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 CREDIT 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, alongside resilient underlying profitability. The universal banking model has in our view enabled the Group to remain resilient throughout past crises and maintain a robust underlying capacity to generate earnings. CA’s funding and liquidity remains 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.

The rating action also reflects 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. DBRS Morningstar notes that CA's asset quality profile has thus far been resilient despite a number of economic challenges such as COVID-19, the conflict in Ukraine, inflation, and the energy crisis. DBRS Morningstar expects geopolitical tensions, rising interest rates and high inflation to lead to a rise in defaults across CA’s footprint. We view CA’s strong earnings generation capacity to be a key mitigating factor, providing the Group with some flexibility to absorb any potential deterioration in asset quality.

CREDIT RATING DRIVERS

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

The ratings would be downgraded if CA experiences a prolonged material deterioration in its asset quality profile or profitability.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
CA’s franchise is underpinned by its universal banking model, supported by its leading positions in retail banking and insurance in France and in asset management in Europe. CA’s retail networks in France generate around half of the Group’s banking revenues and, together with the 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. Credit Agricole has recently stepped up to consolidate its franchise, notably through the acquisition of Creval which increased the Group’s footprint in Italy, and Lyxor, which made CA a European leader in the ETF market.

Earnings Combined Building Block (BB) Assessment: Good
DBRS Morningstar considers that CA generates robust underlying earnings, supported by the Group’s universal banking model. In our view, this has enabled the Group’s profitability to remain resilient throughout past crises. CA reported EUR 8.1 billion net income in 2022, down from EUR 9.1 billion. This was mainly driven by higher cost of risk on provisions related to the current macroeconomic environment and higher operating expenses resulting from investments to support higher activity levels, and remuneration hikes against a background of inflationary pressures. However, the Group reported good revenue growth in most business lines with notable performances in Large Customers and International Retail Banking, which started to benefit from higher rates. We expect inflation to somewhat pressure the Group’s results in 2023, although this should be more than offset for the time being by the contained cost of risk and revenue growth. Reported group net income went up 23.6% YOY in Q1 2023 to EUR 1.7 billion (IFRS 17 restated). Specific items totalled a negative EUR 24 million in Q1 2023 compared to a negative EUR 153 million in Q1 2022. Excluding specific items, underlying net income group share was EUR 1.7 billion, up 12.6% YOY. Q1 2023 results were driven by much lower cost of risk, higher revenues and contained operating expenses.

Risk Combined Building Block (BB) Assessment: Strong/Good
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 generally low-risk home lending. DBRS Morningstar views CA’s asset quality as solid. DBRS Morningstar expects geopolitical tensions, rising interest rates and high inflation to lead to a rise in defaults across CA’s footprint. However, we view CA’s strong earnings generation capacity to be a key mitigating factor, providing the Group with some flexibility to absorb any potential deterioration in asset quality. At end-Q1 2023, CA’s reported NPL ratio was 2.1%, slightly up from 2.0% YOY. The coverage of impaired loans, including collective reserves, was relatively strong at 83.4%. The cost of risk stood at 23 bps at end-March 2023, which is in line with pre-COVID levels and below the Group’s assumption for its Medium-Term Plan.

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. 63.6% 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 calculations, the loan-to-deposit ratio at end-Q1 2023 was 107.1% up from 101.7% at end-2022, on loan growth. The Group retains good access to wholesale funding. At end-Q1 2023, the Group had issued EUR 21.2 billion of medium and long-term market funding. CA maintains a substantial buffer of high-quality assets. The HQLA (high quality liquid assets) portfolio totalled EUR 124 billion at end-Q1 2023, while total liquidity reserves were a significant EUR 457 billion, equivalent to 27% of CA’s banking cash balance sheet. The LCR ratio (12-month average) for Q1 2023 was 162.6%, well above the regulatory requirement.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views CA’s capitalisation as strong with capital ratios comparing very favourably with most domestic and international peers. This is driven by the Group’s stable earnings, overall low risk exposures and solid cushion above the regulatory requirements. At end-Q1 2023, the Group’s phased-in Common Equity Tier 1 (CET1) ratio was 17.6%, stable from end-2022, providing the Group with a cushion of around 870 bps above the Supervisory Review and Evaluation Process (SREP) requirements, one of the highest amongst European banks. At end-Q1 2023, the phased-in Total Capital ratio and leverage ratio also remained strong at 21.7% and 5.4%. The Group has continued to build-up its total loss absorption capacity by consistent issuance of senior non-preferred debt in recent quarters. The end-Q1 2023 MREL ratio was around 32.8% of RWAs and around 9.3% of LRE (Leverage Ratio Exposure). The total loss-absorbing capacity (TLAC) ratio at end-Q1 2023 was 27.4% of RWAs, well above the requirements of 21.6%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/417430

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or Governance factor(s) that had a significant or relevant effect on the credit analysis.

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 (4 July 2023) https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023) https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this credit rating include Morningstar Inc. and Company Documents, CA 2022 Report, CA 2022 Press Release, CA 2022 Presentation, CA 2022 Universal Registration Documents and Updates. DBRS Morningstar considers the information available to it for the purposes of providing this credit 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 credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit 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: https://registers.esma.europa.eu/cerep-publication/. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/417429

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

Lead Analyst: Arnaud Journois, Vice President - European Financial Institutions
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of Global FIG
Initial Rating Date: July 13, 2010
Last Rating Date: September 13, 2022

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