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Rating Action:

Moody's downgrades CMA's junior senior unsecured debt and subordinated debt ratings to Baa1

23 Mar 2018

Review for downgrade extended on all long-term ratings

London, 23 March 2018 -- Moody's Investors Service today downgraded Credit Mutuel Arkea's (CMA) junior senior unsecured debt (also commonly referred to as senior non-preferred) and dated subordinated debt ratings to Baa1 from A3, and extended the existing review for downgrade initiated on 24 January 2018. CMA's long-term deposit, issuer and senior unsecured debt ratings, currently at Aa3, remain on review for downgrade, as do its Prime-1 short-term issuer and (P)Prime-1 programme ratings. CMA's long-term Counterparty Risk Assessment (CR Assessment) remains at Aa2(cr), on review for downgrade. The BCA of baa1 was affirmed, as were the short-term deposit rating and the short-term CR Assessment at Prime-1 and Prime-1(cr) respectively.

The downgrade of the junior senior and dated subordinated debt ratings follows the downgrade of CMA's adjusted BCA to a3 from a2, which reflects the lower standalone financial strength of Groupe Credit Mutuel (GCM). The review for downgrade on the adjusted BCA has also been extended.

Moody's extends the review for downgrade CMA's long-term CR Assessment, its adjusted BCA and all its ratings, except for the short-term deposit rating and BCA, to reflect the increased risk of a separation of CMA from GCM, which had triggered the rating action of 24 January (https://www.moodys.com/research/--PR_378529). The process of an exit from GCM is contingent upon the results of a first round of votes of CMA's networks of local banks, which started on 23 March and will last a few weeks. It also hinges on the feasibility of a separation, which is to be endorsed by the licensing and supervisory authority (the European Central Bank) while preserving CMA's mutual structure. The pre-exit process will span several months and might not be completed before the final vote scheduled for the second half of 2018, assuming that the first round of votes validates the "exit strategy".

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

RATINGS RATIONALE

DOWNGRADE OF ADJUSTED BCA

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.

Despite the increased likelihood of CMA's separation from GCM since the beginning of this year, CMA remains affiliated to GCM's group's central organisation (Confederation Nationale du Credit Mutuel) and consequently is still an integral part of the mutual support mechanism prevailing within GCM and enshrined in French law. This commitment is reflected in Moody's assumption of affiliate-backed support for CMA and an adjusted BCA of a3 in line with the rating agency's assessment of GCM's standalone creditworthiness.

The adjusted BCA of CMA remains on review for downgrade because the bank would no longer benefit from GCM's solidarity mechanisms in case of separation.

AFFIRMATION OF BCA

The affirmation of the BCA of baa1 reflects Moody's expectation that the BCA will not deteriorate materially in the short-term, even assuming the local banks would vote in favour of the split. The baa1 BCA reflects CMA's (1) high solvency; (2) good asset quality, underpinned by its retail bancassurance-focused business and resilient franchise; (3) sound liquidity and funding positions; and (4) low profitability.

DEPOSIT AND SENIOR UNSECURED RATINGS REMAIN AT Aa3 ON REVIEW FOR DOWNGRADE

CMA's long-term deposit and senior unsecured debt ratings of Aa3 reflect (1) the adjusted BCA of a3; (2) the application of our Advanced Loss Given Failure (LGF) analysis, resulting in two notches of uplift from the adjusted BCA, 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. Previously, Moody's also assumed moderate support that did not result in any uplift because of the proximity of the ratings of the French government (Aa2 stable) to the unsupported creditworthiness of CMA.

DOWNGRADE OF JUNIOR SENIOR AND SUBORDINATED DEBT

The downgrade of CMA's junior senior debt and subordinated debt ratings to Baa1 was prompted by the downgrade of its adjusted BCA to a3.

The junior senior debt and dated subordinated debt instruments are rated one notch below the bank's adjusted BCA to reflect their higher loss-given-failure.

Both the junior senior debt and subordinated debt ratings remain on review for downgrade.

REVIEW FOR DOWNGRADE IS EXTENDED

CMA's separation process from GCM is contingent upon votes of CMA's networks of local banks, which started on 23 March, and the feasibility of the separation, which is to be endorsed by the ECB, while preserving CMA's mutual structure. Pending a clearer view on the outcome of the process, which might not occur before the fall, the review continues to be based on the following elements:

1- CMA's adjusted BCA of a3 currently benefits from one notch of affiliate-backed support from GCM, reflecting the mutual support mechanism prevailing within the group, which will cease to benefit CMA if the separation were to materialize.

2- Under such a scenario, Moody's LGF analysis will also be based on CMA's own liability structure instead of GCM's consolidated balance sheet. Based on CMA's standalone liability structure at end-June 2017, this may expose CMA's senior unsecured debt to more risk given the relatively limited size of its senior unsecured debt outstanding, reducing ratings uplift to one notch from two notches, while remaining unchanged for other debt classes.

3- As a smaller standalone entity, CMA's senior unsecured debt and deposits are less likely to benefit from potential government support than is currently the case as part of the much larger and systemically important GCM.

WHAT COULD MOVE THE RATINGS UP/DOWN

All of CMA's long-term ratings and short-term debtprogramme and issuer ratings are on review for downgrade. An upgrade is therefore unlikely.

CMA's adjusted BCA would be downgraded through the removal of the one-notch affiliate-backed support from GCM if it were to leave the group. This would result in a downgrade of all ratings. In such a scenario, the LGF analysis will be performed on the basis of CMA's own liability structure instead of GCM, which based upon the bank's financials at end-June 2017, would result in an LGF uplift of one notch instead of two currently for CMA's senior unsecured debt rating.

CMA's ratings could also be downgraded as a result of a lower BCA if Moody's considered, for example, that the separation process would negatively affect the bank's creditworthiness. However, the rating agency does not expect the bank's fundamentals to deteriorate in the short-term.

In sum , the separation would likely result in a three-notch downgrade to CMA's long-term issuer and senior unsecured debt ratings, a two-notch downgrade to its long-term deposit rating, a one- notch downgrade to its junior senior unsecured and dated subordinated debts, and a downgrade of its short-term issuer and programme ratings to Prime-2 and (P)Prime-2 respectively.

LIST OF AFFECTED RATINGS

Issuer: Credit Mutuel Arkea

..Extension of review for downgrade:

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

....Long-term Bank Deposit, currently Aa3 Rating under Review

....Long-term Issuer Ratings, currently Aa3 Rating under Review

....Short-term Issuer Ratings, currently P-1

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

....Senior Unsecured Regular Bond/Debenture, currently Aa3 Rating under Review

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

Downgraded and placed on review for further downgrade:

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

....Junior Senior Unsecured Regular Bond/Debenture, downgraded to Baa1 from A3

....Junior Senior Unsecured Medium-Term Note Program, downgraded to (P)Baa1 from (P)A3

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

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

..Affirmed:

....Baseline Credit Assessment, affirmed baa1

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

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

Outlook: Rating under Review

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.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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