DBRS Morningstar Confirms Crédit Agricole’s LT Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Groupe Crédit Agricole (CA or the Group) and Crédit Agricole SA (CASA), including the Long-Term Issuer Ratings of AA (low) and the Short-Term Issuer Ratings of R-1 (middle). The trend on all ratings remains Stable. DBRS Morningstar has also maintained the Group’s Intrinsic Assessment at AA (low) and the Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings takes into account CA’s very strong retail and commercial banking franchise in its domestic market, which is further supported by its solid position in asset management, insurance and other specialised financial services. Profitability has been resilient in recent years, despite the low interest rate environment as business volumes have remained strong. Efficiency levels are weaker than some European peers, however, cost management remains a key priority for the Group. DBRS Morningstar sees cost control as a key driver to support profitability in the current challenging environment. CA’s risk profile is relatively low, reflecting a substantial share of low-risk home loans in France and prudent underwriting standards. CA’s funding and liquidity are solid, while its capitalisation levels are robust with capital buffers comparing favourably with many peers. The Group has been consistently strengthening its loss absorption capacity in recent years.

Despite the Group’s performance being resilient in H1 2020, CA’s earnings generation and risk profile are likely to be adversely affected by the major economic slowdown driven by the COVID-19 pandemic (COVID-19). In particular, the asset quality of the Group’s unsecured retail exposures could be adversely affected by the rise in unemployment in its core markets. However, we expect the effects of the economic downturn to be partly offset by some of the fiscal and monetary support measures introduced in response to COVID-19. DBRS Morningstar considers that the impact of the COVID-19 outbreak on the Group’s performance in the medium to long-term will depend on the depth of the economic crisis and we will continue to monitor the developing situation and its impact on CA’s overall revenue and credit profile.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating is unlikely in the near term, given the challenging economic outlook. Nonetheless, an upgrade of the ratings could occur should the Group substantially improve profitability and efficiency over the medium term, whilst maintaining a resilient credit profile throughout the COVID-19 crisis.

The ratings could be downgraded if CA experiences a prolonged material deterioration of its asset quality profile. Ratings would also be downgraded if the Group’s franchise were to weaken, leading to a structural deterioration in profitability.

RATING RATIONALE

CA’s franchise is underpinned by its leading positions in retail banking and savings management in France. Well-developed specialised financial services support the Group’s universal banking model, focused on synergies and cross-selling. CA’s retail networks in France generate around half of the Group’s banking revenues and, together with Asset Gathering businesses, which include asset management, insurance, and private banking, provide some earnings stability. While the Group is concentrated in France, other businesses, including International Retail Banking, Specialised Financial Services and Large Customers, increase diversification and support the strength of the Group’s universal banking model. In June 2019, CA launched its 2022 strategic plan, focused on growth, revenue synergies and technological transformation for greater efficiency.

The Group has continued to generate resilient underlying earnings, supported by healthy levels of customer activity across different business lines. However, the wide and growing scale of economic and market disruption resulting from COVID-19 is likely to negatively impact CA’s revenues, loan loss provisions and profitability in the near to medium term. In H1 2020 CA’s reported underlying net income group share was EUR 2.8 billion, down 15.7% YoY, mainly due to an increase in the cost of risk, which increased to EUR 2.1 billion (equivalent to an annualised 45 bps of outstandings) compared to EUR 879 million in H1 2019. Revenues remained resilient in H1 2020 at EUR 16.9 billion, supported by the solid performance of the Large Customers business line, driven by strong activity in bond issuance and increased demand for financing and hedging. Underlying operating expenses stayed flat YoY in H1 2020, with most business lines posting declines in operating expenses, benefiting from temporary lower personnel and travel costs. The underlying cost-to-income ratio excluding the contribution to the Single Resolution Fund (SRF) was 62.1% compared to 62.7% in H1 2019.

CA’s risk profile is viewed as relatively low reflecting its retail banking cooperative foundations, however the Group does have operations in some higher risk business lines such as consumer finance. Lending is primarily focused on the domestic market, with close to 70% of the loan book in France, according to DBRS Morningstar’s calculations. Retail exposures account for around half of the loan book, in large part consisting of the generally low risk home lending. Operational risk appears to be low and the Group has not been affected by substantial conduct or litigation issues to date. DBRS Morningstar views CA’s asset quality as solid. At end-H1 2020, CA’s reported NPL ratio was 2.4%, down from 2.6% at end-H1 2019. The coverage of impaired loans, including collective reserves, was 84.5%. However, due to the COVID-19 pandemic, we expect asset quality to deteriorate. We note that some of the most vulnerable sectors to the COVID-19 crisis (Aircraft, Hotels and Leisure, Retail Distribution (non-food), Transports and Storage and Oil & Gas) represented round 9% of the Group’s total Exposure at Default (EAD), as of H1 2020.

DBRS Morningstar views CA’s funding profile as solid, benefiting from the Group’s leading position in the French savings market. Close to two-thirds of CA’s banking cash balance sheet (banking business balance sheet after netting of items that have a symmetrical impact on assets and liabilities) are funded by customer balances, which have seen consistent growth in recent years. According to DBRS Morningstar’s calculation, the loan-to-deposit ratio at end H1-2020 was 102.3%, down from 107.4% at end-2019. The Group retains good access to wholesale funding and has been diversifying its sources as part of enhancing its funding and liquidity management. Liquidity is solid with a substantial buffer of high-quality assets (EUR 119 billion) amply covering short-term funding. The LCR was 155.4% for Q2 2020

CA’s capitalisation remains robust and its capital ratios compare favourably with most domestic and international peers. The Group’s Common Equity Tier 1 (CET1) ratio at end-H1 2020 was 16.1%, representing a cushion of approximately 720 bps above the 2020 SREP requirement (including the countercyclical buffer). The H1 2020 phased-in Total Capital ratio and the Basel III phased-in CRD IV leverage ratio also remained strong at 19.7% and 5.3%. The resilience of CA’s balance sheet has been strengthened by consistent issuance of senior non-preferred debt in recent years. At end-H1 2020, the Group’s TLAC ratio was 23.8%, excluding eligible preferred senior debt, in compliance with current and expected future requirements. MREL resources, which additionally include around 9% of potentially eligible senior debt with maturities over one year, were equivalent to approximately 32% of RWAs, as estimated by CA.

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.

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

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/362170/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 Company Documents, CA 2019 and H1 2020 Reports, CA 2019 and H1 2020 Press Release, CA 2019 and H1 2020 Presentation, CA 2019 Pillar III Document, CA 2019 and H1 2020 Registration Document, CA August 2020 Credit Update 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.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.
With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

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/367259

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

Lead Analyst: Arnaud Journois, Vice President – Global FIG
Rating Committee Chair: Ross Abercromby - Managing Director - Global FIG
Initial Rating Date: July 13, 2010
Last Rating Date: October 1, 2019

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.