to Positive reflects DBRS’s view that CA continues to make consistent progress in improving its funding and liquidity, building up its capital, and enhancing its risk profile. In improving its funding profile, the Group has reduced its reliance on short term funding and built substantial liquidity in its balance sheet, as well as making significant advancement in its issuance of senior and subordinated debt, which means that it is compliant with key long term regulatory requirements. The Group has also been steadily building its capital position and its fully-loaded Common Equity Tier 1 (CET1) ratio is in the upper end of the range for its peers. Management plans to maintain a conservative risk profile, with a cost of risk target for CA of below 35 basis points (bps) under its Medium Term Plan. DBRS notes that CA’s underlying cost of risk has been trending down since 2014, stabilising at around 30 bps in 1H16.

Despite a challenging operating environment in its domestic markets, the Group has continued to deliver resilient earnings, which DBRS views as a confirmation of the Group’s franchise strength and favourable business diversification. In 1H16, underlying net income group share was around EUR 2.9 billion, modestly down YoY. The Group’s underlying total 1H16 revenues remained relatively stable, supported by a steady contribution from Asset Gathering and Specialised Financial Services. The Group’s underlying cost/income ratio is slightly up from 1H15, but has remained at a similar level to many peers.

In confirming the Group’s IA at A (high), DBRS recognises that Crédit Agricole has a strong franchise that is diversified by business and geography with a strong domestic base that has resilient earnings power. In DBRS’s view, Crédit Agricole’s core strength is its leading position in French retail banking with its extensive footprint, its complementary networks, and its ability to leverage this position through its other business segments. CA’s recent financial performance has demonstrated the strength of its revenue generation capabilities and expense control. DBRS also takes into account the progress that CA has achieved in refocusing on its core capabilities, including adapting its investment banking activities. Nevertheless, continued progress with expense control, managing risk and capital positioning remain important to enhance CA’s resiliency.

In August 2016 CA simplified its Group structure. DBRS views positively the greater transparency of the Group as well as the positive impact it should have on CASA’s capital and liquidity and notes that both CASA’s role as the Central Body of the Group, as well as the internal support mechanisms remain in place.

The Regional Banks together with LCL typically generate more than half of the Group’s banking revenues and, together with Asset Gathering (which includes CA’s asset management, Insurance, and Private Banking businesses) provide earnings stability, and are important determinants of a low risk profile. In 1H16, revenues in French and international retail business segments were under pressure from low interest rates, while the Large Customers division coped with challenging conditions in the capital markets. CA’s underlying revenues declined, but only by 2% YoY, due to a steady contribution from Asset Gathering and Specialised Financial Services. Underlying operating expenses, including the Single Resolution Fund (SRF) contribution, were EUR 10.3 billion, marginally up YoY, mainly due to an increase in variable compensation and investments in technology in the Regional banks. Based on DBRS estimates, the cost/income ratio on an underlying basis and including the contribution to the SRF was at 65.5%, up to from 63.3% in 1H15, but remained at a level that is not out of line with the Group’s peers. Under the strategic Medium Term Plan announced in March 2016, CASA is targeting EUR 0.9 billion in annual cost savings to be reached by 2019. The target cost-to-income ratio for CA and CASA is below 60%.

In line with CA’s substantial retail banking foundations and its business mix that has only a moderate involvement in higher risk activities, the Group has a relatively low risk profile that has been enhanced by its actions since the financial crisis. CA’s cost of risk, excluding Office of Foreign Assets Control (OFAC) remediation and legal provision costs has been on a downward trend since 2014. In 1H16 the underlying cost of risk was EUR 1.3 billion, stabilising at around 30 bps (rolling four-quarter average). At end-1H16 CA’s impaired loans ratio, as calculated by DBRS, was at a low of 3.2%, flat to end-2015 and slightly below the 3.3% in 2014.

The Group’s funding profile has been also improving. At end-1H16 short term funding was EUR 93 billion, equivalent to 9% of the cash balance sheet (IFRS banking business balance sheet after netting of items that have a symmetrical impact on assets and liabilities), down from 10% at end-2015 and 12% at end-2014. The Group has been also diversifying its wholesale funding sources. DBRS views CA’s funding profile as solid, underpinned by its strong and unique position in the French retail banking and savings management. DBRS estimates that the end-1H16 loan-to-deposit ratio was 112.3% at the Group level. Crédit Agricole maintains a significant liquidity buffer at EUR 227 billion at end-1H16. At end-1H16 the coverage of short term debt by liquid reserves was at more than two and half times. CA manages its Liquidity Coverage Ratio (LCR) with a target of more than 110% at end-2019 and at end-1H16 it stood above 110%.

DBRS views the Group’s capitalisation as strong. At end-1H16, CA reported a fully-loaded CET1 ratio of 14.2%, an increase of 100 bps from a year before. The Group reported a phased-in leverage ratio of 5.6%. CA estimated its 1H16 total loss-absorbing capacity (TLAC) ratio (excluding eligible senior debt) at 19.5%, in line with the future minimum requirement (which allows for inclusion of 2.5% of eligible senior debt). CA targets a 22% TLAC ratio, excluding eligible senior debt by end-2019. In addition, CASA is considering issuing non-preferred senior debt, once the legal framework for issuing such instruments is finalised in France. In July 2016, CA comfortably passed the EBA stress test and achieved one of the highest fully loaded CET1 ratios under the adverse scenario in 2018 among the European Global Systemically Important Banks.

RATING DRIVERS

Positive rating pressure on the ratings could come from the Group delivering further progress with regard to cost efficiency and asset quality, while maintaining strong and stable earnings, a conservative risk profile and delivering successful progress on the Group’s Medium Term Plan.

Given the Positive trend, a downgrade is unlikely. However, negative rating pressure could arise from a significant weakening in key segments of the Group’s franchise that impact its earning power, capitalization and financial profile, or if the French economy were to deteriorate such that CA’s financial fundamentals were substantially impacted.

Notes:

All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), and the Critical Obligations Rating Criteria (February 2016). 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, company disclosures, and European Central Bank. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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: Tomasz Walkowicz
Back-up: Roger Lister
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: July 13, 2010
Most Recent Rating Update: September 29, 2015

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