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Fitch Affirms CM11 at 'A+'; Stable Outlook
May 23, 2017 / 4:47 PM / 7 months ago

Fitch Affirms CM11 at 'A+'; Stable Outlook

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: CM11 - Rating Action Report here PARIS, May 23 (Fitch) Fitch Ratings has affirmed CM11's Long-Term Issuer Default Rating (IDR) at 'A+', Short-Term IDR at 'F1' and Viability Rating (VR) at 'a+'. The Outlook on the Long-Term IDR is Stable. In addition, Fitch has assigned a 'A+(dcr)' Derivative Counterparty Rating (DCR) to Banque Federative du Credit Mutuel (BFCM), which is a notable derivative counterparty within CM11, as part of its roll-out of DCRs to significant derivative counterparties in western Europe and the US. The rating actions are part of a periodic portfolio review of the large French cooperative banking groups rated by Fitch. A full list of rating actions is available in the related Rating Action Report. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The ratings of CM11 reflect the group's balanced business model focussed on retail and commercial banking, combined with a healthy franchise and established insurance operations in France, low-risk appetite and strong capitalisation. The ratings also factor in slightly higher impaired loans as a proportion of gross loans than the average for similarly rated peers and resilient profitability. CM11 is mainly active in France, where it is the third-largest cooperative banking group. Abroad, it is expanding in consumer finance primarily in Germany. It is also deploying its bancassurance model in Spain. As with its domestic and European peers, CM11 is suffering from the low-interest-rate environment and strong competitive pressure, in particular in housing lending in France, resulting in declining retail banking revenue. However, this is mitigated by the diversification of the group's activities. Higher-risk but higher-margin consumer finance activity supports net interest income. Despite an increase in consumer finance, which Fitch views as higher risk, we believe CM11's risk appetite remains fairly modest. The loan portfolio is mainly concentrated in France with a large portion of low-risk housing loans, while consumer finance accounts for around 10% of customer loans. CM11's impaired loans-to-gross loans ratio is slightly higher than the average for similarly rated peers and a material part of the group's impaired loans relates to the consumer finance portfolio. However, impaired consumer loans are adequately reserved in Fitch's view. CM11 is largely funded by deposits, mostly from retail customers, providing it with a stable funding source. Short-term wholesale funding is at an acceptable level, and CM11 maintains regular access to the secured and unsecured debt markets. The group has significantly improved its liquidity. Central bank deposits and high quality liquid assets covered short-term funding and wholesale funding maturing over the next 12 months at end-2016. Liquidity management is prudent but CM11's liquidity profile is not exceptionally strong, compared with similarly rated European peers. Hence the Short-Term IDR of 'F1' is the lower of the two possible Short-Term IDRs for an 'A+' Long-Term IDR. Capitalisation is a rating strength for the group. At end-2016, the fully loaded common equity Tier 1 (CET1) ratio was 15%, which provides a substantial buffer above the 8.5% Supervisory Review and Evaluation Process (SREP) requirement expected for 2019. The Fitch core capital ratio has been maintained at around a solid 14% over the past four years. The group's capitalisation is supported by a modest dividend payout ratio explained by CM11's cooperative structure. Capital management has been focused on maintaining high levels of core capital, meaning that CM11 has a lower volume of junior debt instruments than similarly rated peers. SUPPORT RATING AND SUPPORT RATING FLOOR CM11's and Credit Industriel et Commercial's (CIC) Support Ratings (SRs) of '5' and Support Rating Floors (SRFs) of 'No Floor' reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign if the group becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. SUBSIDIARIES CIC is CM11's largest subsidiary, representing around half of group assets. CIC's main business is domestic retail and commercial banking. It also runs the group's limited capital market activities. It is highly integrated with its parent in terms of management, balance sheet fungibility and systems, meaning the subsidiary's and parent's credit profiles are highly correlated. CM11 and CIC therefore share common VRs and IDRs. BFCM's IDRs and senior debt ratings are aligned with those of CM11 based on our opinion that BFCM is a core subsidiary of CM11 as the group's main issuing vehicle. It manages the group's liquidity and coordinates the group's subsidiaries. We do not assign a VR to BFCM as it is difficult to analyse this entity meaningfully in its own right. Fitch has assigned a 'A+(dcr)' DCR to BFCM, which is a notable derivative counterparty within CM11. The DCR is at the same level as BFCM's Long-Term IDR because derivative counterparties in France have no definitive preferential status over other preferred senior obligations in a resolution scenario. Subordinated debt and deeply subordinated debt issued by BFCM are notched down from CM11's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. We rate subordinated Tier 2 debt one notch below CM11's VR to reflect below-average recoveries for this type of debt. Legacy deeply subordinated Tier 1 securities are rated four notches below CM11's VR to reflect the higher-than-average loss severity risk of these securities (two notches from the VR) as well as a higher risk of non-performance (an additional two notches). The long-term ratings of the debt issued by Banque Europeenne du Credit Mutuel (BECM) guaranteed by BFCM are aligned with BFCM's Long-Term IDR of 'A+'. This reflects Fitch's view that BFCM is highly likely to honour its commitment as guarantor if required, as the guarantee is unconditional, irrevocable and timely. Fitch has assigned a 'F1' short-term rating to the commercial paper (CP) issued under BECM's EUR600 million French CP programme guaranteed by BFCM, aligned with the Short-Term IDR of BFCM for the same reason. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT The Stable Outlook on CM11's Long-Term IDR reflects our expectations that the group will continue to maintain a fairly modest risk appetite, strong capitalisation, adequate asset quality and a sound liquidity position. A material deterioration of CM11's capital position, which currently provides a strong buffer, could lead to negative rating pressure, although this is not expected. In addition, a weakening of the liquidity position, or a marked deterioration in the risk profile, potentially from a stronger-than-expected expansion in consumer lending or in peripheral European countries, could lead to pressure on the VR. A weakening in the creditworthiness of other entities of Credit Mutuel that are not part of CM11 could also have a negative impact on the ratings, as they could eventually present a burden on its capitalisation. Upgrade potential is limited given the current high ratings. This would be contingent on a demonstration of exceptionally strong and stable financial metrics, in particular stronger profitability and lower impaired loan ratios, but also a track record of stronger liquidity. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of CM11's and CIC's SRs and upward revision to the SRFs would be contingent on a positive change in the French sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. SUBSIDIARIES BFCM's and CIC's ratings are sensitive to changes in the ratings of CM11 and changes to the subsidiaries' importance to the group. BFCM's DCR is currently aligned with the bank's Long-Term IDR and is therefore primarily sensitive to changes to the bank's Long-Term IDR. The ratings of the subordinated debt and hybrid capital instruments issued by BFCM are primarily sensitive to a change in CM11's VR. The ratings of the legacy deeply subordinated Tier 1 securities are also sensitive to Fitch changing its assessment of the probability of their non-performance relative to the risk captured in CM11's VR. The ratings of the debt issued by BECM guaranteed by BFCM are primarily sensitive to changes in BFCM's IDRs. Contact: Primary Analysts Francois-Xavier Deucher, CFA (all entities except CIC) Director +33 1 44 29 92 72 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Olivia Perney Guillot (CIC) Senior Director +33 1 44 29 91 74 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Julien Grandjean Associate Director +33 1 44 29 91 41 Committee Chairperson Bridget Gandy Managing Director +44 20 3530 1095 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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