DBRS Assigns First-Time AA (high) / R-1 (high) Issuer Ratings to SFIL SA, Stable Trend

DBRS Ratings Limited (DBRS) has assigned first-time public ratings to SFIL SA (SFIL or the Bank), a public development bank owned by the Republic of France (France). The ratings assigned include a AA (high) Long-Term Issuer Rating and an R-1 (high) Short-Term Issuer Rating. The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS

DBRS has assigned a support assessment of SA1 to SFIL, which implies the expectation of predictable support from its shareholders. DBRS currently rates the Republic of France’s Long-Term Foreign and Local Currency – Issuer Ratings at AAA with a Stable Trend. The Issuer Rating of SFIL is one notch below the Issuer Rating of France, reflecting the high likelihood of support from the French State in case of need. DBRS notes that due to its ownership and the expectation of support, SFIL’s ratings are positioned above the entity’s intrinsic creditworthiness.

RATING DRIVERS

Given the already high rating level stemming from the high likelihood of support from the French State, upward rating pressure would require additional comfort in relation to potential support from the State.

Given the strong link with the French State, downward rating pressure could come from a deterioration in the ratings of France or from a weakening in the likelihood of support. A material deterioration in the capital levels, risk profile or earnings of the Bank could also lead to negative rating pressure.

RATING RATIONALE

SFIL’s franchise focuses on two public policy missions, (i) public-sector financing, where it has a 23% market share in France, and (ii) export credit agreement refinancing, for which it received the mandate in 2015. In 2017, SFIL became the leading liquidity provider in France for export credits, reaching a market share above 50%. SFIL owns 100% of the Caisse Française de Financement Local (CAFFIL), through which it refinances medium and long-term loans offered by la Banque Postale in partnership with the Caisse des Dépôts et Consignations to French local authorities and French Public hospitals.

SFIL was created in 2013 and with total assets of EUR 72 billion at end-2017, is the 7th largest financial institution in France by asset size. The bank is ultimately owned 100% by the French State, with 75% direct ownership and 25% indirect ownership through la Caisse des Dépôts et Consignations and la Banque Postale. As the main and reference shareholder under French Law, the French State is represented on the board of directors and the CEO is appointed by presidential decree. In addition, DBRS considers that there is a strong likelihood that the French State would support SFIL because it understands the French Republic – as the reference shareholder - is committed to ensuring that SFIL is able to pur¬sue its activities in an ongoing manner and to honour its financial commitments.

DBRS views SFIL’s earnings power as constrained, reflecting a combination of low margins, the Bank’s business positioning and mandate in public financing, and its relatively high cost base. However, active de-risking of the legacy portfolio has led to releases of provisions which has improved profitability. SFIL was profitable in 2017 and 2016, and DBRS expects profitability and margins to be sustained thanks to a reduction in funding costs. In addition, the mandate to refinance export credit should positively impact the Bank’s earnings going forward.

SFIL’s risk profile is mainly driven by its loan book which is very low risk due to the high proportion of lending to the French public sector. Reflecting the high quality of the portfolio, the non-performing loans (NPL) ratio was 0.98% at end-2017. DBRS does not expect the export credit agreements refinancing activity to materially impact SFIL’s asset quality given the guarantee provided by BPI France Assurance Export on behalf of the French State. After its inception in 2013, SFIL inherited a substantial amount of problematic structured loans that had been granted by Dexia to the French public sector prior to the financial crisis. This portfolio has been substantially reduced to EUR 1.2 billion at end-2017, from EUR 8.5 billion at end-2013. DBRS views as positive the fact that the de-risking process is now almost entirely completed, especially the reduction of uncapped loans indexed on the EUR/CHF exchange rate as these proved to be the most challenging part of the process.

DBRS views the Bank’s capitalisation as solid given the Bank’s low risk profile. SFIL’s status as a public development bank affects its capability to generate profits, but profit generation is not considered part of its main mission. This in turn affects the Bank’s flexibility in retaining earnings and expanding its capital base. At end-2017 the Bank reported a phased-in CET 1 ratio of 23.1% and a Total Capital Ratio of 23.8%. The capital cushions are well above the requirements of the European Central Bank as indicated through its Supervisory Review and Evaluation Process (SREP) for 2018.

SFIL’s capital ratio is driven by the very low risk weight exposures, resulting in total RWAs of only EUR 5.8 billion at end-2017. However, the low risk weights also result in a high degree of leverage. SFIL reported a weak leverage ratio of 2% at end-2017. DBRS notes however that the European Commission has published a proposal to amend the current regulation, which would include the possibility for public development banks to exclude certain assets from their leverage exposure calculation. As a result, DBRS expects the adjusted leverage ratio to be above the future requirements once the amendment is adopted.

Notes:

All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents, SNL Financial and the French Government. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly rated issuer. This is the first DBRS rating on this issuer.
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: Arnaud Journois, Assistant Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: September 11, 2018
Most Recent Rating Update: Not Applicable as no last rating date

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