DBRS Upgrades Credit Agricole’s Senior Ratings to AA (low), Trend Stable

DBRS Ratings Limited (DBRS) upgraded the Long-Term Issuer Ratings of Groupe Crédit Agricole (CA or the Group) and Crédit Agricole SA (CASA) to AA (low). The Long-Term Senior Debt and Long-Term Deposit ratings of CASA were also upgraded to AA (low). The Long-Term Critical Obligations Rating of CA was upgraded to AA (high), while the short-term ratings of both entities remained unchanged. The trend on all the ratings is Stable. The Group’s intrinsic assessment (IA) was also upgraded to AA (low). The support assessment remains SA3 and as such, the Long-Term ratings are positioned in line with the Group’s IA.

The ratings upgrade reflects the progress achieved by the Group in recent years, which has led to an improvement in its financial profile. In particular, the upgrade takes into account the enhancement of the risk profile and improvements in funding and liquidity. The Group has derisked its operations, which has contributed to a decline in the cost of risk since 2014, reduced its reliance on short term funding and strengthened its liquidity buffers. Also, CA has been steadily building up its capital buffers, which compare favourably with those of its domestic peers. The Group has also successfully offset margin pressure in its domestic operations with healthy volume growth across its various businesses and its focus on cost containment. This success, combined with a fall in the cost of risk, contributed to underlying profit growth in 2016 and 1H17.

The strength of CA’s franchise is an important factor in the ratings. CA’s core strength is its leading position in French retail banking with its extensive footprint, its complementary networks, and its ability to leverage this position through cross-selling with specialised businesses, many of which have global reach or are market leading. The Regional Banks, together with Le Credit Lyonnais (LCL), generate around half of the Group’s banking revenues and, together with Asset Gathering (which includes CA’s asset management, insurance, and private banking businesses) provide earnings stability. Other businesses, including International retail banking, Specialised financial services and Large Customers add to the diversification of the Group and offer cross-selling potential, which remains an important element of the Group’s strategy. DBRS notes that the acquisition of Pioneer Investment by Amundi (the Group’s asset management subsidiary) substantially strengthened CA’s activities in this area and increased its presence in Italy, which is the second domestic market of the Group.

The Group’s earnings generation is robust, supported by solid positions in its core markets and cross-selling. Earnings have been supported by a low cost of risk. However, CA – like its domestic peers – has a relatively high cost-income ratio. As a result, cost containment remains an important strategic priority. While reported net income group share in 2016 declined by 20% YoY to EUR 4,825 million, primarily due to significant one-offs, underlying net profit group share remained resilient, increasing by 3.1% to EUR 6,353 million. Underlying revenues were EUR 31,314 million, flat YoY as strong interest margin pressure in French and Italian retail was offset by robust commercial growth in retail networks and specialised business lines, including insurance, capital markets and investment banking. Underlying operating expenses increased by 1.5% YoY to EUR 20,134 million, largely due to strategic investments. The cost-to-income ratio based on underlying figures and including the contribution to the Single Resolution Fund (SRF) was 64.3% (2015: 63.3%), relatively high in an international context but in line with the large domestic peers. Under the Medium Term Plan announced in March 2016, CASA is targeting EUR 0.9 billion in annual cost savings to be reached by 2019. The target cost-to-income ratio for CA is below 60%. The underlying cost of risk amounted to EUR 2,412 million, a decrease of 5% YoY. Adjusted for EUR 100 million of litigation provisions in 2016, the cost of risk was equivalent to 21% of the underlying IBPT.

In 1H17, reported net income group share was EUR 3,706 million, up 34% YoY. When adjusted for specific items, net income was EUR 3,656 million, up by 27%. The improvement in underlying profitability was driven by solid growth in revenues, supported by robust recovery from a low base in the Large Customers division, good momentum in retail volumes and a much less negative contribution from the Corporate centre than in 1H16. Operating expenses remained well contained while the cost of risk declined strongly, reflecting net provision reversals in Regional Banks during 2Q17.

Reflecting CA’s retail banking foundations and a moderate involvement in higher risk activities, the Group has a low risk profile, enhanced by its derisking and deleveraging actions since the financial crisis. Lending is focused on the domestic market, which represents 70% of the loan portfolio. More than half of the loan book in France comprises low risk home loans. The Group has reduced its cost of risk in recent years, mainly through improvements in its Italian operations and in consumer finance. At end-2Q17, the cost of credit risk was 21bps (rolling four-quarter average), below the Group’s Medium Term Plan target of 35bps in 2019. The impaired loans ratio was 2.8% at end-2Q17, relatively low when compared to domestic peers, down from 3.0% at end-2016. At end-2016 the coverage of impaired loans by specific reserves was an adequate 56%.

The Group’s funding and liquidity remain strong. CA benefits from its strong position in the French retail savings and retains good access to wholesale funding. At end-2Q17 close to two-thirds of CA’s banking cash balance sheet (IFRS banking business balance sheet after netting of items that have a symmetrical impact on assets and liabilities in terms of liquidity risk and those related to insurance activities) were funded by customer funds. DBRS estimates that at end-2Q17, the loan-to-deposit ratio was 111.6% at the Group level. The contribution of short term wholesale funding remained on a downward trend. At end-2Q17, short term funding was EUR 91 billion, equivalent to 8.2% of the banking cash balance sheet, down from 8.7% at end-2016 and 10.4% at end-2015. The Group has been also diversifying its wholesale funding sources. CA maintains a substantial liquidity buffer at EUR 246 billion, covering the short term debt by more than three times. Slightly more than half of CA’s liquidity reserves was in the form of HQLA securities. The Group’s Liquidity Coverage Ratio (LCR) stood at 131%, in line with the Medium-Term Plan target of LCR ratio above 110%.

DBRS views CA’s capitalisation as strong. The Group aims to remain one of best-capitalised groups in Europe, exceeding by a wide margin current regulatory minima. CA targets a 16% fully-loaded CET1 ratio at end-2019, which it plans to achieve mainly through earnings retention at the Regional Banks. The Group increased its fully-loaded CET1 ratio to 15.0% at end-2Q17 from 13.7% at end-2015 and remains on track to meet its end-2019 capital targets. The acquisition of Pioneer Investments by Amundi in mid-2017 is expected to reduce the Group’s fully loaded CET1 ratio by 43bps in 3Q17. CA reported a phased-in leverage ratio of 5.8%.

The Group must comply with the requirements for a total loss-absorbing capacity (TLAC) ratio that is in excess of 19.5% (including 2.5% capital conservation buffer and 1% G-SIB buffer) from 2019 and in excess of 21.5% from 2022. At end-2Q17, CA estimated its TLAC ratio (excluding eligible senior debt) at 20.8%. CA targets a 22% TLAC ratio, excluding eligible senior debt by end-2019.

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

RATING DRIVERS

While unlikely given the recent upgrade, positive rating pressure could come from CA substantially strengthening its cost efficiency and returns, and further enhancing its risk profile, while at the same time maintaining solid financial fundamentals.

Negative rating pressure could arise from a significant weakening in any of the key segments of the Group’s franchise that impact its earning power, risk profile or balance sheet, or if the French economy were to deteriorate to a degree that the Group’s fundamentals weakened significantly.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). Other applicable methodologies include the DBRS Criteria: Guarantees and Other Forms of Support (February 2017). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, company documents, the ACPR and the Banque de France. 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 access to accounts, management and other 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.

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Lead Analyst: Tomasz Walkowicz – Vice President Analyst, Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman – Managing Director, Head of EU FIG - Global Financial Institutions Group
Initial Rating Date: July 13, 2010
Last Rating Date: July 14, 2017

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