Actions conclude the review announced on 15 February 2012
London, 15 June 2012 -- Moody's Investors Service has today downgraded the standalone bank
financial strength rating (BFSR) of BPCE, the central institution
and main issuing entity of Groupe BPCE (unrated), to D (mapping
to a standalone credit assessment of ba2) from C-/baa2.
Concurrently, this prompted the downgrade of BPCE's long-term
debt and deposit ratings by two notches to A2 from Aa3. The long-term
ratings now incorporate three notches of cooperative support (previously
one notch), resulting in an adjusted standalone credit assessment
of baa2 and a further three notches of systemic support (previously four
notches), in line with Moody's systemic support assumptions
incorporated into the ratings of other large, systemically important
French banking groups.
In addition, Moody's has downgraded by either one or two notches
to A2 the long-term debt and deposit ratings of four of BPCE's
subsidiaries: Natixis, Crédit Foncier de France (CFF),
Banque Palatine (BP) and Locindus. The standalone BFSRs of these
entities were also lowered by either one or two notches, except
that of Locindus, which remains on review due to bank-specific
reasons.
This press release concludes the reviews of the French banking groups
placed on review for downgrade on 15 February 2012, with the exception
of BNP Paribas, Credit Agricole, Societe Generale and their
subsidiaries, which will be concluded together with the reviews
for other global firms with large capital markets operations.
Please click this http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143134
for the List of Affected Credit Ratings. This list is an integral
part of this press release and identifies each affected issuer.
For additional information on bank ratings, please refer to the
webpage containing Moody's related announcements: http://www.moodys.com/bankratings2012.
The outlooks on all long-term debt ratings and the BFSR are stable,
with the exception of CFF which has a negative outlook on the BFSR.
The Prime-1 short-term ratings of BPCE and all of its subsidiaries
were unaffected by today's rating action. Dated subordinated
debt securities were downgraded following the removal of systemic support
from such debt. Furthermore, Moody's has downgraded
or confirmed the ratings of a number of hybrid debt instruments issued
by these entities.
Moody's says that the drivers behind BPCE's weakening credit
profile are:
(i) BPCE and the entire Groupe BPCE are structurally reliant on wholesale
funding, particularly short-term funding sources, which
Moody's considers as a key credit weakness because of the increased
risk of possible disruptions amidst the adverse and uncertain current
environment;
(ii) Reduced economic activity and higher funding costs are exerting downward
pressure on BPCE's pre-provision income; and,
(iii) BPCE and the rest of the group are mainly exposed to the French
economy. Moody's expects that weakening economic conditions
in France could impact the group's overall asset quality,
particularly in relation to its SME exposures.
These considerations resulted in a lowering of BPCE's standalone
credit strength by three notches to ba2, which is partly compensated
by three notches of cooperative support, reflecting the strength
of Groupe BPCE as a whole. A further three-notch rating
uplift from Moody's assumption of very high systemic support (if
needed), results in long-term ratings of A2.
Today's rating actions conclude the review of these institutions'
BFSRs (except that of Locindus which remains under review for downgrade),
and their long-term debt and deposit ratings initiated on 15 February
2012 (see "Moody's reviews Ratings for European Banks" - http://www.moodys.com/research/Moodys-Reviews-Ratings-for-European-Banks--PR_237914?WT.mc_id=BankRatings2012)
and the review of subordinated debt ratings initiated on 29 November 2011
(see Moody's reviews European banks' subordinated, junior and Tier
3 debt for downgrade - http://www.moodys.com/research/Moodys-reviews-European-banks-subordinated-junior-and-Tier-3-debt--PR_231957).
RATINGS RATIONALE -- STANDALONE CREDIT ASSESSMENTS
Today's rating actions reflect Moody's view that BPCE and
the entire group face considerable challenges in weakening operating and
funding environments. As a result, BPCE's standalone
BFSR was downgraded to D from C- and its adjusted standalone credit
assessment -- which includes cooperative support and thus
the overall strength of Groupe BPCE -- was lowered to baa2
from baa1. This reflects a combination of adverse factors that
are likely to impact the group's performance going forward.
FIRST DRIVER -- RELIANCE ON WHOLESALE FUNDING
Based on audited 2011 financials, Groupe BPCE had a loan-to-deposit
ratio of 143%, reflecting its high reliance on wholesale
funding. The group has a significant amount of short- and
long-term debt outstanding, with high maturity concentrations
over the next 18 months. In addition, the liquidity buffer
does not fully cover the short-term borrowings, including
these maturities falling due. In case of market disruption,
the group would have to adjust its loan production, which could
be detrimental to its franchise. Despite this, Moody's
notes that Groupe BPCE has maintained access to capital markets in recent
quarters, characterised by restricted conditions, and that
it has made progress towards refinancing its long-term debt due
to mature this year. The rating agency considers that the high
reliance on confidence sensitive wholesale funding is a key credit weakness,
because this funding source is susceptible to investors' confidence
that can change unexpectedly. For these reasons, Moody's
believes that the group remains vulnerable to liquidity and refinancing
risk in the current challenging market conditions, due to its funding
structure and comparatively weak liquidity position.
SECOND DRIVER -- NEGATIVE PRESSURE ON PRE-PROVISION
INCOME
Similar to other European banks, Groupe BPCE is experiencing downwards
pressures on pre-provision income, because of reduced economic
activity and higher funding costs. However, Moody's
notes that the group's core activities, comprising commercial
banking and insurance, have continued to deliver steady results
and that the negative pressure on profits is partly off-set by
post-merger efficiencies, supplemented by further cost-saving
initiatives underway. However, results are still weak compared
with those of its French peers. Lower earnings reduce the group's
capital generation capacity, making it more challenging for the
group to absorb unforeseen losses without potentially eroding capital.
THIRD DRIVER -- DETERIORATING ASSET QUALITY
The group is mainly exposed to the French economy, with some degree
of diversification to the rest of Europe and beyond. Although France
remains one of the stronger economies in the euro area, Moody's
expects that weakening economic conditions will lead to mounting negative
pressures on the group's overall asset quality. This,
in turn, would reduce the overall capital generation capacity through
higher provisioning costs. Moody's notes that the group is
relatively exposed to the SME sector, which it believes is sensitive
to the current weakening economic conditions, relative to other
market segments. For this reason, Moody's expects that
asset-quality deterioration will emerge in the coming quarters.
Groupe BPCE has experienced some asset-quality issues in recent
quarters, due to the sizeable Greek bond holdings primarily held
within its subsidiary CFF. However, according to the firm's
audited accounts for 2011 and quarterly result for Q1 2012, these
exposures have been written down to around 22% of their nominal
value. Moody's says that the residual exposures to weak European
countries such as Italy remain material, but manageable overall,
totalling EUR3.9 billion and corresponding to around 9%
of the group's Tier 1 capital.
MITIGATING FACTORS
Moody's notes that several mitigating factors have limited the magnitude
of today's downgrades. Firstly, Groupe BPCE is reducing
its wholesale funding requirements through deleveraging actions and it
has maintained access to capital markets, albeit at higher prices
than in the past. Secondly, the group has a strong franchise
in France that continues to prove resilient, thereby providing a
certain degree of earnings stability. Lastly, the group has
continued to generate earnings in recent quarters, albeit lower
than in the previous year, allowing the group to strengthen its
capital position, improving its ability to absorb unexpected losses.
BPCE
As the central institution and main issuing entity of the group,
BPCE mainly consolidates Natixis, CFF, Banque Palatine and
Locindus and it does not fully benefit from the creditworthiness of the
broader Groupe BPCE. The standalone credit assessment only captures
a small portion of the credit strength of the large retail banking business
through Natixis's 20% participation in the two networks of
regional banks (Banques Populaires and Caisses d'Epargne).
These networks, which form the basis of the cooperative group,
in turn own 100% of BPCE. For this reason, BPCE is
primarily wholesale-funded, making it very vulnerable to
fluctuations in market sentiment. Moody's says that the downgrade
of BPCE's standalone credit assessment reflects this factor,
but also captures the broader weakening operating environment in France
and other European countries in which BPCE operates through its subsidiaries,
as well as the relatively high risk profile of some of its investment
banking operations (booked within Natixis).
NATIXIS
Natixis's standalone credit assessment was lowered to D/ba2 from
D+/baa3 to reflect the bank's vulnerability to the weakening
operating environment. Moody's expects Natixis's asset-quality
profile to deteriorate in the next few quarters, as it is exposed
to some cyclical sectors, such as commercial real estate and energy,
which are vulnerable to the current difficult operating environment,
leading to higher provisioning charges. In addition, lower
economic activity in the regions in which Natixis operates will exert
additional downwards pressure on its earnings.
Moody's notes that Natixis's business mix covers a wide range
of activities, some of which generate steady income streams;
as such, its earnings are less volatile than more traditional corporate
and investment banks. However, the bank faces challenges
in relation to the transition to an 'originate-to-distribute'
business model, with a greater focus on existing clients of Groupe
BPCE and in relation to the implementation of the deleveraging plan,
which carries execution risk.
CREDIT FONCIER DE FRANCE
The downgrade of CFF's BFSR to D-/ba3 from D/ba2 is due to
pressure on the asset side, primarily reflecting Moody's assessment
of increasing risk of rating migration in its RMBS portfolio --
totalling around EUR12 billion, or 8% of its total assets
according to audited FYE 2011 financials -- which could
affect the bank's modest capitalisation. CFF is a specialised
real-estate lender that is almost entirely wholesale funded.
However, it endeavours to match its funding with its asset profile
and therefore loan origination volumes depend on the bank's ability
to access the capital markets.
Moody's says that the outlook on the BFSR is negative to reflect
the potential for erosion in CFF's franchise, reduced profitability
and execution risk resulting from the implementation of its deleveraging
plan. This could result in losses on the assets sold at a time
when asset prices are depressed.
BANQUE PALATINE
The downgrade of Banque Palatine's BFSR to D+/baa3 with stable
outlook from C-/baa2 reflects the bank's vulnerability to
the weak operating environment, due to its focus on large SMEs and
high single-borrower concentrations.
RATINGS RATIONALE -- DEBT & DEPOSIT RATINGS
The downgrade of BPCE and the aforementioned subsidiaries' long-term
debt and deposit ratings reflects (i) the lowering of the banks'
standalone credit assessments; (ii) the assessment of a weakening
credit profile of Groupe BPCE, providing cooperative support if
required, which results in an adjusted standalone credit assessment
of baa2 (baa1 previously); and (iii) Moody's view that assumptions
for potential systemic support should be brought into line with other
large, systemically important French banks, at three notches
of uplift, instead of the previous four notches.
RATIONALE FOR STABLE OUTLOOK
The stable outlooks on the long-term ratings express Moody's
view that currently foreseen risks to creditors are now reflected in these
ratings. Nevertheless, negative rating momentum could develop
if conditions deteriorate beyond current expectations. Specifically,
Moody's has factored into the ratings an increased risk of an exit
of Greece from the euro area, but this is currently not Moody's
central scenario. If a Greek exit became Moody's central
scenario, further rating actions on European banks could well be
needed.
RATINGS RATIONALE -- SUBORDINATED DEBT AND HYBRIDS RATINGS
The downgrades of BPCE's subordinated Medium-Term Note Program's
rating to (P)Baa3 from (P)A1 and its junior subordinated rating to (P)Ba1
from (P)Baa2 reflect the removal of systemic support from these instruments.
In Moody's view, systemic support in many European countries,
including France, is no longer sufficiently predictable and reliable
going forward to warrant incorporating systemic-support driven
uplift into these debt ratings. For the same reason, Natixis's
subordinated debt was downgraded to Baa3 from A1.
The ratings on BPCE's cumulative and non-cumulative preference
stocks were downgraded to Ba2 (hyb) from Baa3 (hyb), corresponding
to three notches below the adjusted standalone credit assessment of baa2,
from two previously. In addition, the ratings on non-cumulative
preference stocks issued by Natixis and its other specialised issuing
vehicles was confirmed at Ba2 (hyb), three notches below Natixis's
adjusted standalone credit assessment of baa2, from four notches
previously. Moody's considers that the current rating differentials
better reflect the risk carried by these securities, further to
the full repayment of government financial support in 2011.
WHAT COULD CHANGE RATINGS UP/DOWN
Upgrades of the banks' ratings are unlikely in the near term,
given the negative factors characterising the operating environment in
which these entities operate. A limited amount of upwards rating
pressure could develop if Groupe BPCE as a whole improves its credit profile
and resilience to the prevailing operating conditions.
Higher standalone credit assessments might be achievable if BPCE and its
subsidiaries demonstrate a significant improvement in their credit-rating
drivers, particularly liquidity, asset quality, profitability
and capital.
The long-term ratings of BPCE and its subsidiaries carry stable
outlooks. However, ratings may decline further if (i) economic
conditions were to worsen beyond current expectations, for example
in France, leading to materially weaker asset-quality profiles,
impaired profitability and weaker capitalisation levels; or (ii)
restricted funding access were to prevent the group from refinancing its
operations.
The methodologies used in these ratings were Bank Financial Strength Ratings:
Global Methodology, published in February 2007, and Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: Global
Methodology, published in March 2012. Please see the Credit
Policy page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143134
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
Releasing Office
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Moody's downgrades BPCE's long-term ratings to A2 from Aa3; outlook stable
