DBRS Confirms Credit Agricole at AA (low), Trend Stable

DBRS Ratings Limited (DBRS) confirmed the Long-Term Issuer Ratings of Groupe Crédit Agricole (CA or the Group) and Crédit Agricole SA (CASA) to AA (low). The Intrinsic Assessment (IA) was also maintained at AA (low). Please see the end of the press release for a full list of rating actions.

KEY RATING CONSIDERATIONS

In maintaining the Group’s IA at AA (low), DBRS takes into account CA’s strong franchise in the domestic market, and well developed asset management, insurance and specialised financial services, which add to the Group’s diversification and offer cross-selling potential. The Group’s earnings in recent years have benefitted from organic growth and acquisitions. While profitability has been stable, reflecting focus on low risk businesses, CA’s cost efficiency is below that of many European peers. The risk profile is relatively low, reflecting the Group’s focus on lending in the domestic market and a relatively high share of home loans, and CA’s funding and liquidity are strong. Also, CA has been steadily building up its capital buffers, which compare favourably with those of many domestic and international peers.

RATING DRIVERS

While unlikely, given the already high rating, 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 be driven by a significant deterioration of the French economy that would result in a significant weakening of the Group’s fundamentals. Also, potential acquisitions of businesses that would significantly increase the Group’s risk profile, could have a negative rating impact.

RATING RATIONALE

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 Group’s recent acquisitions of Pioneer Investments by Amundi and of smaller Italian banks by Cariparma have strengthened CA’s position both in asset management and in the Italian market.

The Group’s earnings generation is robust, supported by solid positions in its core markets and cross-selling. Despite continued pressure from low interest rates and home loan renegotiations in the domestic market the Group’s underlying earnings in 2017 have been supported by a combination of healthy volume growth across its retail networks, solid commercial momentum in other business lines, acquisitions, and a low cost of risk. Stated net income group share in 2017 was up by 36% YoY to EUR 6,536 million, mainly reflecting a reduced drag from specific one-off items, which were relatively high in 2016, and underlying growth. Adjusted for specific items, underlying net income group share was EUR 7,123 million, increasing by 9% from 2016, boosted by the acquisition of Pioneer Investments. The cost-to-income ratio based on underlying figures and excluding the contribution to the Single Resolution Fund (SRF) was 63.3% (2016: 62.8%). DBRS notes that CA – like its domestic peers – has a relatively high cost-income ratio. As a result, cost containment remains an important strategic priority. 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 fell by 34% to EUR 1,536 million, reflecting a continued improvement across different business divisions, in particular the Italian operations as well as the disposal of a non-performing loan portfolio at Agos. Cost of risk (excluding provisions for legal risk) absorbed a relatively low 14% of the Group’s 2017 IBPT, based on DBRS’ calculations.

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. CA’s cost of risk has stabilized at around 18 bps since June 2017. The management plans to maintain a low risk profile and the 2019 financial targets under the Medium-Term Plan include maintaining the cost of risk below 35bps for CA and below 50bps for CASA. The share of impaired loans ratio in gross customer and interbank loans was 2.7% at end-2Q18 and the coverage ratio (including collective reserves and not netted for available collateral and guarantees) was a high 85%.

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-2Q18, the loan-to-deposit ratio was 109.5% at the Group level. The contribution of short term wholesale funding remains relatively low, despite some rebound in 1H18. At end-2Q18, short term funding was EUR 117 billion, equivalent to 10% of the banking cash balance sheet. CA maintains a substantial liquidity buffer at EUR 256 billion, covering the short term debt by more than two times. Close to half of CA’s liquidity reserves was in the form of HQLA securities. The Group’s Liquidity Coverage Ratio (LCR) stood at 135%, 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 solid 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’s fully-loaded Common Equity Tier 1 (CET1) ratio has remained fairly stable since end-2016 and stood at 14.8% at end-1H18 compared to 14.9% at end-2019 on the back of solid internal capital generation despite organic growth and the initial application of IFRS 9.

With an estimated total loss-absorbing capacity (TLAC) ratio (excluding eligible senior debt) of 21.2% at end-1H18, CA is well positioned to meet its end-2019 TLAC ratio target of 22% excluding 2.5% of eligible senior debt and the related regulatory requirements. The Group must comply with a TLAC ratio 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. CA intends to fill its TLAC requirement without recourse to senior debt in order to protect its senior bondholders.

In other rating actions DBRS assigned Long-Term and Short-Term Critical Obligations Ratings to CASA at AA (high) and R-1 (high), whilst CA’s Long-Term and Short-Term Critical Obligations Ratings and the Short-Term Debt Rating were discontinued. The Critical Obligation Ratings have been assigned to CASA to reflect its role as the Central Body of Groupe Crédit Agricole. It is required under French financial regulations to ensure the maintenance of satisfactory liquidity and solvency of the Group’s members and acts as the Group’s central institution in terms of refinancing, supervision and regulatory reporting. DBRS expects that CASA would play a key role in any potential resolution of the Group. Concurrently, CASA’s support designation was changed to SA1 from SA3 to reflect that Crédit Agricole S.A. can obtain intra-group support under the solidarity mechanism based on cross-guarantees.

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

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 is an unsolicited rating. This credit rating was not initiated at the request of the 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: Tomasz Walkowicz, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: July 13, 2010
Most Recent Rating Update: September 29, 2017

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