May 31, 2017 / 3:09 PM / 6 months ago

Fitch Affirms Credit du Nord at 'A'; Outlook Stable

(The following statement was released by the rating agency) PARIS, May 31 (Fitch) Fitch Ratings has affirmed Credit du Nord's (CN) Long-Term Issuer Default Rating (IDR) at 'A', Short-Term IDR at 'F1', Support Rating at '1' and Viability Rating (VR) at 'bbb+'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, SUPPORT RATING AND SENIOR DEBT CN's IDRs and senior debt ratings are aligned with the parent Societe Generale's (SG, A/Stable/a), reflecting Fitch's view that CN is a core subsidiary of SG. We see an extremely high probability that CN would receive support from SG, if required, as reflected in the Support Rating of '1'. As a core subsidiary CN is integral to SG's domestic retail banking strategy and strongly integrated within SG. CN is a significant contributor to SG's French retail banking operations as it generated around 30% of this division's pre-tax profit in 2016. CN's limited size compared with SG's (around 5% of SG's total assets at end-2016) should make any required support from SG manageable. VR CN's VR reflects the bank's adequate franchise in France, a stable business model, which is weighted towards traditional commercial banking, an acceptable risk appetite and resilient profitability. CN's weak asset quality is a rating constraint. CN's asset quality compares unfavourably by international standards and with other French banks. Its impaired loans/gross loans ratio is high at around 7% at end-2016. This is partly explained by a higher exposure to SMEs and professionals, which are more vulnerable to a weak economic environment, compared with peers. However, a large part of the loan portfolio is in the form of better performing housing loans. French banks also generally do not write off impaired loans before they are fully resolved as opposed to some jurisdictions with a swifter write-off policy. CN has a small national franchise with around a 2% market share in deposits and lending, albeit stronger in some regions. CN's focus on retail and commercial banking supports earnings stability. Its net interest margin compares well with peers' given a larger share of high-risk but high-return loans to SMEs and professionals. As with its domestic and European peers, CN's profitability is suffering from a low-interest-rate environment. CN has launched different cost-cutting initiatives and is developing fee-based businesses such as insurance, leasing or private banking, which should help maintain stable and adequate profitability. CN's Fitch Core Capital (FCC) ratio was 12.4% at end-2016. The bank's fully loaded common equity Tier 1 (CET1) ratio was lower at 10.8%, but above the 8% Supervisory Review and Evaluation Process (SREP) requirement expected for 2019. The difference between FCC and fully loaded CET 1 ratios is largely explained by the deduction of expected dividend payments from the regulatory capital ratio. CN's regulatory leverage ratio stood at 3% at end-2016, the minimum level expected under European regulation. CN's capitalisation improved in 2016, mainly due to a lower payout ratio to SG than previous years, but remains only acceptable in our view given the bank's risk profile and capital tied to unreserved impaired loans (55% of the bank's FCC at end-2016). In our assessment of capitalisation and leverage, we take into account ordinary capital support that can flow from CN's parent if needed, but also factor in the high dividend historically paid to SG. CN is not dependent on SG for funding and is mostly funded by deposits, which accounted for nearly 70% of its total funding (excluding derivatives) at end-2016. CN's loans/deposits ratio is just above 100%, below the level of most domestic peers. Liquidity management is prudent and the bank maintains a comfortable liquidity buffer. RATING SENSITIVITIES IDRS, SUPPORT RATING AND SENIOR DEBT CN's IDRs, Support Rating and senior debt ratings are sensitive to a change in SG's IDRs. The Stable Outlook on CN's Long-Term IDR mirrors that on SG's. Unless CN's integration with or strategic importance to SG diminishes, CN's IDRs and senior debt ratings will continue to be equalised with SG's. CN's Support Rating would be downgraded if Fitch changes its assessment of SG's propensity or capacity to provide timely support to CN. VR CN's VR would benefit from a stronger domestic retail franchise and from improved asset quality, including reduced capital encumbrance to unreserved impaired loans. A marked deterioration in asset quality or capital ratios would put pressure on the VR. The rating actions are as follows: Long-Term IDR: affirmed at 'A'; Outlook Stable Short-Term IDR: affirmed at 'F1' Viability Rating: affirmed at 'bbb+' Support Rating: affirmed at '1' Long-term debt: affirmed at 'A' Short-term debt: affirmed at 'F1' Contact: Primary Analyst Francois-Xavier Deucher, CFA Director +33 1 44 29 92 72 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 Cristina Torrella Senior Director +34 93 323 8405 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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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