Fitch Affirms Credit du Nord at 'A', Negative Outlook

Thu Jul 17, 2014 10:28am EDT

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(The following statement was released by the rating agency) PARIS/LONDON, July 17 (Fitch) Fitch Ratings has affirmed Credit du Nord's (CN) Long-term Issuer Default Rating (IDR) at 'A' with a Negative Outlook, Short-term IDR at 'F1', Viability Rating (VR) at 'bbb+' and Support Rating (SR) at '1'. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, SUPPORT RATING AND SENIOR DEBT CN's IDRs, SR and senior debt ratings are driven by Fitch's view that CN is a core subsidiary of its 100% shareholder, Societe Generale (SG, A/Negative/F1) and as such are aligned with SG's. SG's IDRs are based on potential support available from the French state in case of need. In Fitch's view, this support would flow through to CN, given its role as an important contributor to SG's French retail and commercial banking network. Fitch's view of CN's status as a SG core subsidiary is underpinned by its (and its eight regional commercial banking subsidiaries') integral role in SG's domestic retail banking strategy, its full ownership by SG, its strong integration within SG, and its contribution to SG's retail banking profitability (around 25% of operating profit). Its management is strongly integrated within SG, which oversees CN's credit, market and liquidity risk policies. CN is of limited size relative to SG (5.5% of risk weighted assets at end-2013), which makes financial support from SG easier to provide, even if SG itself faces financial stress. RATING SENSITIVITIES - IDRS, SUPPORT RATING AND SENIOR DEBT CN's IDRs and senior debt ratings are sensitive to a change in SG's IDRs. Unless its integration with or strategic importance to SG diminishes, CN's IDRs will continue to be equalised with SG's. As such, the Negative Outlook on CN's Long-term IDR mirrors that of SG. In turn, the Negative Outlook on SG's Long-term IDR reflects Fitch's expectation that the probability of support from the French state, if needed, is likely to decline during the next one to two years, as further progress is made in enabling effective resolution frameworks. The agency expects to downgrade SG's SR to '5' and revise down the Support Rating Floor to 'No Floor'. The revision of SG's SRF to 'No Floor' would mean that SG's Long-term IDR would likely be downgraded to the level of its VR, which - as it currently stands - would mean a one-notch downgrade to 'A-'. Therefore, the revision of SG's SRF would result in a downgrade of CN's Long-term IDR to 'A-' from 'A'. The timing at this stage is likely to be in late 2014 or in 1H15. CN's SR of '1' is unlikely to be changed if SG's IDR is downgraded to the level of its VR. The SR would be downgraded if Fitch changes its assessment of SG's propensity or capacity to provide timely support to CN. KEY RATING DRIVERS - VR CN's VR reflect its robust regional franchise, acceptable risk appetite, ability to deliver recurring profitability even in a challenging operating environment, and strong funding and liquidity profile. Nevertheless, asset quality is a key constraint on the VR. Compared with peers, CN has a larger share of higher-risk SMEs and professionals, which translates into a higher proportion of impaired loans (6.8% at end-2013). In addition, impaired loans are moderately covered (55% coverage at end-2013) and result in a high 39% unreserved loans/equity ratio, which also compares unfavourably with other French retail banks. Finally, the loan book is significantly exposed to borrower concentration with the top 20 loans representing a significant 125% of Fitch core capital at end-2013. CN's VR also factors in its only acceptable capital ratios. CN is a small French retail bank with a solid franchise in some regions. Nationally, it has a limited franchise with around a 2% market share in both deposits and lending. CN's ability to maintain comfortable margins and control operating costs should enable it to maintain satisfactory profitability. However, Fitch expects CN's profitability to remain under pressure in 2014 due to decreased lending activity, higher impairment charges - given subdued economic prospects in France - and slightly higher operating costs driven by the implementation of a common IT system with SG. CN has a strong funding profile and has made significant progress since 2011 in reducing its dependence on wholesale markets. CN benefits from a solid retail funding base. At end-2013, customer deposits accounted for around two-thirds of CN's funding (excluding equity). CN is not dependent on SG for financing. It has a comfortable buffer against potential liquidity pressures (EUR5bn of liquid assets at end-2013), which covers more than one year of short-term market funding. Fitch views CN's Fitch core capital ratio (10.9% at end-2013) as only acceptable given the bank's level of unreserved impaired loans and the significant loan concentration. However, CN benefits from potential support from its parent. RATING SENSITIVITIES - VR CN's VR would benefit from stronger asset quality evidenced by a lower portion of impaired loans and a higher coverage, which would overall translate into a lower net credit risk exposure relative to equity. Conversely, a marked deterioration in capital ratios or in asset quality, as well as a negative outcome from the asset quality review on SG by the EU as part of a region-wide exercise - evidencing insufficient provisioning - would put pressure on the VR. The rating actions are as follows: Long-term IDR: affirmed at 'A'; Outlook Negative Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'bbb+' Support Rating: affirmed at '1' Long-term debt: affirmed at 'A' BMTN programme: affirmed at 'A' EMTN programme: Long-term affirmed at 'A', Short-term affirmed at 'F1' Certificates of deposits: affirmed at 'F1' Contact: Primary Analyst Sonia Trabelsi Director +33 1 44 29 91 42 Fitch France S.A.S 60 rue de Monceau 75008 Paris Secondary Analyst Solena Gloaguen Director +44 20 3530 1126 Committee Chairperson Eric Dupont Senior Director +33 1 44 29 91 31 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014 are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria 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.