DBRS Confirms Crédit Logement’s Issuer Rating at AA (low); Stable Trend
Banking Organizations, Non-Bank Financial InstitutionsDBRS Ratings Limited (DBRS) has today confirmed Crédit Logement’s (CL or the Company) issuer rating (IA) at AA (low) with a Stable trend. DBRS has also confirmed the A (high) Issuer Rating of Crédit Logement Assurance. These rating actions follow a detailed review of the Company’s performance and outlook.
The confirmation of the Company’s IA at AA (low), takes into account CL’s strong franchise with its leading position in the French home loans guarantees market, a low risk profile, benefitting from its prudent underwriting standards and significant expertise in bad loans recovery, a healthy residential mortgage lending market in France, solid capital, sufficient to withstand a significant increase in defaults, and shareholders’ commitment to maintain its solvency in case of stress.
The Company has a strong franchise underpinned by its leading position in the French home loan guarantees with about 50% market share. Overall, around 30% of all home loans outstandings in France are guaranteed by CL. Market position and distribution capacity are supported by cooperation with major French banking groups, which include CL’s shareholders. The Company’s franchise reflects the knowledge, expertise and capabilities that it has developed since its inception in 1975. Financial guarantees in France are a popular alternative to mortgages, thanks to their speed of approval and flexibility. CL’s financial guarantee is based on pooling risk across home loan borrowers, who pay a contribution of about 1% of loan into CL’s Mutual Guarantee Fund (the Fund). Totalling EUR 4.9 billion at end-2016, MGF represents a sizeable cushion against adverse developments in the home loan market. From the perspective of its bank partners, CL’s guarantees fully cover the risk of final loss. CL takes over the management of debt collection in the case of default.
The Company has a track record of generating consistently positive earnings, even if profit maximisation is not its strategic goal. CL’s revenues and earnings are driven, one the one hand, by the volume of guarantees put in place and, on the other hand by the investment return on its funds, predominantly composed of net interest income earned on bank deposits. In 2016 the Company’s net profit declined 54% YoY to EUR 108 million from a high base in 2015, inflated by a non-recurrent compensation payment for early termination of high interest deposits. At the same time, despite record guarantees production, net fee income was down 14% to EUR 150 million, aligning a decline in the volume of guarantees put in place when compared to 2015. CL books its cost of risk on the guarantees portfolio directly to equity.
CL’s risk profile is dominated by the credit risk inherent in its French home loan guarantees portfolio, which at end-2016 was EUR 301 billion. Despite concentration in the French home loans market, DBRS views CL’s risk profile as low. Even with the relatively strict underwriting standards of its bank partners, CL evaluates the applications received from banks and declines around 20% of them. CL also has strong expertise in the recovery of overdue loans. The Company’s expertise in risk management is evident in the strong quality of its guarantees portfolio. Some characteristics of the French home loans market are supportive for CL’s guarantee portfolio performance. French home loans are predominantly fixed rate and amortised. A well-developed system of social support is a mitigating factor in case of borrower’s unemployment. In addition, in case of default, debt collection not restricted to the financed property. From the historical perspective, asset quality of French home loans has been solid with the share of doubtful home loans below 2% since 2001.
The enhancing of internal risk management systems in 2012 had a positive effect on the performance of new guarantee generations since 2013 as measured by the average Probability of Default of the guarantee portfolio, which has been on a downward trend since September 2015. The average Probability of Default (1 year) of the guarantee portfolio at end-2016 was 0.28%, down 3 bps YoY. The share of doubtful exposures declined as well to 0.74% (end-2015: 0.78%), around half of that observed in the French banking sector, benefiting from the improvement in risk but also reflecting a 7% growth in the guarantee outstandings. DBRS notes also that a steady decline in interest rates on French home loans in recent years, driven by their renegotiation or repurchase, is likely to have a positive long-term impact on CL’s credit risk profile. Based on historical experience, the main catalyst of the deterioration could be a recession and rising unemployment.
Another important element of CL’s risk profile is the credit risk of its investment portfolio of EUR 8.9 billion at end-2016. The Company’s investment portfolio is predominantly in the form of deposits with the major French banks, of which the majority are collateralised. Management of the investment portfolio is subject to strict counterparty limits and stress tests. In DBRS’s opinion, given the structure of placements and CL’s investment policy, credit risk of the investment portfolio is low.
CL’s liquidity risk in essence represents the risk of inadequacy of liquid funds when compared to CL’s commitment as guarantor to cover creditor claims, especially in a scenario where such claims were to rise abruptly and persist over a prolonged period of time. A positive feature from the point of view of CL’s liquidity management, is that based on the agreements with its shareholders-partners, in the case of a significant rise in defaults, CL can delay the payment of claims for up to two years.
In DBRS’s opinion, CL’s capital is solid, representing a sufficient buffer to withstand a significant increase in defaults of the home loans it guarantees. CL’s shareholders, which include many of the major banking groups in France uphold a commitment to maintain CL’s solvency at required levels. CL’s most recent stress tests indicate that the Company’s resources are sufficient to cope with very adverse scenarios, including significant deterioration in the domestic economic environment and in the housing market. This is confirmed by DBRS’s proprietary analysis, which indicates that CL has sufficient capital, under various adverse scenarios, to support an Intrinsic Assessment of AA (low) based, inter alia, on an evaluation of risk utilising the DBRS European RMBS model.
Based on the French prudential regulations for financial companies (Sociétés de Financement), MGF is part of CET1 capital. CL’s Pillar 1 CET1 ratio, based on the calculation of capital requirements for credit risk of the guarantees portfolio using the advanced IRB method, stood at 15.51%, improving by 88 bps YoY. In addition to CET1, CL’s capital consists of Tier 1 and Tier 2 subordinated instruments, including borrowings issued to CL’s shareholders. Some of the sub debt is subject to grandfathering. CL’s Pillar 1 total capital ratio was 23.51% compared to 22.60% in 2015, up 91 bps YoY. Additionally, CL is subject to Pillar 2 requirements with regards to the total capital, defined to be at minimum 80% of the capital requirement for standardised credit risk under CRD IV. In late 2016 the French regulator indicated its plan to review Pillar 2 requirements for CL. CL’s total capital at end-2016 was EUR 7,610 million, EUR 325 million in excess of the Pillar 2 requirement of EUR 7,285 million. The excess of capital over the Pillar 2 requirement declined from EUR 482 million at end-2015 as a result of an increase in the guarantee outstandings. Guarantee Commitments Received from shareholding banks totalled EUR 2,637 million at end-2016.
RATING DRIVERS
Upward pressure on the ratings is unlikely given the high level of the rating. However, a significant increase in the capital buffer, combined with an improvement in the risk profile could result in positive pressure on the rating.
Downward pressure on the rating could result from a material decrease in the capital or significant deterioration of the performance of guarantee portfolio. Any weakening of risk management systems or deterioration in the financial strength of CL’s partner banks would also put downward pressure on the rating.
Notes:
All figures are in EUR unless otherwise noted.
The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). DBRS has also applied the RMBS Model under RMBS methodology. These can be found can be found at: http://www.dbrs.com/about/methodologies
The sources of information used for this rating include company documents, SNL Financials and the Bank of France. DBRS considers the information available to it for the purposes of providing this rating to be 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
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, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: 9 May 2014
Most Recent Rating Update: 27 May 2016
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