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Fitch Upgrades Credit Agricole to 'A+'; Stable Outlook
May 23, 2017 / 4:43 PM / in 7 months

Fitch Upgrades Credit Agricole to 'A+'; Stable Outlook

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Credit Agricole - Rating Action Report here PARIS, May 23 (Fitch) Fitch Ratings has upgraded Credit Agricole's (CA) Long-Term Issuer Default Rating (IDR) to 'A+' from 'A' and Viability Rating (VR) to 'a+' from 'a'. The Outlook on the Long-Term IDR is Stable. The Short-Term IDR was affirmed at 'F1'. Fitch has assigned 'A+(dcr)' Derivative Counterparty Ratings (DCRs) to Credit Agricole S.A. (CA S.A.) and Credit Agricole Corporate and Investment Bank (CACIB), which are notable derivative counterparties within CA, 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 CA's rating upgrade reflects the implementation of a lower risk appetite, combined with further improvement in the group's capitalisation, which is strong and in line with similarly rated peers. The group successfully implemented its 2014-2016 strategic plan. The plan included deleveraging actions, the de-risking of corporate and investment banking (CIB) activities and a substantial strengthening of capitalisation and liquidity. CA's business model is stable, diversified and weighted towards traditional commercial banking. The group has a leading franchise in French retail and commercial banking as well as in asset-gathering activities, which provide it with recurring earnings. Its strategy is to reinforce its leading domestic position by achieving organic growth, revenue synergies through additional cross-selling between group entities and further cost savings. Its largest foreign operations are in Italy (9% of 2016 revenues), which are an integral part of CA's strategy. The group intends to continue to roll out all of its French business segments in Italy to strengthen cross-selling and improve profitability. Our ratings reflect a fairly low risk appetite. More than two-thirds of CA's loan book is in France and a substantial portion is low-risk housing loans (around 40% of gross customer loans). CA's regional banks and Le Credit Lyonnais are prudent in lending to professionals and SMEs relative to some French banks. In Italy, CA has materially tightened underwriting standards. In CIB, the bank now follows an originate-to-distribute model and has a low appetite for market risk. CA's impaired loans/gross loans ratio is in line with its two cooperative peers' at 3.4% at end-2016, although this is slightly higher than the average for similarly rated peers. French banks generally do not write off impaired loans before they are fully resolved as opposed to some jurisdictions with a swifter write-off policy. However, the reserve coverage of impaired loans was high at 80% at end-2016, comparing well with peers. The exposure to Italy, estimated at less than 10% of lending and considered as higher-risk by Fitch, is manageable for the group. We expect further improvements as the flow of new impaired loans reduces. As with its domestic and European peers, CA's profitability is suffering from the low-interest-rate environment. French retail banking revenue are under pressure from a recent increase in housing loan prepayments and a high number of rate renegotiations as well as the limited flexibility on the remuneration of deposits. The negative effect on revenue is partially offset by higher loan volumes and additional cross-selling. It is also mitigated by the diversification of the group's activities. CA's capitalisation is solid and improving. The group's fully loaded common equity Tier 1 (CET1) ratio was 14.5% at end-March 2017 and is expected to reach 16% in 2019, CA's 2016-2019 strategic target. This provides a substantial buffer above the 9.5% Supervisory Review and Evaluation Process (SREP) requirement expected for 2019. The Fitch core capital ratio was a strong 14.7% at end-2016, in line with similarly rated peers. The group's capitalisation is supported by a modest dividend payout ratio explained by its cooperative structure. CA wants to build its total loss-absorbing capacity (TLAC) buffer without reliance on preferred senior debt and was the first French bank to issue non-preferred senior debt at end-2016. It has issued EUR4.9 billion equivalent to date as part of its plan to issue EUR13 billion by end-2019. CA benefits from the strong deposit franchise of its domestic retail operations. About 65% of total funding (excluding derivatives) consists of customer deposits. CA has access to diversified wholesale funding sources under different forms and currencies. The bank aims at being able to survive up to a one year market disruption period associated with a deposit run. Short-term wholesale funding is well covered by central bank balances and high quality liquid assets (HQLA). CA's 'F1' Short-Term IDR is the lower of the two possible Short-Term IDRs mapping to an 'A+' Long-Term IDR because we do not consider its liquidity to be exceptionally strong compared with similarly rated banks globally. DERIVATIVE COUNTERPARTY RATINGS Fitch has assigned 'A+(dcr)' to CA S.A. and CACIB, which are notable derivative counterparties within CA. The DCRs are at the same level as CA S.A.'s and CACIB's Long-Term IDRs because derivative counterparties in France have no definitive preferential status over other preferred senior obligations in a resolution scenario. SUPPORT RATING AND SUPPORT RATING FLOOR CA's Support Rating (SR) of '5' and Support Rating Floor (SRF) 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. SUBORDINATED DEBT AND HYBRID SECURITIES Subordinated debt and deeply subordinated debt issued by CA S.A. are all notched down from CA'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 CA's VR to reflect below-average recoveries for this type of debt. Legacy subordinated upper Tier 2 instruments are rated three notches below the VR to reflect below-average recoveries (one notch) as well as a higher risk of non-performance due to possible coupon deferral (an additional two notches). CA S.A.'s Tier 2 contingent capital notes are rated four notches below CA's VR: two notches for loss severity to reflect a principal write-down feature, and two notches for non-performance to reflect high incremental risk compared with the risk as reflected in the VR, as a result of a 7% CET1 ratio trigger. Additional Tier 1 notes are rated five notches below CA's VR: two notches for loss severity and three notches for non-performance to reflect the fully discretionary coupon and incremental risk compared with the risk reflected by the VR, due to the 7% CET1 ratio trigger. Legacy hybrid Tier 1 securities are rated four notches below CA's VR (two notches for loss severity and two notches for non-performance). AFFILIATED ENTITIES AND SUBSIDIARIES CA is a cooperative banking group bound by solidarity mechanisms comprising its 39 regional banks (caisses regionales; CRs), CA S.A., the group's listed central body, and CACIB. As a result, Fitch has the same IDRs for CA, CA S.A. and CACIB and would also have the same ratings for the CRs if it were to rate them. The Long-Term IDRs of CA Consumer Finance (CACF) and Credit Agricole Leasing & Factoring (CAL&F) have been upgraded to 'A+' from 'A'. Their Long- and Short-Term IDRs are equalised with those of CA as we view them as core subsidiaries given their strategic role within the group as providers of consumer finance as well as leasing and factoring solutions. They are also highly integrated within the group in terms of management, capital and liquidity. We do not assign a VR to CACF or to CAL&F as it is difficult to analyse these entities meaningfully in their own right. Fitch has withdrawn its long-term rating on CACF's EUR9 billion French commercial paper (CP) programme as we no longer consider it to be relevant to our coverage as the maturity of the CPs cannot be longer than 366 days. This does not affect our short-term rating on the programme. Fitch has assigned a 'F1' rating on the CP issued under CAL&F's EUR2.5 billion French CP programme. The long-term ratings of the debt issued by Credit Agricole CIB Financial Products (Guernsey) and Credit Agricole CIB Finance (Guernsey) guaranteed by CACIB are aligned with CACIB's Long-Term IDR of 'A+'. This reflects Fitch's view that CACIB is highly likely to honour its commitment as guarantor if required, as the guarantees are unconditional, irrevocable and timely. Fitch has withdrawn its short- and long-term ratings on CACIB's and Credit Agricole CIB Finance (Guernsey)'s EUR25 billion and EUR50 billion structured debt issuance programmes as we no longer consider these ratings relevant to our coverage. This does not affect the ratings of the notes issued under both programmes. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT The Stable Outlook on CA's Long-Term IDR reflects Fitch's expectation that the group will maintain its fairly low risk appetite, continue to improve its capitalisation and to maintain an ample liquidity buffer. CA's IDRs, VR and senior debt ratings are primarily sensitive to a deviation from the focus on domestic retail and commercial banking, such as expansion into higher-risk business, especially abroad, and from the current capital trajectory and liquidity policies. Upside to the ratings is limited given their already high level, but could be driven by a material improvement in asset quality and higher profitability. CA's preferred senior debt could be upgraded to one notch above the group's Long-Term IDR if the buffer of qualifying junior debt plus non-preferred senior debt became sufficient to protect preferred senior creditors from default in case of failure. CA's qualifying junior debt buffer stood at around 6% of risk weighted assets at end-2016. We would consider an upgrade of the preferred senior debt if the buffer of qualifying junior debt and non-preferred senior debt exceeded 8%-9%, provided that the buffer was sustainable. DERIVATIVE COUNTERPARTY RATINGS Under French law, derivative counterparties rank pari passu with preferred senior creditors, meaning that CA S.A.'s and CACIB's DCRs are sensitive to the same factors as the preferred senior debt rating of CA S.A. They are currently aligned with the banks' Long-Term IDRs and are primarily sensitive to changes to these, but also to a sufficient and sustainable increase in the buffer of qualifying junior debt and non-preferred senior debt available to protect derivative counterparties of those specific banks. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade to CA's SR and upward revision to the group's SRF 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. SUBORDINATED DEBT AND HYBRID SECURITIES The ratings of subordinated debt and hybrid capital instruments are primarily sensitive to a change in CA's VR. Except for subordinated Tier 2 instruments, the securities' ratings are also sensitive to a change in Fitch's assessment of the probability of their non-performance relative to the risk captured in CA's VR. AFFILIATED ENTITIES AND SUBSIDIARIES CACIB's ratings are sensitive to the same factors that might drive a change in CA's IDRs unless there is a change in the affiliation status, which Fitch views as extremely unlikely. CA S.A.'s IDRs and senior debt ratings would be sensitive to a change in those of CA. CACF and CAL&F ratings are sensitive to changes in CA's IDRs and changes in the subsidiaries' importance to the group. The ratings of the debt issued by Credit Agricole CIB Financial Products (Guernsey) and Credit Agricole CIB Finance (Guernsey) guaranteed by CACIB is primarily sensitive to CACIB's Long-Term IDR. Contact: Primary Analyst Olivia Perney Guillot Senior Director +33 1 44 29 91 74 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Francois-Xavier Deucher, CFA Director +33 1 44 29 92 72 Committee Chairperson Bridget Gandy Managing Director +44 20 3530 1095 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 Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) 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. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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