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

DBRS Ratings GmbH (DBRS Morningstar) has confirmed Crédit Logement’s (CL or the Company) Long-Term Issuer rating at AA (low) with a Stable trend. CL’s intrinsic assessment (IA) was confirmed at AA (low). A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of CL’s IA at AA (low), takes into account the Company’s strong franchise and leading position in the home loan guarantees market in France; its low risk profile, supported by conservative underwriting and significant expertise in the recovery of doubtful exposures; 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), Stable), and BNP Paribas (AA (low), Stable).

DBRS Morningstar expects CL to suffer a deterioration in the quality of its guarantee portfolio in the medium term as a result of COVID-19 and the consequent substantial weakening of the French economy in 2020. However, the impact on CL’s risk profile is likely to be largely mitigated by its conservative underwriting, and the low risk of its guarantee outstandings. Despite a likely increase in unemployment, France has a well-developed system of social support and French home loan borrowers typically have the right to request a temporary suspension or reduction in debt payments for a certain period. In addition, in response to the COVID-19 outbreak, the French authorities introduced several measures to support corporates and families, including the introduction of debt moratoriumsto support the economy.

We note that CL’s capital represents a sufficient buffer to withstand a significant increase in defaults in CL’s portfolio of home loan guarantees, as indicated by CL’s regular stress tests. DBRS Morningstar notes also that the Company has a capital planning procedure in place, and in case of a very severe deterioration in asset quality, leading to the risk of falling below the required solvency levels, it has the option to issue subordinated loans to its bank shareholders and partners. Based on agreements with its shareholders, CL can delay the payment of claims for up to two years in the case of an extremely challenging market environment, which limits liquidity risk. We expect the COVID-19 crisis to lead to a decline in the volume of guarantees put in place and, consequently, in 2020 revenues. However, the Company should remain profitable, given the cost of risk is booked directly to equity and the cost efficiency ratio is very strong.

RATING DRIVERS
An upgrade is unlikely given the relatively high rating level. However, a significant strengthening of capital, combined with maintenance of the low risk profile could result in an upgrade.

A downgrade of the ratings could derive from a substantial economic impact of the COVID-19 pandemic on the French economy, resulting in more severe than anticipated deterioration in CL’s asset quality and weakening of its capital cushions.

RATING RATIONALE
CL is the leading issuer of financial guarantees in the French home loans market in France. Financial guarantees are the most popular form of collateral, securing close to 60% of all outstanding French home loans. CL has a leading position in home loans financial guarantees. At end-2019, CL’s outstanding portfolio of home loan guarantees stood at EUR 375 billion, equivalent to around one-third of all home loans outstanding in France. CL’s strong franchise reflects its leading position in the market and is supported by the 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.

CL has a track record of generating consistently positive earnings. We recognise profit maximisation is not its strategic goal, however, the retention of earnings support the group’s capital generation, The Company’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. CL’s 2019 net profit was slightly up 1% year-on-year (YoY) to EUR 103.4 million. The main driver was a 8.8% increase in gross commissions, in line with an increase in guarantees put in place over the course of 2019, which compensated for a 15% decline in net interest income. Costs were fairly stable YoY at EUR 51 million, and DBRS Morningstar estimates that CL’s cost-to-income ratio was a very low 27% in 2019 fairly stable compared to 2018. The cost of risk on the guarantees portfolio is covered by the MGF and booked directly to equity.

CL’s risk profile reflects primarily the credit risk of its French home loan guarantees portfolio, which at end-2019 amounted to EUR 375 billion. Despite concentration in the French home loans market, DBRS Morningstar views CL’s risk profile as low, supported by conservative underwriting standards, advanced risk monitoring procedures, and strong expertise in the recovery of overdue loans. In DBRS Morningstar’s opinion, CL’s position as the leading guarantor of home loans and its longstanding expertise in the French market represent an advantage in assessing risks.

The enhancement of internal risk management systems combined with a benign credit environment has had a positive effect on the quality of new guarantees in recent years. The share of doubtful exposures for the overall portfolio remained on a downward trend and was 0.57% at end-2019 down from 0.61% at end-2018, benefiting from the improvement in risk profile. The share of doubtful exposures in CL’s guarantee portfolio remained substantially below that observed in the broader French market. The credit risk of CL’s investment portfolio (EUR 9.5 billion at end-2019) is also low. The management of the investment portfolio is subject to strict counterparty limits and stress tests. CL has also a policy of collateralisation of its investments. 64% of bank placements were collateralised and 99.7% of the investment portfolio was invested in parties internally ranked in the A range or higher.

DBRS Morningstar views CL’s approach to the management of liquidity risk as conservative. The liquidity risk represents the risk of the inadequacy of its liquid placements to cover creditor claims, especially in a scenario where such claims were to rise abruptly and persist over a prolonged period of time. The Company maintains a substantial buffer of high quality placements and runs regular stress tests, which assume a significant increase in losses on CL’s guarantee portfolio. An important feature, which is a positive from the point of view of CL’s liquidity management is that, based on the agreements with its bank shareholders, CL can delay the payment of claims for up to two years in the case of an extremely challenging market environment.

In DBRS Morningstar’s opinion, capital is strong and represents a sufficient buffer to withstand a significant increase in defaults in CL’s portfolio of home loan 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. In addition, CL benefits from its shareholders’ commitment to maintain its solvency in case of stress.

During 2019, CET1 and Total capital ratios strengthened by 0.8% to 17.3% and 23.3%, respectively, reflecting mainly an increase in the Mutual Guarantee Fund (MGF), which more than offset a reduction in capital due to the payment of a special dividend (EUR 247 million) from CL’s distributable profit reserve. CET1 and Total Capital ratios are well above the Pillar 1 regulatory requirements, which, following the outbreak of the Covid-19 pandemic, and the consequent reduction of the countercyclical buffer (to 0% from 0.25% previously) in March 2020, were reduced to 7% and 10.5%, respectively.

Pillar 2 requirements represent the effective floor for CL’s regulatory Total capital, given they are much higher than the Pillar 1 requirement. CL is obliged to maintain total capital of at least 2% of guarantee outstandings, equivalent to EUR 7.5 billion at end-2019. Historically, CL has maintained a relatively small capital cushion over the relatively demanding Pillar 2 requirements. At end-2019 the regulatory total capital represented 2.2% of guarantee outstandings and the cushion above the total capital requirement was EUR 310 million.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019), https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Company Documents, Crédit Logement 2019 Annual Report and S&P Global Market Intelligence, DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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.

The sensitivity analysis of the relevant key rating assumptions can be found at:
http://dbrsmorningstar.com/research/361893

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Arnaud Journois, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: June 5, 2014
Last Rating Date: May 31, 2019

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