DBRS Confirms SFIL’s Issuer Rating at AA (high), Stable Trend

DBRS Ratings GmbH (DBRS) confirmed the ratings of SFIL SA (SFIL or the Bank), including the Long-Term Issuer Rating of AA (high) and the Short-Term Issuer Rating of R-1 (high). The trend on all ratings remains Stable. The Support Assessment remains SA1. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of SFIL’s Long-Term Issuer Rating at AA (high) reflects DBRS’s AAA Issuer Rating, with a Stable trend on the Republic of France. SFIL’s ratings reflect its statutory ownership and the expectation of predictable support from its shareholders, all of whom are ultimately owned by the French state. DBRS has assigned a support assessment for SFIL of SA1 which implies the expectation of predictable support from its shareholders. As such SFIL’s Issuer Rating is positioned one notch below the Issuer Rating of France, and above the entity’s intrinsic creditworthiness.

RATING DRIVERS

Given the already high rating level stemming from the high likelihood of support from the French State, upward rating pressure would require additional comfort in relation to potential support from the State.
Given the strong link with the French State, downward rating pressure could come from a deterioration in the ratings of France or from a weakening in the likelihood of support.

RATING RATIONALE

SFIL’s franchise focuses on two public policy missions, (i) public-sector financing, where it has a 20-25% market share in France, and (ii) export credit agreement refinancing, for which it received the mandate in 2015 and is now the market leader with a market share of around 50%. SFIL owns 100% of the Caisse Française de Financement Local (CAFFIL), through which it refinances medium and long-term loans offered by la Banque Postale in partnership with the Caisse des Dépôts et Consignations to French local authorities and French Public hospitals.

SFIL was created in 2013 and with total assets of EUR 73 billion at end-2018, is the 7th largest financial institution in France by asset size. The bank is ultimately owned 100% by the French State, with 75% direct ownership and 25% indirect ownership through the Caisse des Dépôts et Consignations and La Banque Postale. DBRS considers that there is a strong likelihood that the French State would support SFIL because it understands the French Republic – as the reference shareholder - is committed to ensuring that SFIL is able to pur¬sue its activities in an ongoing manner and to honour its financial commitments. Discussions have started between the French State and the CDC to transfer the ownership of SFIL to the CDC. DBRS does not consider that this transfer will materially impact SFIL’s ratings, as the Bank would remain entirely owned by the French State, as the CDC is 100% owned by the Republic of France. In addition, such a transfer would come with a commitment of the shareholders to ensure SFIL’s financial strength, to protect its economic base and to provide necessary support for the continuation of SFIL’s activities.

DBRS views SFIL’s earnings power as constrained, reflecting a combination of low margins, the Bank’s business positioning and mandate in public financing, and its relatively high cost base. SFIL was profitable in 2018, with net income of EUR 63 million, up from EUR 54 million in 2017. This was mostly driven by growth in IBPT due to SFIL’s improved funding conditions, contained operating expenses and continued low cost of risk. DBRS expects margins to be maintained at current levels with a reduction of funding costs offsetting some margin pressure.

SFIL’s risk profile is mainly driven by its loan book which is very low risk due to the high proportion of French public sector lending. Reflecting the high quality of the portfolio, the non-performing loans (NPL) ratio was 2.44% at end-2018. After its inception in 2013, SFIL inherited a substantial amount of problematic structured loans that had been granted by Dexia to the French public sector prior to the financial crisis. This portfolio has been substantially reduced and at FY18 was only EUR 0.9 billion, down from EUR 8.5 billion at FY13. DBRS views as positive the fact that the de-risking process is now almost entirely completed, especially the reduction of uncapped loans indexed on the EUR/CHF exchange rate as these proved to be the most challenging part of the process.

DBRS views the Bank’s capitalisation as solid given the Bank’s low risk profile. SFIL’s status as a public development bank affects its capability to generate profits, but profit generation is not considered part of its main mission. This in turn affects the Bank’s flexibility in retaining earnings and expanding its capital base. At FY18, the Bank reported a phased-in CET 1 ratio of 25.1% and a Total Capital Ratio of 25.9%. The capital cushions are well above the requirements of the European Central Bank as indicated through its Supervisory Review and Evaluation Process (SREP) for 2019. SFIL’s capital ratios are driven by the very low risk weight exposures, resulting in total RWAs of only EUR 5.5 billion at end-2018. On April 16, 2019, the European Commission adopted an amendment to the existing framework (CRR II/CRD V), which includes the possibility for public development banks to exclude certain assets from the calculation of their leverage exposure. Taking into account the amendment, SFIL would report a leverage ratio well above the 3% minimum requirement, at around 7%.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company Documents, the French Government, the European Commission and S&P Global Market Intelligence. 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Arnaud Journois, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: September 11, 2018
Last Rating Date: September 11, 2018

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