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Rating Action:

Moody’s affirms Credit Logement’s Aa3 issuer rating; outlook stable

18 December 2019

Dated subordinated debt affirmed at A1, hybrid debt at A3(hyb)

Paris , December 18, 2019 – Moody's Investors Service today affirmed the Aa3 long-term issuer rating of Credit Logement (CL). Concurrently, Moody's affirmed CL's subordinated debt and its non-cumulative preferred stock ratings at A1 and A3(hyb), respectively.

CL's Aa3 long-term issuer rating reflects (1) the institution's dominant role and market position in France as leading provider of home-loan guarantees to the large banks; (2) its prudent underwriting policy, despite some deterioration in underwriting criteria in the French housing loan market in general; (3) its solid loss-absorption capacity, which would enable the institution to withstand significant stress in its guaranteed loan portfolio; and (4) the credit quality of its investment portfolio, which is however mitigated by its conservative investment policy.

Credit Logement's long-term issuer rating reflects Moody's opinion of the ability of the entity to honour senior unsecured financial counterparty obligations and contracts, notably its customers' (i.e. the originating banks') claims on guaranteed home loans.

RATINGS RATIONALE

AFFIRMATION OF THE LONG-TERM ISSUER RATING

CL's issuer rating of Aa3 reflects:

1) Its dominant market position and long track record as a provider of guarantees for French residential home-loans

Thanks to its strong value proposition for the large French banks active in housing loans, who are also its shareholders, CL's market share in the guarantee market exceeds 50%. Owing to the attractiveness of guaranteed loans versus traditional mortgages in France (a simpler and less costly product), Moody's estimates that CL provides guarantees to 34% of outstanding domestic home loans.

2) The soundness of the domestic home loan market, despite some deterioration in underwriting in general as recently pointed out by the High Council for Financial Stability.

Loans guaranteed by CL are amortising and predominantly fixed-rate which immunize them from interest-rate changes. Furthermore, favorable social welfare system in France is supportive of the good performance of this asset class. Additionally, in case of default, lenders have full recourse on all the borrowers' net worth, should the proceeds of the property's sale not fully cover their claims.

Moody's does not expect any significant deterioration in the performance of home loans. Home prices increased at a moderate pace in the last two years, helped by the low interest rate environment.

3) CL's conservative underwriting policy and strong capital buffers to absorb shocks

The high quality of CL's insured portfolio is underpinned by conservative underwriting and sound risk management. It also reflects its efficient collection policy. The performance of the assets guaranteed by CL is materially better than the market average thanks to the higher underwriting standards it requires from its partner banks to guarantee their loans. The quality of outstanding housing loans improved over the past few years given the importance of refinancing loans in its insured portfolio – which carry a lower risk than at origination.

CL is also well positioned to withstand a material deterioration, if any, in the performance of home loans thanks to its capital buffers and its ability to pass credit losses on to borrowers through the Mutual Guarantee Fund (MFG). At year-end 2018, the sum of the MFG and other regulatory capital instruments represented 2.2% of outstanding guarantees, representing 3.4 times the highest cumulative default rates incurred on any vintage since 1992 (vintage of 2008).

4) Credit risk stemming from the investment portfolio mitigated by a conservative investment policy

CL's intrinsic financial strength is also correlated to the credit risk of its investment portfolio made up of securities (€1.2 billion) and deposits mostly concentrated at its shareholder banks (€7.4 billion or approximately 127% of CL's Tier 1 capital). However, CL introduced a collateralization mechanism on its deposits at banks to mitigate its risks.

Finally, Moody's does not have any particular governance concern for CL and does not apply any corporate behaviour adjustment to the institution.

AFFIRMATION OF THE SUBORDINATED DEBT AND HYBRID DEBT RATINGS

The dated subordinated instruments are rated one notch below the institution's long-term issuer rating to reflect their subordination in case of liquidation. CL's hybrid instruments are rated three notches below its long-term issuer rating to reflect (1) their deeply subordinated claim in liquidation; and (2) the mandatory coupon skip mechanism tied to a capital deficiency event, or a regulatory notification trigger.

STABLE OUTLOOK

The stable outlook on CL is underpinned by the fact that Moody's does not expect any significant deterioration in the French home loan market over the outlook horizon and the rating agency's view that the entity has ample buffers to withstand a potential deterioration in this market. The rating agency also expects the credit quality of CL's investment portfolio, including exposures to banks, to remain stable, as reflected in the stable outlooks on the ratings of most CL's counterparties.

WHAT COULD CHANGE THE RATING UP/DOWN

An improvement in CL's long-term issuer rating could develop following further reduction of risks in its guaranteed loan portfolio, or a material improvement in its loss-absorption capacity.

A downgrade of CL's long-term issuer rating could occur (1) in case of severe deterioration of the French housing market's performance or in CL's guaranteed home-loan portfolio beyond Moody's anticipation, or (2) if its loss-absorption capacity were to reduce, notably if the institution's capitalisation were to be reduced. Its issuer rating may also come under pressure as a result of a rising risk on its investment portfolio including exposures to banks, notably if the credit quality of the firm's main counterparties were to deteriorate significantly, and if the agency considered that the collateral posted by its counterparties did not adequately mitigate this risk.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Mortgage Insurers Methodology published in November 2019. 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, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Guillaume Lucien-Baugas
VP-Senior Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris
France
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

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

Releasing Office :
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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