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Rating Action:

Moody's affirms Aa3 senior debt of CNCE, BFBP, Natixis; downgrades corresponding BFSRs

06 Jul 2009

Provisional rating assigned to BPCE's new hybrids; downgrade of Natixis's existing hybrids

Paris, July 06, 2009 -- Moody's Investors Service announced today that it expects to assign a bank financial strength rating (BFSR) of C- to the newly created BPCE SA (BPCE), conditional on completion of the ongoing merger between Groupe Banque Populaire (GBP) and Groupe Caisse d'Epargne (GCE) scheduled for 31 July 2009. BPCE is to be the central body of the newly formed Groupe BPCE. At the same time, Moody's affirmed the outstanding senior debt ratings of Natixis, Banque Fédérale des Banques Populaires (BFBP) and Caisse Nationale des Caisses d'Epargne (CNCE) at Aa3 with a stable outlook, but downgraded the BFSRs of CNCE to C- from C, BFBP to C- from C+ and Natixis to D from D+. The outlook on all the BFSRs is negative.

CNCE and BFBP are, respectively, the current central entities of the mutual banking groups GCE and GBP, the parent companies of Natixis, which is the groups' investment banking and financial services arm. Upon completion of the merger between GBP and GCE, BPCE will effectively become the central body of the newly formed Groupe BPCE via the transfer of certain assets from CNCE and BFBP to BPCE.

Today's BFSR downgrades reflect the potential risks from the higher than initially understood exposure, especially on credit derivative product companies (CDPCs), from the discontinued activities of Natixis's corporate and investment banking (CIB) unit. Moody's views the risks for Natixis to be higher than it had previously estimated, potentially significantly impairing Natixis' creditworthiness and affecting its current and future parent companies.

On the other hand, Moody's affirmation of the Aa3 senior debt and deposit ratings with a stable outlook signals the rating agency's opinion of the continued importance of GBP and GCE to the domestic retail market. Accordingly, the senior debt ratings incorporate Moody's expectation of high intra-group solidarity as well as a very high probability of ongoing systemic support from the Aaa-rated French government if needed.

Natixis' D BFSR now maps to a Baseline Credit Assessment (BCA) of Ba2 from Ba1 previously. The C- BFSRs of CNCE and BFBP and the provisional C- BFSR of BPCE all map to BCAs of Baa2. All the short-term ratings were affirmed at Prime-1.

Simultaneously, Moody's took the following rating actions on the group's subordinated and hybrid instruments:

- the subordinated debt ratings of Natixis, BFBP and CNCE were affirmed at A1 with a stable outlook;

- all Natixis's hybrid instruments were downgraded to B2 from A3. This rating action concludes the review for possible downgrade that was initiated on 6 March 2009;

- CNCE's A1 junior debt and A2 preferred stock ratings were affirmed;

- the new undated deeply subordinated notes to be issued in four series by BPCE under the exchange offer for seven issues of outstanding Tier 1 securities issued by Natixis, NBP Capital Trust I and NBP Capital Trust III were assigned provisional ratings of (P)A2. These ratings are conditional on completion of the ongoing merger, which implies the effective transfer of certain assets from CNCE and BFBP to BPCE.

The outlooks on the ratings of all hybrid instruments of Natixis and CNCE and on the provisional ratings of hybrid instruments to be issued by BPCE are stable. In that respect, Moody's cautions however that it released a Request for Comment entitled, "Moody's Proposed Changes to Bank Subordinated Capital Ratings", dated 16 June 2009, requesting market feedback on potential changes to its bank hybrid rating methodology. Should Moody's implement this revised methodology as proposed, the ratings on the hybrid securities could potentially be negatively affected by a multi-notch downgrade, possibly to non-investment grade.

BFSR ACTIONS REFLECT POTENTIAL RISKS FROM NATIXIS' SEGREGATED PORTFOLIOS

The downgrade of Natixis' BFSR to D from D+ was triggered by potential adverse effects stemming from the segregated assets of the non-core activities of the bank's CIB unit, managed on a run-off basis. As already stated, the losses reported by Natixis in Q1 2009 were near the upper boundary of Moody's expected stress scenario. The inclusion of the more granular exposure to credit derivative product companies (CDPCs) within the rating agency's stress tests, not included previously, have resulted in significant larger potential losses when compared with those anticipated at the time of the last rating action on 6 March 2009.

The negative outlook on Natixis's BSFR continues to reflect the bank's particular vulnerability to current market conditions given its high risk profile, which includes sizeable concentrations in a number of sectors, including ship finance, aerospace and real estate. In addition, Moody's continues to believe that the ongoing comprehensive transformation of Natixis' CIB should take time to result in a less volatile business model over the medium term.

On a positive side, Moody's expects that the new simplified organisational structure, with closer links to one single parent company, should, overtime, improve governance and risk management and result in better integration and cohesion within the enlarged BPCE group, thus accelerating Natixis' transformation process.

The downgrades of the BFSRs of BFBP and CNCE to C- from C+ and C, respectively, also incorporate Moody's opinion that Natixis could, due to the reasons noted above, require further parental support to protect it from additional losses and shore up its capital position, as shown by the recent significant capital-reinforcement measures totalling EUR3.5 billion so far, which have been equally split between BFBP and CNCE. All this results in lower loss absorption capacity at the level of the parent companies, also reflected in BPCE's provisional C- BFSR. Although both retail networks will continue to operate separately under their own brands, Moody's opinion on the intrinsic financial strength of the new central body takes into account the strength, complementarity and critical size of the combined Caisse d'Epargne and Banque Populaire networks given BPCE's central role in conducting policies and strategic orientations of the enlarged group and its affiliated entities. Overtime, Natixis should also fully benefit from the strength of the combined networks.

The negative outlook on the BFSRs of BFBP and CNCE and on the conditional BFSR of BPCE incorporates Moody's expectation that, despite the large retail base and relative resilience of the savings and regional banks' activities and their recurring underlying revenue generation capacity, the profitability of the enlarged group is likely to remain significantly affected by Natixis' performance. The negative outlook also reflects the challenges arising from implementing an effective merger of the previously separate BFBP and CNCE entities. Moody's will monitor the higher cohesion, integration and streamlining of the organisational structure that it expects to result from the merger, notably in terms of group-wide risk management and controls, but notes the challenges in terms of piloting such a complex organisation and improving profitability and cost efficiency in a more difficult market and macro environment. The rating agency anticipates to resolve its negative outlook within the next 18 months once a more detailed strategic plan and review of the various activities' strategic importance to the enlarged group have been completed.

SENIOR DEBT RATINGS CONTINUE TO BENEFIT FROM INTRA-GROUP SOLIDARITY SCHEMES AND SYSTEMIC SUPPORT

Natixis, CNCE and BFBP's long-term debt and deposit ratings have been affirmed at Aa3 with a stable outlook, reflecting the full support that Moody's expects from the solidarity mechanisms and cross-guarantees prevailing within the two mutualist groups' respective domestic retail networks. Moody's notes that, by law, a strong solidarity and cross guarantee mechanism will continue within the enlarged BPCE group, to be implemented by BPCE and including Natixis as affiliated subsidiary. As such, Natixis' debt and deposit ratings still benefit from a very high probability of group support due to its strategic importance to the combined group, thus

enjoying an eight-notch uplift from the bank's baseline credit assessment of Ba2.

Moody's assessment of a very high probability of systemic support for the combined group, confirmed by the French state's total equity contribution of EUR5 billion upon completion of the combined transaction, which will enable the state to take a stake of up to 20% in the new central body after five years, remains valid. The stable outlook on the Aa3 long-term debt and deposit ratings of Natixis, CNCE and BFBP reflects, inter alia, the stability of expected support especially in the light of the increasing importance of their retail business to the French banking market, from a combined perspective.

RATING ACTIONS ON HYBRID INSTRUMENTS

The downgrade to B2 stable from A3 of the non-cumulative Tier I instruments issued by Natixis and its vehicles, NBP Preferred Capital I LLC and NBP Preferred Capital III LLC, reflects, in Moody's opinion, a lower probability that these hybrid instruments would receive support in the future, especially given the substantially weakened profitability outlook for Natixis. Although the weak solvency triggers attached to these Tier I issues are less likely to be breached in the medium term, the risk of coupon deferral has increased in the rating agency's opinion, given:

(i) a lesser protection from the dividend pusher after the bank has announced that no dividend would be paid to common shareholders;

(ii) the risk of a suspension of interest payments due to regulatory intervention has, in Moody's view, increased in the current adverse environment, especially given the support provided to Natixis so far ;

(iii) the high loss severity in case of coupon non-payment due to the non-cumulative nature of these instruments.

The affirmation of CNCE's preferred stocks at A2 incorporates Moody's opinion that the weak solvency triggers attached to these Tier 1 issues are less likely to be breached in the medium term. Also, the payment of dividends by CNCE, both on its ordinary and preferred stocks, lowers the risk of coupon deferral. Similarly, Moody's provisional ratings of (P)A2 on the new undated deeply subordinated notes to be issued in four series by BPCE under the exchange offer for seven of the outstanding Tier 1 securities issued by Natixis, NBP Capital Trust I and NBP Capital Trust III, reflects the low risk of breach of any deferral clause. It is Moody's understanding that CNCE's long-term debt outstanding, including hybrid instruments, will be transferred to BPCE upon completion of the transaction combination.

As noted above, the outlooks on the ratings of all hybrid instruments of Natixis and CNCE and on the provisional ratings of hybrid instruments to be issued by BPCE are stable.

LAST RATING ACTIONS AND MOODY'S METHODOLOGIES

The last rating action on Natixis was on 6 March 2009, when Moody's placed the A3 ratings of all its hybrid instruments on review for possible downgrade. In addition, the outlook on Natixis' D+ BFSR was changed to negative from stable. Moody's also affirmed the bank's Aa3 long-term deposit and senior unsecured debt ratings and short-term Prime-1 deposit rating, in line with the deposit and senior unsecured debt ratings of Natixis' two parent companies, CNCE and BFBP.

The last rating action on CNCE was on 6 March 2009, when Moody's downgraded its BFSR to C (with a negative outlook) from C+. The Aa3 long-term debt and deposit ratings (with a stable outlook) and the Prime-1 short-term rating were affirmed.

The last rating action on BFBP was on 6 March 2009, when Moody's affirmed its C+ BFSR and changed the outlook on it to negative from stable. The Aa3 long-term debt and deposit ratings (with a stable outlook) and the Prime-1 short-term rating were affirmed.

The principal methodologies used in rating the issuers covered by this press release are "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Credit Policy & Methodologies directory.

Based in Paris, Groupe Caisse d'Epargne posted audited, consolidated assets of EUR650 billion and a Tier 1 capital ratio of 8.14% (Basel II) at the end of 2008.

Based in Paris, Groupe Banque Populaire posted audited, consolidated assets of EUR403 billion at the end of 2008 and a Tier 1 capital ratio of 7.7% (Basel II) at year-end 2008.

Based in Paris, Natixis reported audited, consolidated assets of EUR556 billion and a Tier 1 ratio of 8.2% at the end of 2008 and net losses, group share, of EUR2.8 billion for the full year.

Paris
Helene Sere
Vice President - Senior Analyst
Financial Institutions Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Carola Schuler
Managing Director
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Aa3 senior debt of CNCE, BFBP, Natixis; downgrades corresponding BFSRs
No Related Data.
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