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 CA’s Long-Term ratings at AA (low) continues to reflect the Group’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 and a resilient underlying profitability. We also incorporate CA’s conservative risk management and low risk profile stemming from the Group’s substantial share of low-risk home loans in France and prudent underwriting standards. CA’s funding and liquidity remain strong, benefiting from stable customer deposits and good access to wholesale markets, 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.

Nevertheless, the rating action also take into account DBRS Morningstar’s view that whilst the unprecedented measures put in place by the domestic and European authorities has delayed the formation of NPLs through the COVID-19 pandemic, uncertainty remains regarding the full effect on asset quality. In addition, DBRS Morningstar notes that the operating environment could be impacted by Russia’s invasion of Ukraine and its implications for supply chains, energy prices, inflation and interest rates.

RATING DRIVERS

An upgrade of CA’s Long-Term Issuer Rating would occur should CA substantially improve profitability and efficiency over the medium term, whilst maintaining a resilient credit profile.

The ratings would be downgraded if CA experiences a prolonged material deterioration in its asset quality profile, profitability or capital buffers.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
CA’s franchise is underpinned by its universal banking model, supported among others by leading positions in retail banking in France and in asset management in Europe. CA’s retail networks in France generate around half of the Group’s banking revenues and, together with the 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. Credit Agricole has recently stepped up to consolidate its franchise, notably through the acquisition in 2021 of Creval which increased the Group’s footprint in Italy, and Lyxor, which made CA a European leader in the ETF market.

Earnings Combined Building Block (BB) Assessment: Good
DBRS Morningstar considers that CA generates robust underlying earnings, supported by the Group’s universal banking model. In our view, this has enabled the Group’s profitability to remain resilient throughout past crises. CA reported EUR 9.9 billion net income in 2021, its strongest results in its history. This was mainly driven by the cost of risk falling back to pre-COVID 19 levels and a strong rebound in revenues in all business lines, supported by an improved economic environment. Despite higher operating expenses on the back of business recovery, we expect CA to continue managing its cost base efficiently. We expect inflation to somewhat pressure the Group’s results for the remainder of 2022, although this should be more than offset by the low cost of risk and continued revenue growth, supported by higher volatility levels that have benefited capital markets revenues in H1 2022. Reported net income group went down 9.4% in H1 2022 to EUR 4.1 billion, whilst the underlying net income group share was EUR 3.9 billion, down 0.9% YoY. H1 2022 results were driven by higher revenues and contained operating expenses despite growth in the cost of risk.

Risk Combined Building Block (BB) Assessment: Strong/Good
CA’s risk profile is relatively conservative 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 generally low risk home lending. DBRS Morningstar views CA’s asset quality as solid. At end-H1 2022, CA’s reported NPL ratio was 2.0%, down from 2.3% YoY. The coverage of impaired loans, including collective reserves, was relatively strong at 88.0%. Whilst the unprecedented measures put in place by the domestic and European authorities have delayed the formation of NPLs following the COVID-19 pandemic, uncertainty remains regarding the full effect on asset quality. In addition, the macroeconomic outlook has been made less clear by Russia’s invasion of Ukraine, tensions in China, rising interest rates and inflation. The cost of risk stood at 21 bps at end-June 2022, in line with 2019 levels.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views CA’s funding profile as solid, benefiting from the Group’s leading position in the French savings market. 61.3% 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 end-H1 2022 loan-to-deposit ratio was 102.0% compared to 102.3% at end-H1 2021, on loan growth. The Group retains good access to wholesale funding. At end-H1 2022, the Group had issued EUR 26.0 billion of medium and long-term market funding. Liquidity is solid with a substantial buffer of high-quality assets (EUR 112 billion) amply covering short-term funding. The average LCR over 12 months was 169.3% for Q2 2022, well above regulatory requirements.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
CA’s capitalisation remains strong and its capital ratios compare favourably with most domestic and international peers. At end-H1 2022, the Group’s phased-in Common Equity Tier 1 (CET1) ratio was 17.5%, stable from end-2021, providing the Group with a cushion of around 860 bps above the Supervisory Review and Evaluation Process (SREP) requirements. At end-H1 2022, the phased-in Total Capital ratio and leverage ratio also remained strong at 21.5% and 5.3%. The Group has continued to build-up its total loss absorption capacity by consistent issuance of senior non-preferred debt in recent years. The end-H1 2022 MREL ratio was around 30.8% of RWAs and around 8.7% of LRE (Leverage Ratio Exposure). The total loss-absorbing capacity (TLAC) ratio at end-H1 2022 was 26.7% of RWAs, well above requirements.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/402673

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) - https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The sources of information used for this rating include Morningstar Inc. and Company Documents, CA 2021, Q1 and Q2 2022 Reports, CA 2021, Q1 and Q2 2022 Press Releases, CA 2021, Q1 and Q2 2022 Presentations, CA 2021 and Q1 and Q2 2022 Universal Registration Documents and Updates. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/402672

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

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: July 13, 2010
Last Rating Date: September 13, 2021

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