DBRS Confirms Credit Agricole at AA (low), Trend Stable

DBRS Ratings Limited (DBRS) confirmed the Long-Term Issuer Ratings of Groupe Crédit Agricole (CA or the Group) and Crédit Agricole SA (CASA) to AA (low). The trend on all ratings is Stable. The Intrinsic Assessment (IA) was also maintained at AA (low). Please see the end of the press release for a full list of rating actions.

KEY RATING CONSIDERATIONS
In maintaining the Group’s IA at AA (low), DBRS takes into account CA’s very strong franchise in the domestic market, which, combined with its solid position in asset management, insurance and other specialised financial services, represents the foundation of CA’s universal banking model. Despite pressure from low interest rates and challenging conditions in capital markets, profitability has been resilient, supported by healthy commercial momentum across different business lines. Like other large French banks, CA lags some of the European peers in efficiency, however cost management remains an important strategic priority for the Group. CA’s risk profile is relatively low, reflecting a substantial share of low-risk home loans and prudent underwriting. CA’s funding and liquidity are strong and capital buffers compare favourably with those of many domestic and international peers. The Group has been consistently strengthening its loss absorption capacity in recent years.

RATING DRIVERS
Positive rating pressure could come from CA substantially improving its cost efficiency while at the same time maintaining solid financial fundamentals.
Negative rating pressure could be driven by a significant deterioration of the French economy, resulting in a substantial deterioration of the Group’s fundamentals. Also, potential acquisitions of businesses that would significantly increase the Group’s risk profile, could have a negative rating impact.

RATING RATIONALE
DBRS’ ratings take into account CA’s very strong franchise, underpinned by its leading positions in retail banking and savings management in France. Well-developed specialised financial services support the Group’s universal banking model, focused on synergies and cross-selling. CA’s retail networks generate around half of the Group’s banking revenues and, together with Asset Gathering businesses, which include asset management, insurance, and private banking provide earnings stability. While the Group is concentrated in France, other businesses, including International Retail Banking, Specialised Financial Services and Large Customers, increase diversification and support the strength of the Group’s universal banking model. In June 2019, CA launched its 2022 strategic plan, focused on growth, revenue synergies and technological transformation for greater efficiency. The new strategy builds upon the previous medium-term plan for 2016-2019, which delivered almost all of its financial results a year ahead of schedule.
Despite pressures from low interest rates and challenging conditions in capital markets, earnings generation has been resilient, supported by healthy levels of customer activity across different business lines. In 1H19, reported net income group share declined by 9.8% to EUR 3.2 billion. Excluding specific items, which totalled a negative EUR 118 million after-tax in 1H19 (the impact of home purchase savings plans) and a positive EUR 96 million in 1H18 (mainly change in the value of goodwill) net income group share was down 3.7% to EUR. The decline in the underlying profits was due to a normalisation of the cost of risk, which nevertheless remained a low 19 bps of average outstandings in 2Q19 (rolling four-quarter average), reflecting focus on low risk retail lending and cautious underwriting. The continuation of solid commercial momentum across CA’s different business lines contributed to moderate growth in underlying revenues. Operating expenses were under good control and the cost efficiency ratio based on reported figures was 66% (2018: 65.3%). DBRS notes that while CA’s cost efficiency ratio remains relatively high in the European context it has started to compare favourably with some of its large domestic peers.
CA’s risk profile is strong, reflecting the retail banking foundations and a moderate involvement in higher risk activities. Lending is focused on the domestic market, with close to 70% of the loan book in France, according to DBRS’ calculations. Around half of the overall lending book are retail exposures, in large part consisting of the low risk home lending. Operational risk appears to be low and the Group has not been affected by substantial conduct or litigation issues. DBRS views CA’s asset quality as solid. At end-2Q19, the impaired loans ratio for CA was 2.6%, flat compared to the end-4Q18 level and down from 3% on 1 January 2019. The coverage of impaired loans including collective reserves was a relatively strong 83.7%. Following a downward trend, the cost of risk has stabilised and has remained in the 17 – 19 bps range since the second half of 2017.

DBRS views CA’s funding profile as solid, benefiting from the Group’s leading position in the French savings market. Close to two-thirds of CA’s banking cash balance sheet (banking business balance sheet after netting of items that have a symmetrical impact on assets and liabilities) are funded by customer balances, which have seen consistent growth in recent years. According to DBRS’s calculation, the end-2Q19 loan-to-deposit ratio was 109%, remaining broadly stable over the last year. The Group retains good access to wholesale funding and has been diversifying its sources as part of enhancing its funding and liquidity management. The share of short-term market funds in the funding structure is relatively low. CA maintains a substantial buffer of high-quality assets. At end-2Q19, the coverage of short-term debt by liquid reserves was a strong 252% and CA’s LCR (12-month average) was 132%.

CA’s capitalisation is strong and its capital ratios compare favourably with most domestic and international peers. The Group’s Common Equity Tier 1 (CET1) ratio at end-2Q19 was 15.4%, representing a cushion of approximately 590 bps above the 2019 SREP requirement (including the countercyclical buffer). CA remains on track to meet its strategic target of CET1 ratio above 16%. The phased-in Total Capital and leverage ratios were strong, at 19.5% and 5.7%, respectively. The resilience of CA’s balance sheet has been strengthened by consistent issuance of senior non-preferred debt in recent years. The end-2Q19, MREL ratio including around 11% of potentially eligible senior preferred debt with maturity above one year was estimated at approximately 34% of RWA. The total loss-absorbing capacity (TLAC) ratio at end-2Q19 was 25.2% of RWAs including 2.5% of senior preferred debt, based on DBRS’ calculation. DBRS notes that CA expects to meet its future TLAC and MREL requirements without recourse to senior debt.

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

Notes: All figures are in Euros unless otherwise noted.

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

The sources of information used for this rating include company documents, S&P Global Market Intelligence and the French Government. 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 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: July 13, 2010
Most Recent Rating Update: October 1, 2018

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