DBRS Confirms Crédit Logement’s Long-Term Issuer Rating at AA (low); Stable Trend

DBRS Ratings Limited (DBRS) has confirmed Crédit Logement’s (CL or the Company) Long-Term Issuer rating at AA (low) with a Stable trend. CL’s intrinsic assessment (IA) was confirmed at AA (low). A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of CL’s IA at AA (low), takes into account the Company’s strong franchise and a leading position in the home loans guarantees market in France, a low risk profile, supported by conservative underwriting, significant expertise in the recovery of doubtful exposures, strong capital, sufficient to withstand a significant increase in defaults, and shareholders’ commitment to maintain its solvency in case of stress. CL’s three largest shareholders are Credit Agricole Group (AA (low) Stable), Société Générale (A (high), Positive), and BNP Paribas (AA (low), Stable).

RATING DRIVERS

Upward rating pressure is constrained by the relatively high rating level. However, a significant strengthening of capital, combined with maintenance of the low risk profile could result in positive pressure on the rating.

A material weakening of the performance of CL’s guarantee portfolio could lead to a downgrade. In addition, a weakening of CL’s risk management systems, a material decrease in its capital buffer, or deterioration in the financial strength of CL’s partner banks could also lead to downward rating pressure.

RATING RATIONALE

CL is the leading issuer of financial guarantees in the French home loans market in France. Financial guarantees are the most popular form of collateral, securing close to 60% of all outstanding French home loans. CL has a dominant, 50-60% market share in the segment of home loans secured by financial guarantees. At end-2018, CL’s outstanding portfolio of home loan guarantees stood at EUR 346 billion, equivalent to around one-third of all home loans outstanding in France. CL’s strong franchise reflects its leading position in the market and is supported by the expertise and capabilities that it has developed over many decades. Additionally, CL’s market position and distribution capacity benefit from cooperation with the major French banking groups, which are its shareholders.

While profit maximisation is not its strategic goal, CL has a track record of generating consistently positive earnings. The Company’s revenues and earnings are driven, on the one hand, by the volume of guarantees put in place and, on the other hand by the investment return on its funds, predominantly composed of net interest income earned on bank deposits and other low risk investments. In 2018 CL’s net profit decreased by 15% year-on-year (YoY) to EUR 102 million. The main driver was a reduction in gross commissions, aligning a normalisation of the volume of guarantees put in place after a relatively strong 2017. The decline in commissions was in part offset by stronger net interest income, driven by non-recurrence of one-off costs related to the repayment of some of its subordinated debt in 2017. Owing to CL’s business model the cost base is relatively stable, however in 2018 operating expenses declined moderately YoY thanks to good cost discipline. DBRS estimates that CL’s cost-to-income ratio was a very low 26.1% in 2018 and 22.9% in 2017. DBRS notes that CL books its cost of risk on the guarantees portfolio directly to equity.

CL’s risk profile reflects the credit risk inherent in its French home loan guarantees portfolio. Despite concentration in the French home loans market, DBRS views CL’s risk profile as low. Even with the relatively strict underwriting standards of its bank partners, CL evaluates the applications received from banks and declines close to 20% of them. CL also has strong expertise in the recovery of overdue loans. The Company’s expertise in risk management is evident in the strong quality of its guarantees portfolio.

The enhancing of internal risk management systems undertaken by CL in 2012 has had a positive effect on the quality of new guarantee generations since 2013. The share of doubtful exposures for the overall portfolio has remained on a downward trend since 2015, and at end-2018 was 0.61%, down from 0.68% at end-2017 and 0.76% a year earlier. It benefited from an improvement in risk profile, but also reflected 6% YoY growth in the guarantee outstandings. The share of doubtful exposures in CL’s guarantee portfolio is less than half of the average share of doubtful exposures for all home loan outstandings in the French market. In 2018 CL observed some deterioration in risk parameters in the production received from its banking partners. As a result, the Company updated its internal scoring systems, which has led to a lower approval rate for loans in the higher risk bands.

Another important element of CL’s risk profile is the credit risk of its investment portfolio of EUR 8.9 billion at end-2018. Management of the investment portfolio is subject to strict counterparty limits and stress tests. CL also has a policy of collateralisation of its investments: 50% of bank placements were collateralised and 99.6% of the investment portfolio was invested in instruments ranked in the A range or higher. In DBRS’s opinion, given the structure of placements and CL’s investment policy, the credit risk of the investment portfolio is low.

DBRS views CL’s approach to the management of liquidity risk as conservative. The liquidity risk represents the risk of the inadequacy of its liquid placements to cover creditor claims, especially in a scenario where such claims were to rise abruptly and persist over a prolonged period of time. The Company maintains a substantial buffer of high quality placements and runs regular stress tests, which assume a significant increase in losses on CL’s guarantee portfolio. CL’s liquidity management takes into account regulatory and internal liquidity thresholds. An important feature, which is a positive from the point of view of CL’s liquidity management is that, based on the agreements with its bank shareholders, CL can delay the payment of claims for up to two years in the case of an extremely challenging market environment.

In DBRS’ opinion, capital is strong and represents a sufficient buffer to withstand a significant increase in defaults in CL’s portfolio of home loan guarantees. CL’s regular stress tests indicate that the Company’s resources are sufficient to cope with very adverse scenarios, including significant deterioration in the domestic economic environment and in the housing market. In addition, CL benefits from shareholders’ commitment to maintain its solvency in case of stress. CL’s CET1 and total capital ratios of 16.5% and 22.5% at end-2018, respectively were well above the regulatory Pillar 1 minima. DBRS notes that in 2019 CL plans to pay a special dividend of EUR 247 million from the 2018 net profit and from the distributable capital reserve, equivalent to 241% of the 2018 net profit. Through the special dividend CL plans to distribute the excess capital, built up in earlier years in anticipation of changes in Pillar 2 requirements, which were finalised by the regulator in 2017. DBRS estimates that pro forma for the full impact of the special dividend, the end-2018 CET1 ratio was 16.0% and the total capital ratio 22.0%.

Pillar 2 requirements represent the effective floor for CL’s regulatory total capital, given they are much higher than the Pillar 1 requirement. Under Pillar 2, CL is obliged to maintain total capital of at least 2% of guarantee outstandings. Historically, CL has maintained a relatively small capital cushion over the relatively demanding Pillar 2 requirements and its total regulatory capital at end-2018 represented an estimated 2.1% of guarantee outstandings on a pro-forma basis for the special dividend).

The Grid Summary Grades for CL are as follows: Franchise Strength –Strong; Earnings Power – Strong; Risk Profile – Very Strong/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 Bank of France. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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 European FIG, Global FIG

Initial Rating Date: June 05, 2014
Last Rating Date: June 04, 2018

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