DBRS Confirms Crédit Logement’s Issuer Rating at AA (low); Stable Trend

DBRS Ratings Limited (DBRS) has confirmed Crédit Logement’s (CL or the Company) Long-Term Issuer rating (IA) at AA (low) with a Stable trend. DBRS has also confirmed the A (high) Long-Term Issuer Rating of Crédit Logement Assurance. These rating actions follow a detailed review of the Company’s performance and outlook.

KEY RATING CONSIDERATIONS

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, strong capital, sufficient to withstand a significant increase in defaults, and shareholders’ commitment to maintain its solvency in case of stress. CL’s three largest shareholders are Credit Agricole Group (AA (low) Stable), Société Générale (A(high), Positive), and BNP Paribas (AA(low), Stable).

RATING DRIVERS

Upward pressure on the ratings is less likely given their high level. However, a significant increase in the capital buffer, combined with maintenance of low risk profile could result in positive pressure on the rating.
A material weakening of the performance of CL’s guarantee portfolio could exert downward pressure on the rating. In addition, a weakening of CL’s risk management systems, a material decrease in its capital buffer, or deterioration in the financial strength of CL’s partner banks could also lead to downward rating pressure.

RATING RATIONALE

CL is the leader in the French home loan guarantees market, with a market share of between 50 and 60% in originated home loans secured by financial guarantees, a dominant form of collateral in French residential property lending. At end-2017, CL’s outstanding portfolio of home loan guarantees stood at EUR 326 billion, equivalent to around one-third of all home loan outstandings in France. CL’s leading position in the market is supported by the knowledge, expertise and capabilities that it has developed over many decades. Additionally, CL’s market position and distribution capacity benefit from cooperation with the major French banking groups, which are its shareholders.

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, on 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 and other low risk investments. In 2017 the Company’s net profit increased 12% YoY to EUR 121 million. The main driver was a strong, 22% increase in guarantees put in place over the course of 2017, which contributed to growth in CL’s commissions. This was in part offset by an increase in interest costs, driven by non-recurrent charges related to the repayment of some of its subordinated debt at the end of 2017. Operating costs remained under good control, increasing by 6% YoY. DBRS estimates that its cost-to-income ratio was 22.9% in 2017 and 23.7% in 2016. DBRS notes that 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-2017 was EUR 326 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.

The enhancing of internal risk management systems undertaken by CL in 2012 had a positive effect on the quality of new guarantee generations since 2013. The share of doubtful exposures for the overall portfolio remained on a downward trend initiated in 2015, declining to 0.68% at end-2017 from 0.76% a year earlier. It benefited from the improvement in risk profile, but also reflected 8% YoY growth in the guarantee outstandings. The share of doubtful exposures in CL’s guarantee portfolio is around half of that of home loans in the French market.

Another important element of CL’s risk profile is the credit risk of its investment portfolio of EUR 8.9 billion (end-2017). Management of the investment portfolio is subject to strict counterparty limits and stress tests. CL has also a policy of collateralisation of its investments. 59% of bank placements were collateralised and 99% were with parties internally ranked in the A range or higher. The Company’s short-term liquidity is invested mainly with banks and credit institutions in the eurozone (91% of counterparty risk at end-2017). In DBRS’s opinion, given the structure of placements and CL’s investment policy, the credit risk of the investment portfolio is very low.

CL’s liquidity risk 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. The main element in CL’s liquidity management are regular stress tests, assuming a significant increase in losses on CL’s guarantee portfolio and the management of liquidity gaps. From the point of view of CL’s liquidity management, a positive feature under its agreements with its shareholders-partners is that CL can delay the payment of claims for up to two years, if it experiences a significant rise in defaults.

DBRS views CL’s capital as strong, representing a sufficient buffer to withstand a significant increase in defaults of the home loans portfolio it guarantees. CL’s regular 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. CL’s CET1 and total capital ratios of 16.1% and 22.8%, respectively, compare favourably with those observed in the banking sector and are well above the regulatory Pillar 1 minima. CL is also subject to Pillar 2 capital requirements, defined by the French regulator, Autorité de Contrôle Prudentiel de Régulation (ACPR). Pillar 2 requirement represents the effective floor for CL’s total capital, given it is much higher than the Pillar 1 requirement. During 2017 ACPR changed the formula defining the Pillar 2 requirement. Under the new formula, CL is obliged to maintain total capital of at least 2% of guarantee outstandings. Previously, the minimum was defined as 80% of the requirement for residential retail mortgage exposures based on the standardised approach under CRR. As a result of the above change, CL’s end-2017 Pillar 2 total capital requirement was EUR 6.5 billion (2% of guarantee outstandings) under the new rules, down from EUR 7.3 billion (equivalent to 2.4% of guarantee outstandings) under the previous rules at end-2016. Due to a reduction in the Pillar 2 requirement, the total capital buffer increased to EUR 1.0 billion at end-2017 from EUR 0.4 billion, a year earlier. In DBRS’s opinion, taking into account CL’s strong capitalisation and relatively rigorous Pillar 2 requirements, a potential reduction in CL’s capital buffer, while maintaining compliance with the regulatory minima, would not result in downward pressure on CL’s ratings, provided that other elements of CL’s credit profile remain strong Based on end-2017 DBRS estimates that Pillar 2 requirement is equivalent to 19.7% of RWAs.

The Grid Summary Grades for CL are as follows: Franchise Strength –Strong; Earnings Power – Strong; Risk Profile – Very Strong/Strong; Funding & Liquidity – Strong; Capitalisation –Strong.

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 Financial 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 and US 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: 02 June 2017

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