Fitch Affirms Credit Agricole at 'A'; Stable Outlook

Thu Jul 3, 2014 12:01pm EDT

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(The following statement was released by the rating agency) LONDON, July 03 (Fitch) Fitch Ratings has affirmed Credit Agricole's (CA) Long-term Issuer Default Rating (IDR) at 'A' with a Stable Outlook and Short-term IDR at 'F1'. At the same time, the agency has affirmed the Viability Rating (VR) at 'a', Support Rating Floor (SRF) at 'A' and Support Rating (SR) at '1'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRs, VR AND SENIOR DEBT Credit Agricole's (CA) Long- and Short-Term IDRs are driven by its standalone financial strength, as indicated by its VR. CA's IDRs, senior debt and VR reflect its strong French retail franchise, satisfactory asset quality, satisfactory funding and liquidity and solid capital ratios. They also factor in the group's exposure to Italy. CA is not a single entity, but a cooperative banking group. Its 39 regional banks (caisses regionales; CRs), Credit Agricole S.A. (CA S.A., the group's central body and publicly quoted entity) and Credit Agricole Corporate and Investment Bank (CACIB) are bound by a cross-support mechanism according to the French Financial and Monetary Code. Accordingly, Fitch has the same IDRs for CA, CA S.A. and CACIB. The IDRs would also apply to the CRs if Fitch rated them. CA is one of Europe's largest banking groups by deposits. It is the domestic retail banking leader (with market shares of roughly 25%) as well as in the related businesses of bancassurance, asset management, consumer finance and factoring. Moreover, Fitch believes this will continue to be the case. The group's domestic retail banking business generates solid and stable earnings and is the largest contributor to operating profit. CA has a low-risk appetite, albeit higher than domestic cooperative peers. Its loan portfolio is mainly concentrated in France with a large portion of low-risk housing loans. However, the bank's exposure to Italy (10% of total credit risk) is higher risk. Impaired loans are manageable and coverage ratios particularly high (over 80%). The solid quality of the group's domestic loan book offsets poor asset quality at CA's Italian subsidiaries, which have high impaired loans (and generate large loan impairment charges). Fitch believes these subsidiaries will remain under pressure given weak forecasted economic growth in Italy in 2014. Customer deposits form the bulk of funding and the loans to deposits ratio is satisfactory (115% at end-2013). CA's high quality liquid assets and cash roughly cover one year short-term market funding. However, many international peers have a higher buffer of high quality liquid assets and cash. CA's capital ratios compare well with similarly rated peers. They have improved due to earnings retention and lower risk weighted assets and this should continue. RATING SENSITIVITIES - IDRs, VR AND SENIOR DEBT CA's current IDRs, senior debt and VR factor in the expectation that it will continue to focus on its core domestic retail franchise. Any expansion into higher-risk business, especially abroad, could lead to negative rating pressure but this is not expected. A sustained improvement in CA's risk profile as demonstrated by better asset quality notably of CA's Italian subsidiaries combined with a stronger liquidity position could be positive for the VR. The upside potential for the VR would be limited if CA were to face high litigation fines or a negative outcome from the asset quality review. CA S.A.'s IDRs (and senior debt) would be sensitive to any change in those of CA. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR CA's SR and SRF reflect Fitch's view that it is extremely likely that support from the French authorities would be forthcoming if needed. CA is systemically important in France given its size, its position as the leading French retail bank (with roughly 25% market share of customer deposits), and its importance as core provider of credit and other key financial services to the French economy. CA S.A.'s SR and SRF reflect its integral role within CA and Fitch's opinion that potential state support to the group would flow through CA S.A. RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR CA's and CA S.A.'s SRs and SRFs would be sensitive to a decrease in Fitch's view of France's ability (as measured by its rating) or willingness to support CA. These ratings are also sensitive to a change in Fitch's assumptions around the availability of sovereign support for French financial institutions. Fitch expects the probability of support, if needed, is likely to decline during the next one to two years, as further progress is made in enabling effective resolution frameworks. Therefore, Fitch expects to downgrade CA's and CA S.A.'s SR to '5' and revise down their SRF to 'No Floor'. The timing at this stage is likely to be some point in late 2014 or in 1H15. A decline in support would have no impact on CA and CA S.A.'s IDRs as long as the VR remains at 'a' or higher, which is in line with our expectations. KEY RATING DRIVERS AND SENSITIVITIES - SUBSIDIARIES Credit Agricole Corporate and Investment Bank (CACIB) is part of the group's cross-support mechanism according to the French Financial and Monetary Code as modified in 2013. Applying our 'Banking Structures Backed by Mutual Support Mechanisms' criteria, Fitch typically assigns the same Long-Term and Short-Term IDRs (as those assigned to the group) but no VR or SR to entities that benefit from the cross support mechanism. Therefore Fitch has withdrawn CACIB's VR and SR, which allows the application of this criteria in a consistent manner. The Long-and Short-term IDRs and SRs of other subsidiaries - CA Consumer Finance and Credit Agricole Leasing & Factoring - are based on an extremely high probability of support from CA if needed. CA Consumer Finance's and Credit Agricole Leasing & Factoring's Long-and Short-term IDRs are equalised with those of CA as we view them as core subsidiaries given their strategic importance to and integration with their parent. All these ratings are sensitive to changes in CA's IDRs and changes in the subsidiaries' importance to the group. Credit Agricole North America, Credit Agricole CIB Finance (Guernsey) and Credit Agricole CIB Financial Products (Guernsey) are wholly owned financing subsidiaries of Credit Agricole Corporate and Investment Bank. Their debt ratings are aligned with those of Credit Agricole Corporate and Investment Bank based on an extremely high probability of support if required. The ratings are sensitive to the same factors that might drive a change in Credit Agricole Corporate and Investment Bank's IDRs. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Credit Agricole S.A., CA Preferred Funding Trust and CA Preferred Funding Trust III are all notched down from CA's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. Their ratings are primarily sensitive to any change in CA's VR. Subordinated lower Tier 2 debt is rated one notch below CA's VR to reflect below average loss severity of this type of debt when compared with average recoveries. Subordinated upper Tier 2 instruments are rated three notches below the VR to reflect below average loss severity (1 notch for loss severity) as well as a higher risk of non-performance (an additional 2 notches for non-performance). Legacy hybrid Tier 1 securities are rated four notches below CA's VR (two notches for loss severity and two notches for non-performance). Credit Agricole S.A.'s Tier 2 Contingent Capital Notes are rated four notches below CA's VR (two notches for loss severity to reflect the principal write-down feature, and two notches for non-performance risk, to reflect the high incremental risk due to the 7% CET1 ratio trigger compared with the risk reflected in the bank's VR. Additional Tier 1 notes are rated five notches below CA's VR (two notches for loss severity and three notches for non-performance risk to reflect the fully discretionary coupon and the incremental risk due to the 7% CET1 ratio trigger compared with the risk reflected in the bank's VR). The rating actions are as follows: Credit Agricole Long-term IDR: affirmed at 'A'; Stable Outlook Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Credit Agricole S.A. Long-term IDR: affirmed at 'A'; Stable Outlook Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Senior debt: affirmed at 'A' Short-term debt: affirmed at 'F1' Lower Tier 2: affirmed at 'A-' Upper Tier 2: affirmed at 'BBB' Innovative Tier 1: affirmed at 'BBB-' Non-Innovative Tier 1: affirmed at 'BBB-' Tier 2 contingent capital notes: affirmed at 'BBB-' Additional Tier 1: affirmed at 'BB+' CA Preferred Funding Trust, CA Preferred Funding Trust III: Preferred stock: affirmed at 'BBB-' Credit Agricole North America: Commercial paper: affirmed at 'F1' Credit Agricole Corporate and Investment Bank: Long-term IDR: affirmed at 'A'; Stable Outlook Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a' and withdrawn Support Rating affirmed at '1' and withdrawn Senior debt: affirmed at 'A' Senior debt: 'AAA(tha)'; affirmed Market-linked securities: affirmed at 'Aemr' Short-term debt: affirmed at 'F1' Credit Agricole CIB Finance (Guernsey): Senior debt: affirmed at 'A' Market-linked guaranteed securities: affirmed at 'Aemr' Guaranteed Notes: affirmed at 'A' Short-term debt: affirmed at 'F1' Credit Agricole CIB Financial Products (Guernsey): Senior debt: affirmed at 'A' Senior guaranteed securities: affirmed at 'A' Market-linked guaranteed securities: affirmed at 'Aemr' Short-term debt: affirmed at 'F1' CA Consumer Finance: Long-term IDR: affirmed at 'A'; Stable Outlook Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Senior debt: affirmed at 'A' Short-term debt: affirmed at 'F1' Credit Agricole Leasing & Factoring: Long-term IDR: affirmed at 'A'; Stable Outlook Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Contact: Primary Analyst (Credit Agricole, Credit Agricole S.A., Credit Agricole Corporate and Investment Bank, CA Consumer Finance, Credit Agricole Leasing & Factoring) Alain Branchey Senior Director +33 1 44 29 91 41 Fitch France S.A.S 60 rue de Monceau 75008 Paris Secondary Analyst (Credit Agricole, Credit Agricole S.A. Credit Agricole Corporate and Investment Bank, CA Consumer Finance, Credit Agricole Leasing & Factoring) Solena Gloaguen Director +44 20 3530 1126 Committee Chairperson Michael Dawson-Kropf Senior Director + 49 69 7680 76113 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January2014; 'Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms' dated 18 December 2013 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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