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Rating Action:

Moody's: BFCM and CIC's long-term Aa3 senior unsecured and deposit rating affirmed, outlook stable

23 Mar 2018

Downgrade of subordinated debt to Baa1 and non-cumulative preferred stock to Baa3(hyb)

London, 23 March 2018 -- Moody's Investors Service today affirmed Banque Federative du Credit Mutuel (BFCM) and Credit Industriel et Commercial (CIC)'s long-term deposit and senior unsecured ratings of Aa3 and their short-term deposit and Commercial Paper ratings of Prime-1. The outlooks remain stable.

At the same time, Moody's downgraded BFCM subordinated debt rating to Baa1 from A3 previously, CIC's subordinated programme rating to(P)Baa1 from (P)A3, and BFCM's non-cumulative stock rating to Baa3(hyb) from Baa2(hyb). These downgrades were prompted by a downgrade of BFCM and CIC's adjusted baseline credit assessments (BCAs) to a3 from a2, reflecting Moody's view that, despite its strong fundamentals, Groupe Credit Mutuel (GCM) is prone, like the other large French banks, to negative profitability trends in the French retail banking market to a degree not consistent with the previous and relatively high adjusted BCA of a2.

Moody's also upgraded the BCA of BFCM to a3 from baa1, aligning it with the agency's assessment of the standalone creditworthiness of the Credit Mutuel-CM11 sub-group (CM-CM11), given its highly integrated nature and function as an issuing vehicle. CIC's BCA was affirmed at baa1.

BFCM and CIC's long-term and short-term Counterparty Risk Assessments (CR Assessments) were affirmed at Aa2(cr)and Prime-1(cr) respectively.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

UPGRADE OF BFCM's BCA

BFCM is owned by 11 out of the 18 regional federations which make up GCM. These regional federations, together with BFCM, make up CM-CM11, the largest sub-group within the wider GCM, accounting for around 80% of its consolidated total assets. BFCM operates as the main issuing vehicle and the holding company of the operating subsidiaries of CM-CM11, and is an integral part of CM-CM11 both strategically and operationally. Management of funding and liquidity are centralized at BFCM for the benefit of the whole CM-CM11 subgroup.

The upgrade of BFCM's BCA to a3 from baa1 acknowledges it as a Highly Integrated and Harmonized (HIH) entity within CM-CM11, which better reflects its status and creditworthiness than an analysis of its standalone financials. Moody's therefore aligns BFCM's BCA of a3 with its assessment of the standalone creditworthiness of CM-CM11 as a whole.

The BCA of a3 incorporates CM-CM11's resilient earnings and low risk profile based upon its strong retail bancassurance franchise and commercial banking business built around a large branch network in France. It also reflects its strong solvency. The group's ability to retain the bulk of its annual profits, as allowed by its mutual structure, provides it with additional flexibility to build up a strong capital base, which makes it easier to absorb unexpected losses or adjust to further capital needs prompted by regulatory changes. Liquidity and funding are sound.

AFFIRMATION OF CIC's BCA

CIC, owned by and consolidated within BFCM, has its own franchise in the domestic retail, SME and corporate markets. It also operates as the hub for the CM-CM11 group's modest capital market activities. The BCA of baa1 reflects the bank's solid franchise and the sound liquidity management centralized at CM-CM11. Although sound, CIC's lower solvency compared to the rest of the group, as well as the higher single-name concentrations related to its corporate banking business and the marginal risk stemming from its capital market activities, are weaker aspects of its credit profile.

DOWNGRADE OF BFCM AND CIC's ADJUSTED BCAs

Moody's downgraded its assessment of GCM's standalone creditworthiness to a3 from a2, which remains one of the highest BCAs amongst the rated banks in Europe, reflecting GCM's resilient profitability, strong asset quality and solvency. However, GCM's business model renders it particularly prone to negative trends within the French banking and insurance market, to a degree not consistent with the previous and relatively high assessment of a2. The group's domestic retail banking business, in line with its peers, has suffered from pressure on net interest income that have been higher in France than in other European countries due to the large scale of renegotiations of housing loans, fierce competition, and banks' limited ability to reduce the cost of deposits.

As non-mutual entities, BFCM and CIC do not directly benefit from the mutual support mechanism prevailing within GCM. However, given the strong integration of BFCM into CM-CM11, and the core functions undertaken by CIC within the subgroup, Moody's assumes an affiliate-backed support for BFCM and a very strong probability of support for CIC from GCM, resulting in an adjusted BCA of a3 for both entities.

AFFIRMATION OF LONG-TERM DEPOSIT AND SENIOR UNSECURED RATINGS

BFCM and CIC's Aa3 long-term deposit and senior unsecured ratings reflect (1) their adjusted BCAs of a3; (2) the application of our Advanced Loss Given Failure (LGF) analysis, resulting in two notches of uplift from the adjusted BCAs, stemming from GCM's significant volume of senior debt and junior deposits; and (3) government support uplift of one notch, reflecting a moderate probability of government support in view of GCM's considerable systemic importance to the domestic economy. Previously, Moody's also assumed a moderate probability of support but this did not result in any uplift because of the proximity of the French government's ratings (Aa2 stable) to the unsupported creditworthiness of BFCM's and CIC's senior debt and deposits.

DOWNGRADE OF SUBORDINATED AND JUNIOR DEBT RATINGS

The downgrades of BFCM's subordinated debt ratings to Baa1 from A3, CIC's subordinated (Tier 2) programme rating to (P)Baa1 from (P)A3, and BFCM's non-cumulative preferred stock (Additional Tier 1 capital) rating to Baa3(hyb) from Baa2(hyb) were prompted by the downgrade of their adjusted BCAs to a3.

The dated subordinated debt instruments are rated one notch below the banks' adjusted BCAs to reflect their higher loss-given-failure. Moody's also incorporates additional downward notching for non-cumulative preferred stock, reflecting the risk of coupon suspension.

AFFIRMATION OF CR ASSESSMENTS

BFCM and CIC's CR Assessments of Aa2(cr) include three notches of uplift above the adjusted BCAs of a3, resulting from the large buffer provided to the senior obligations represented by the CR Assessment by more subordinated instruments including bail-in-able senior obligations. Moody's assumption of a moderate probability of government support results in one notch of uplift from the unsupported CR Assessments.

STABLE OUTLOOK

The outlooks on BFCM and CIC's Aa3 long-term deposit and senior unsecured ratings are stable because Moody's does not expect any significant change in the creditworthiness of GCM in the near term.

WHAT COULD CHANGE THE RATING UP/DOWN

BFCM and CIC's adjusted BCAs could be upgraded in the case of more positive trends in net interest margins, which is unlikely over the outlook horizon . Their deposit and senior unsecured ratings could be upgraded if GCM's liability structure results in lower loss-given-failure for these liabilities through higher subordination .

BFCM and CIC's Adjusted BCAs could be downgraded in the case of (1) a material weakening in GCM's underlying profitability, chiefly as a result of asset-quality deterioration or a structural increase in the cost of funding; (2) a weakening liquidity position or funding profile; (3) an unexpected weakening of the banks' fundamentals prompted by the potential split between Credit Mutuel Arkea (Aa3 on review for downgrade) and the rest of GCM; or (4) a material weakening in the operating environment in France.

BFCM and CIC's deposit and senior unsecured ratings could be downgraded as a result of (1) a deterioration in the standalone financial strength of GCM, resulting in lower adjusted BCAs; or (2) a change in GCM's liability structure, resulting in higher loss-given-failure.

LIST OF AFFECTED RATINGS

Issuer: Banque Federative du Credit Mutuel

..Downgraded:

....Adjusted Baseline Credit Assessment, downgraded to a3 from a2

....Subordinate Medium-Term Note Program, downgraded to (P)Baa1 from (P)A3

....Preferred Stock Non-cumulative, downgraded to Baa3(hyb) from Baa2(hyb)

....Subordinate Regular Bond/Debenture, downgraded to Baa1 from A3

..Upgraded:

....Baseline Credit Assessment, upgraded to a3 from baa1

..Affirmed:

....Long-term Counterparty Risk Assessment, affirmed Aa2(cr)

....Short-term Counterparty Risk Assessment, affirmed P-1(cr)

....Long-term Bank Deposits, affirmed Aa3 Stable

....Short-term Bank Deposits, affirmed P-1

....Short-term Deposit Note/CD Program, affirmed P-1

....Senior Unsecured Regular Bond/Debenture, affirmed Aa3 Stable/(P)Aa3

....Senior Unsecured Medium-Term Note Program, affirmed (P)Aa3

....Commercial Paper, affirmed P-1

....Other Short Term, affirmed (P)P-1

..Outlook Action:

....Outlook remains Stable

Issuer: Credit Industriel et Commercial

..Downgraded:

....Adjusted Baseline Credit Assessment, downgraded to a3 from a2

....Subordinate Medium-Term Note Program, downgraded to (P)Baa1 from (P)A3

..Affirmed:

....Baseline Credit Assessment, affirmed baa1

....Long-term Counterparty Risk Assessment, affirmed Aa2(cr)

....Short-term Counterparty Risk Assessment, affirmed P-1(cr)

....Long-term Bank Deposits, affirmed Aa3 Stable

....Short-term Bank Deposits, affirmed P-1

....Short-term Deposit Note/CD Program, affirmed P-1

....Senior Unsecured Regular Bond/Debenture, affirmed Aa3 Stable

....Senior Unsecured Medium-Term Note Program, affirmed (P)Aa3

....Commercial Paper, affirmed P-1

....Other Short Term, affirmed (P)P-1

..Outlook Action:

....Outlook remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Yasuko Nakamura
VP - Senior Credit Officer
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
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United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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