DBRS Morningstar Confirms Crédit Agricole’s LT Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Groupe Crédit Agricole (CA or the Group) and Crédit Agricole SA (CASA), including the Long-Term Issuer Ratings of AA (low) and the Short-Term Issuer Ratings of R-1 (middle). The trend on all ratings remains Stable. DBRS Morningstar has also maintained the Group’s Intrinsic Assessment at AA (low) and the Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of CA’s Long-Term ratings at AA (low) continues to reflect the Group’s very strong retail and commercial banking franchise in its domestic market, which is further supported by its solid position in asset management, insurance and other specialised financial services and a resilient underlying profitability. We also incorporate CA’s conservative risk management and low risk profile stemming from the Group’s substantial share of low-risk home loans in France and prudent underwriting standards. CA’s funding and liquidity remain strong, benefiting from stable customer deposits and good access to wholesale markets, while its capitalisation levels are robust with capital buffers comparing favourably with many peers. The Group has been consistently strengthening its loss absorption capacity in recent years.

Nevertheless, we also take into account both the ongoing pressure on profitability in the low interest rate environment and the asset quality challenges potentially facing CA in 2021-2022. Whilst the Group’s asset quality has remained good to date, we consider that state guaranteed loans and loan moratoria have been preventing the deterioration of traditional asset quality metrics and therefore expect new NPLs to materialise with the end of the support measures.

RATING DRIVERS
An upgrade of CA’s Long-Term Issuer Rating would occur should CA substantially improve profitability and efficiency over the medium term, whilst maintaining a resilient credit profile.

The ratings would be downgraded if CA experiences a prolonged material deterioration of its asset quality profile. Ratings would also be downgraded if the Group’s profitability materially declines.

RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
CA’s franchise is 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 in France generate around half of the Group’s banking revenues and, together with Asset Gathering businesses, which include asset management, insurance, and private banking, provide some 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. Following a successful tender offer that concluded on April 23, 2021, CA, through its main subsidiary in Italy Crédit Agricole Italia, now holds 100% of the shares of Creval at end-June 2021 for a price of EUR 862 million. This transaction further strengthened the Group’s position in Italy, its second-largest domestic market, especially in the dynamic region of Lombardy.

Earnings Combined Building Block (BB) Assessment: Good
The Group has continued to generate resilient underlying earnings, supported by the Group’s universal banking model focused on synergies. Whilst market disruption resulting from the COVID-19 resulted in negative pressure for the Bank’s profitability in 2020, CA reported solid underlying earnings supported by its diversified franchise. We expect pressure on net interest income to continue due to low rates, but that the cost of risk will revert to lower levels. In H1 2021, CA’s reported underlying net income group share was EUR 4.0 billion, up almost twofold from H1 2020. This was mainly due to the normalisation of the cost of risk and higher revenues despite growth in operating expenses. Underlying revenues were up 8.7% YoY at EUR 18.4 billion, mainly due to the solid performance of the Asset Gathering business line, strong growth in Retail Banking and continued recovery in Specialised Financial Services. Underlying operating expenses excluding the Single Resolution Fund contribution (SRF) were EUR 11.0 billion, up 4.7% YoY, on the back of sustained activity levels. Nevertheless, the Group benefitted from a positive jaws effect and the underlying cost-to-income ratio excluding SRF was 59.9% compared to 62.1% in H1 2020. Cost of risk started to normalise at EUR 1.0 billion in H1 2021, thanks to a decrease in all business segments in H1 2021.

Risk Combined Building Block (BB) Assessment: Strong
CA’s risk profile is relatively conservative reflecting its retail banking cooperative foundations, however the Group does have operations in some higher risk business lines such as consumer finance. Lending is primarily focused on the domestic market, with close to 70% of the loan book in France, according to DBRS Morningstar’s calculations. Retail exposures account for around half of the loan book, in large part consisting of the generally low risk home lending. Operational risk appears to be low and the Group has not been affected by substantial conduct or litigation issues to date. DBRS Morningstar views CA’s asset quality as solid. At end-H1 2021, CA’s reported NPL ratio was 2.3%, fairly stable YoY. The coverage of impaired loans, including collective reserves, was 85.5%. However, due to the COVID-19 pandemic we expect asset quality could deteriorate in coming quarters when government support expires and bankruptcies start to materialise. The cost of risk over four rolling quarters reverted to 25 bps in Q2 2021, in line with pre-COVID 19 levels.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
DBRS Morningstar 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 Morningstar’s calculation, the loan-to-deposit ratio at end Q2-2021 was 100.2%, compared to 102.3% at end-Q2 2020, due to the knock-on effect of the pandemic and lockdowns on deposit growth. The Group retains good access to wholesale funding and has been diversifying its sources as part of enhancing its funding and liquidity management. Liquidity is solid with a substantial buffer of high-quality assets (EUR 121 billion) amply covering short-term funding. The average LCR over 12 months was 165.6% for Q2 2021, well above regulatory requirements.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
CA’s capitalisation remains strong and its capital ratios compare favourably with most domestic and international peers. At end-Q2 2021, the Group’s phased-in Common Equity Tier 1 (CET1) ratio was 17.3%, stable from end-2020, as internal capital generation was offset by the consolidation of Creval. This provides the Group with a cushion of around 840 bps above the Supervisory Review and Evaluation Process (SREP) requirements. At end-June 2021,the phased-in Total Capital ratio and leverage ratio remained strong at 21.1% and 5.9%. The Group has continued to build-up its total loss absorption capacity by consistent issuance of senior non-preferred debt in recent years. The end-Q2 2021 MREL ratio was around 25.6% excluding eligible preferred senior debt and, including around 8.3% of TLOF, was estimated at approximately 32% of RWAs.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://www.dbrsmorningstar.com/research/384293

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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, CA 2020 and H1 2021 Reports, CA 2020 and H1 2021 Press Releases, CA 2020 and H1 2021 Presentations, CA 2020 and H1 2021 Registration Documents, CA August 2021 Credit Update, 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.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/384290

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: July 13, 2010
Last Rating Date: April 29, 2021

DBRS Ratings GmbH
Neue Mainzer Straße 75
Tel. +49 (69) 8088 3500
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.