Downgrade driven by impact of funding constraints, deteriorating macro fundamentals
Paris, December 09, 2011 -- Moody's Investors Service has today downgraded the standalone bank
financial strength rating (BFSR) of Credit Agricole SA (CASA) by one notch
to C- from C (mapping to Baa2 on the long-term scale from
A3 previously) and the long-term debt and deposit ratings by one
notch to Aa3. The one-notch downgrade of the long-term
debt and deposit ratings follows the downgrade of the BFSR. The
long-term ratings now incorporate three notches of systemic support
(previously two notches), derived from the rating agency's
view that the probability of systemic support for CASA remains very high.
The rating actions conclude the review initiated on 15 June 2011 and extended
on 14 September 2011. The lower BFSR reflects our view that CASA's
prior credit-positive factors (strong domestic retail banking franchise,
good diversification, stable earnings) are now offset by liquidity
and funding constraints.
The outlooks on the BFSR and long-term ratings are negative.
The Prime-1 short-term rating was affirmed. Dated
subordinated debt securities were also downgraded by one notch to A1 and
remain on review for downgrade pending our reassessment of systemic support
for such debt.
As stated in our recent report "Rising Severity of Euro Area Sovereign
Crisis Threatens Credit Standing of All EU Sovereigns", since
the initiation of our review in June 2011, the severity of the crisis
facing the euro area has increased. As a large bank in the euro
area, the creditworthiness of CASA is necessarily affected by the
fragile operating environment for European banks.
Following our review of CASA's ratings, Moody's has
concluded that:
(1) Liquidity and funding conditions have deteriorated significantly for
CASA and Groupe Credit Agricole (GCA), which have made extensive
use of wholesale funding markets. The probability that the group
will face further funding pressures has risen in line with the worsening
European debt crisis.
(2) GCA's deleveraging plan will likely help somewhat reduce its
need for wholesale funding. However, given that many other
banks around Europe are engaged in similar programmes, there is
a mounting risk that the asset sales, where required, could
be detrimental for capital.
(3) GCA retains significant, albeit reduced, exposures to
sovereigns and their economies that are themselves experiencing tighter
refinancing conditions and declining creditworthiness, notably Greece,
which in turn expose the bank to heightened credit and liquidity risks.
These considerations resulted in a lowering of the BFSR by one notch to
C-. CASA's Adjusted baseline credit assessment (BCA),
which continues to incorporate full cooperative support and thus the strength
of GCA as a whole, has been lowered by two notches to A3 from A1.
We also believe that:
- The likelihood that GCA would benefit from government support
(if needed) remains very high; this leads to a one-notch downgrade
in the senior debt and deposit ratings, despite the two-notch
reduction in CASA's Adjusted BCA; and,
- Conditions in the euro-area sovereign debt and banking
markets -- as well as macroeconomic conditions overall --
lead us to assign a negative outlook to CASA's standalone and long-term
debt and deposit ratings.
Moreover, Moody's will continue to monitor developments in the European
bank debt markets and incorporate in GCA's and CASA ratings (i)
any further deterioration; or (ii) an increase in the likelihood
of such deterioration.
RATINGS RATIONALE
In its press release of 14 September 2011, Moody's concluded
that although GCA had considerable resources to absorb potential losses
it was likely to incur on its Greek government bonds (Greece is rated
Ca, outlook developing) and its Greek subsidiary Emporiki Bank of
Greece (B3/NP/E outlook negative), the exposures themselves were
too large to be consistent with the existing ratings. As a result,
CASA's BFSR was downgraded to C from C+ and its adjusted BCA,
which takes into account cooperative support and thus the overall strength
of GCA, was lowered to A1 from Aa3.
Since then, GCA has realised significant impairments on its Greek
bond holdings, commensurate with Moody's own expectations
earlier this year, and has now written-down 60% of
its gross exposures, of which a material part are held by its insurance
subsidiaries. GCA was able to do this while remaining profitable
in the third quarter. In addition, Moody's continues
to recognise important credit strengths, notably CGA's leading
position in the domestic retail banking market, good diversification,
stable earnings, sound capital, solid efficiency and strong
overall loan book quality.
However, Moody's also noted the challenges to GCA's funding
and liquidity profiles in light of worsening refinancing conditions,
as well as the potential for these conditions to constrain GCA's
franchise. This resulted in the extension of the review on CASA's
ratings announced in September 2011.
-- Difficult refinancing conditions have reduced GCA's
liquidity
Since June, GCA, in common with many other banking groups,
has encountered materially more difficult refinancing conditions,
due principally to investor concerns surrounding the European sovereign
crisis and the consequent reduction in their appetite to invest in banks
such as GCA, given its direct and indirect exposure to distressed
sovereigns and countries. CASA has been able to issue some long-term
debt (EUR6.6 billion between June and October), and has exceeded
its refinancing plans for 2011. However, funding has proven
to be more scarce, more expensive and shorter term than anticipated
earlier in the year. This is particularly true of US dollar funding,
since money market funds have significantly reduced their exposure to
many European banking groups including GCA.
This has resulted in a reduction in the availability of funding to GCA,
which has in turn contributed to a reduction in its pool of highly liquid
reserves to EUR103 billion (post haircut) at end-September from
EUR123 billion at end-July, although we understand it has
since increased. We expect that central bank actions will ensure
the availability of liquidity to the banking sector, and indeed
we note that French banks' borrowing from the Bank of France materially
increased in September. This is one indicator of the tension in
funding markets, which is credit negative for GCA. Structurally,
Moody's believes that liquid assets cover only a portion of short-term
wholesale borrowing, even net of interbank assets, which renders
GCA vulnerable to a continued lack of investor appetite for bank debt.
Given the high and sustained disruption to funding markets, it is
unlikely that term debt markets will return to any degree of normality
in the near future; overall, Moody's believes that the
risks are skewed to the downside.
-- Resulting deleveraging is challenging and poses risks
GCA has announced a deleveraging plan in response to these challenges,
which it expects will reduce its wholesale funding requirement by EUR50
billion through asset reductions by the end of 2012. However,
given that many banks in France and elsewhere are now engaged in deleveraging
efforts, Moody's believes that there is a risk that,
where asset sales are required, a lack of market appetite could
lead to a shortfall against the targeted reduction, or it may be
possible only at depressed prices. This could mean that the deleveraging
plan might either fall short of its objectives and/or turn net-negative
for capitalisation -- rather than positive --
should losses exceed expectations.
-- Some sovereign and related country exposures have become
riskier
GCA has taken large impairment charges on its Greek government bonds,
totalling EUR1.1 billion in the second and third quarters,
leaving EUR0.2 billion of net exposure on its own bank balance
sheet and EUR2.7 billion in its insurance subsidiaries.
In the context of GCA's loss-absorption capacity, these
exposures, together with those to Ireland and Portugal --
EUR0.2 billion and EUR0.7 billion for GCA and EUR1.5
billion and EUR2.2 billion for the insurance subsidiaries --
remain significant but manageable.
However, during the review Moody's concluded that the probability
of multiple defaults (in addition to Greece's private-sector involvement
programme) by euro-area countries is no longer negligible.
In Moody's view, the longer the liquidity crisis continues,
the higher the likelihood of sovereign or bank defaults, and ultimately
the potential exit of one or more countries from the euro area.
In particular, GCA retains a Greek banking subsidiary, Emporiki
Bank of Greece, which had a gross loan book of around EUR24 billion
and an NPL ratio of 31% at end-September 2011, with
a cost of risk for 2011 year-to-date of about 520 basis
points of loans, indicating the severity of credit issues in its
lending. In addition, GCA provides significant cross-border
funding to Emporiki (EUR7.8 billion at 30 September 2011),
which would likely be subject to impairment in a scenario of a Greek exit
from the euro area. Moreover, GCA retains a large exposure
to Italy, which Moody's downgraded on 4 October to A2 from
Aa2. Banking and trading-book holdings fell to EUR6.7
billion in the third quarter, but given the size of this exposure,
GCA's creditworthiness is sensitive to a further deterioration in Italy's
sovereign credit strength.
PROBABILITY OF SYSTEMIC SUPPORT REMAINS VERY HIGH, SUPPORTING Aa3
LONG-TERM RATINGS
Moody's regards France as a high support country and GCA plays a
major role as intermediary in the French economy and is integral to the
banking system. Moody's assess the probability of systemic
support for CASA in the event of distress as being very high. As
such, the bank receives a three-notch uplift from its Adjusted
BCA, which brings the global local-currency deposit rating
to Aa3. The outlook is negative, in line with the outlook
on the BFSR.
KEY RATING SENSITIVITIES
Given the negative outlook on the BFSR and long-term ratings,
the probability of an upgrade in either is unlikely. The main factors
that could lead to a downgrade of the long-term ratings include:
-- Any broader reappraisal of the implications of the highly
fragile funding environment for banks that rely on wholesale funding and
are vulnerable to a loss of investor confidence;
-- A deterioration in sovereign creditworthiness,
especially of Greece and/or Italy;
-- An increase in our expectation of losses resulting from
deleveraging;
-- An inability to meet capital targets;
-- Unexpected losses within the bank's capital markets
activity;
-- A further material increase in the probability of a recession
leading to higher credit losses; and
-- A deterioration in the creditworthiness of the support
provider, France, or its ability and/or willingness to provide
support to the benefit of creditors.
SUBORDINATED OBLIGATIONS AND HYBRID SECURITIES
The ratings on the dated subordinated obligations of CASA are currently
positioned one notch below the senior unsecured ratings. However,
they are included within the reassessment of subordinated debt announced
on 29 November 2011. This may lead us to withdraw entirely the
systemic support of three notches from these securities and notch them
from the bank's adjusted BCA, currently A3. For more
details, please see our note "Moody's reviews European banks'
subordinated, junior and Tier 3 debt for Downgrade",
dated 29 November 2011.
The ratings on the bank's hybrid obligation are notched off the
Adjusted BCA of A3. Junior subordinated obligations currently rated
at one notch below the Adjusted BCA remain on review for downgrade in
conjunction with the above review. The ratings on other hybrid
obligations are not on review and their notching from the Adjusted BCA
is expected to remain as before.
CREDIT AGRICOLE CORPORATE AND INVESTMENT BANKING (CACIB)
The Aa3 long-term debt and deposit ratings were confirmed at Aa3
with negative outlook, in line with those of CASA. Moody's
now assumes full cooperative support to CACIB from GCA, further
to the publication of the decree by the French government confirming the
modification of banking law, allowing completion of the affiliation
process initiated by CASA in September. Moody's notes that
CACIB will become formally affiliated to CASA after approval by the CASA
Board of Directors, which we expect to take place in mid-December.
At this point, CASA will, under French law, assume a
legal responsibility for the solvency and liquidity of CACIB. In
the unlikely event that affiliation does not take place as expected,
CACIB's ratings may be lowered.
LE CREDIT LYONNAIS SA (LCL)
Moody's has also downgraded LCL's long-term debt and
deposit ratings by one notch to Aa3 from Aa2 and affirmed its Prime-1
short-term rating. The subordinated debt ratings were also
downgraded by one notch to A1 from Aa3 and remain on review for possible
downgrade. The outlook on the debt and deposit ratings is now negative,
in reflection of the negative outlook assigned to the debt and deposit
ratings of parent CASA. LCL's BFSR of C+, mapping
to a BCA of A2, is unaffected by the current rating actions and
its outlook remains stable. LCL's adjusted BCA, including
parental support, is changed to A2 from A1, reflecting CASA's
lower adjusted BCA of A3. As a result, its junior subordinated
MTN program has been downgraded by one notch to (P)A3 from (P)A2 and remains
on review for possible downgrade.
METHODOLOGIES
The methodologies used in these ratings were Bank Financial Strength Ratings:
Global Methodology published in February 2007, Incorporation of
Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology published in March 2007, and Moody's Guidelines for
Rating Bank Hybrid Securities and Subordinated Debt published 17 November
2009. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
LIST OF AFFECTED RATINGS
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_137995
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
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are derived exclusively from existing ratings in accordance with Moody's
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this announcement provides relevant regulatory disclosures in relation
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Moody's downgrades Credit Agricole SA's long-term ratings to Aa3, concluding review
