DBRS Morningstar Confirms SFIL’s Issuer Rating at AA (high), Trend Remains Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of SFIL SA (SFIL or the Bank), including the Long-Term Issuer Rating of AA (high) and the Short-Term Issuer Rating of R-1 (high). The trend on the Long-Term ratings remains Negative whilst the trend on the Short-Term ratings remains Stable. The Support Assessment remains SA1. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of SFIL’s Long-Term Issuer Rating at AA (high) reflects DBRS Morningstar’s AAA Issuer Rating, with a Negative trend on the Republic of France. SFIL’s ratings reflect its statutory ownership and the expectation of predictable support from its shareholders, all of whom are ultimately owned by the French state. The support assessment for SFIL of SA1 implies the expectation of predictable support from its shareholders. As such SFIL’s Issuer Rating is positioned one notch below the Issuer Rating of France, and above the entity’s intrinsic creditworthiness.

RATING DRIVERS

Given the negative Trend, an upgrade is unlikely. Considering the already high rating level stemming from the high likelihood of support from the French State, an upgrade would require additional comfort in relation to potential support from its owners.

Given the strong link with the French State, a downgrade could occur from a deterioration in the ratings of France or from a weakening in the likelihood of support.

RATING RATIONALE

SFIL is a public development bank created in 2013 and with total assets of EUR 75 billion at end-2019, is the 7th largest credit institution in France. The Bank focuses on two public policy missions, public-sector financing and export credit agreement refinancing. 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 (LBP) in partnership with the Caisse des Dépôts et Consignations (CDC) to French local authorities and French Public hospitals. The Bank is ultimately owned 100% by the French State, with 75% direct ownership and 25% indirect ownership through CDC and LBP, which are both100% state-owned. DBRS Morningstar considers that there is a strong likelihood that the French State would support SFIL based on our understanding that the French Republic – as the reference shareholder - is committed to ensuring that SFIL is able to pursue its activities in an ongoing manner and honour its financial commitments.

Following an agreement in principle reached between SFIL’s shareholders, the French State, CDC and LBP announced the signature of a commitment from CDC to acquire the stakes owned by LBP (5%) and the French State (75%). As such, CDC will become SFIL’s reference shareholder in lieu of the French State. DBRS Morningstar notes that the Bank would remain entirely owned by the French State, as CDC is 100% owned by the Republic of France. In addition, DBRS Morningstar expects such a transfer would come with a commitment by the shareholders to ensure SFIL’s financial strength, to protect its economic base and to provide necessary support for the continuation of SFIL’s activities.

DBRS Morningstar 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 low cost base. SFIL was profitable in 2019, with net income of EUR 50 million, down from EUR 63 million in 2018. This was mostly driven by lower banking income despite contained operating expenses and provision reversals. DBRS Morningstar expects margins to be maintained at current levels with a reduction in funding costs offsetting some margin pressure.

DBRS Morningstar considers SFIL’s risk profile to be solid, underpinned by a very low risk loan book due to the high proportion of French public sector lending. Reflecting the high quality of the portfolio, the non-performing loans (NPL) ratio was 2.21% at end-2019. DBRS Morningstar does not expect SFIL’s risk profile to be materially affected by the COVID-19 crisis. Nevertheless, we expect lower volumes of public sector loans in 2020, taking into account the very high base in 2019 which benefited from good funding conditions and a pre-election year. We also expect volumes to pick up in 2021, especially for the health sector. As the COVID-19 crisis unfolds, we will continue to closely monitor the potential pressure on the Bank’s risk profile going forward.

DBRS Morningstar 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-2019, the Bank reported a phased-in CET 1 ratio of 24.4% and Total Capital Ratio of 25.2%, down from 25.1% and 25.9% respectively. The capital cushions are well above the requirements of the European Central Bank as indicated through its Supervisory Review and Evaluation Process (SREP) for 2019. DBRS Morningstar does not expect a material deterioration in SFIL’s capital position due to the COVID-19 crisis, given its predominantly low risk exposures, resulting in total RWAs of only EUR 5.9 billion at end-2019. The Bank’s phased-in leverage ratio was well above the 3% minimum requirement, at around 8.6% at end-2019. This incorporates an amendment for public development banks to the existing framework (CRR II/CRD V), which includes the possibility to exclude certain assets from the calculation of the leverage exposure. In addition, SFIL has indicated that it already comfortably complies with the minimum indicative MREL requirements of 1.94% of total liabilities and own funds (TLOF), with around five times that requirement in eligible liabilities.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The sources of information used for this rating include SFIL 2019 Annual Report, SFIL 2019 Pillar III Report, Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/366178.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: September 10, 2018
Last Rating Date: April 23, 2020

DBRS Ratings GmbH
Neue Mainzer Straße 75
Tel. +49 (69) 8088 3500
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.