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Rating Action:

Moody's downgrades LaSer Cofinoga's debt ratings to Baa2/Prime-2

10 Jul 2012

Baseline Credit Assessment downgraded to ba2, outlook negative.

Paris, July 10, 2012 -- Moody's Investors Service has today downgraded the standalone credit assessment (BCA) of LaSer Cofinoga to ba2, from baa1 previously. At the same time, the rating agency has also downgraded the long-term deposit and senior debt ratings of LaSer Cofinoga to Baa2 from A2, the dated subordinated debt ratings to Baa3 from A3 previously and the preference shares rating of Cofinoga Funding One and Cofinoga Funding Two to Ba2 (hyb) from Baa3 (hyb). LaSer Cofinoga's short-term deposit and debt ratings were also downgraded to Prime-2 from Prime-1. The standalone credit assessment and all long-term ratings carry a negative outlook.

The lowering of the institution's standalone credit assessment reflects the pressure on the bank's profitability and asset quality resulting from the weakening macroeconomic outlook and from the more difficult business perspectives following the enforcement of a more stringent regulation on French consumer lending activities. It also reflects the risks stemming from the entity's reliance on wholesale markets for its funding.

The Finance Company Global Rating Methodology, published in March 2012, was used as the primary methodology to arrive at our ba2 standalone credit assessment for LaSer Cofinoga. Previously the firm's standalone credit quality was assessed under the Bank Financial Strength Ratings: Global Methodology, published in February 2007, and we had assigned a standalone Bank Financial Strength Rating (BFSR) of C-, mapping to a baseline credit assessment of baa1, which was placed on review for downgrade on 15 June 2011. With the change in primary methodology for our assessment of LaSer Cofinoga's standalone credit quality we will no longer separately disclose a BFSR.

LaSer Cofinoga's long-term deposit and debt ratings are Baa2. Although BNP Paribas (A2 deposit rating, C-/baa2 standalone bank financial strength rating/standalone credit assessment, with stable outlook) only owns 50% of LaSer Cofinoga, Moody's assesses the probability of parental support to be very high, as evidenced by the liquidity agreement with BNP Paribas and the ample liquidity provided to LaSer Cofinoga since the beginning of the global financial crisis. This results in a three-notch uplift from LaSer Cofinoga's standalone financial assessment of ba2. Given the high reliance on funding provided by BNP Paribas and the absence of any systemic support in our view, LaSer Cofinoga's debt and deposit ratings are constrained by BNP Paribas' standalone financial strength of baa2.

The outlook is negative on LaSer Cofinoga's standalone credit assessment, and reflects our view that LaSer Cofinoga's financial strength may be further pressurized in the event of a more pronounced macro-economic downturn. It also reflects the challenges facing the institution in the implementation of its new strategy and the resulting uncertainty on the benefits associated with it.

This action concludes the review on the bank's ratings initiated on 15 June 2011.

RATINGS RATIONALE -- STANDALONE CREDIT ASSESSMENT

FIRST DRIVER -- PRESSURE FROM A FURTHER DETERIORATION OF THE MACROECONOMIC ENVIRONMENT

As a monoline consumer lender, LaSer Cofinoga is inherently exposed to macroeconomic downturns. This reflects the correlation of the bank's business activity to the levels of households' consumption, which we expect to remain fragile in the context of weak growth. In addition, despite positive developments on new production, we also expect the bank's cost of risk to remain elevated in the short-to-medium term, reflecting (i) the high sensitivity of the issuer's customer base to the deteriorating macroeconomic environment and the level of unemployment, and (ii) the high loss potential associated with consumer lending activities.

We anticipate that the French economy, and more generally most European economies, will continue to have a weak performance in the foreseeable future, and we therefore expect LaSer Cofinoga's profitability and asset quality to remain under pressure. At year-end 2011, around two-thirds of LaSer Cofinoga's loan book comprised consumer loans to French households, while the remainder was exposed to households in Poland, the United Kingdom, the Netherlands, Denmark and Norway.

On the positive side, we note that the bank has adopted a new strategy aiming at lowering the risk profile of its lending activities, notably by increasing the proportion of amortizing loans in its loan book. We expect this strategy ultimately to result in a lower cost of risk through the cycle, although it will take some time to be fully implemented. In addition, we also expect the bank to continue to work through a significant book of legacy non-performing loans with a high loss potential, thereby exerting pressure on the bank's profitability and asset quality in the shorter-term.

SECOND DRIVER -- MORE STRINGENT RULES ON DOMESTIC CONSUMER LENDING

LaSer Cofinoga, in common with other domestic consumer lenders, is also affected by the enforcement of more stringent rules on consumer lending activities aiming at protecting the consumers. Indeed, following a transition period of two years, the "Loi sur le Crédit à la Consommation", also known as the « Lagarde law » which was enacted on 1 July 2010, has now come into full effect.

The most notable changes are (i) the convergence of the maximum interest rates charged on consumer loans, which significantly reduces earnings generation capacity, especially on revolving loans; (ii) the reduction to 8 years (from 10 years) of the duration of debt restructuring plans for over-indebted households, which increases the loss potential on restructured loans, and (iii) the significant increase of the administrative burden associated with consumer lending activities.

Ultimately these changes are designed to protect consumers and prevent weaker households from excessive indebtedness levels. If successful, the new rules should lead to better asset quality over the long-run for consumer lenders.

However in the short-term, while older loans are being worked through, the economics of French consumer lending are negative for lenders due to higher losses and changes to the business model, as evidenced by the impact on the bank's profit levels in 2010 and 2011.

In order to adapt to the challenges facing LaSer Cofinoga, the institution made public in early 2012 its decision to reposition its product mix towards more amortizing loans, with a more favorable risk/return profile. However, the French consumer financing market is highly competitive, and consumer lending arms of large French banking groups have a strong positions on domestic amortizing loans, which may make it more difficult for LaSer Cofinoga to implement its strategy, in our view.

THIRD DRIVER -- RELIANCE ON WHOLESALE FUNDING AND FUNDING FROM BNP PARIBAS

We consider LaSer Cofinoga's pure wholesale funded profile a credit weakness, as the bank does not benefit from diversified funding sources, and remains dependent on external funding in case of stress.

At year-end 2011, LaSer Cofinoga had EUR9.2 billion of wholesale funding (out of a total balance sheet of EUR11.9 billion), comprising EUR 3.9 billion of debt and EUR5.3 billion of interbank funding. The latter was extended by BNP Paribas, and reflects the existence of a funding commitment in the shareholders' agreement between BNP Paribas and Galeries Lafayette, both 50%-shareholders from LaSer, the holding which in turn owns 100% of LaSer Cofinoga.

However, Moody's recognizes the tangible benefits to LaSer Cofinoga's liquidity profile of the access to BNP Paribas' funding. In addition, we note that the bank's policy of matching the duration of its assets and liabilities also mitigates the liquidity risks arising from a wholesale funding profile. Nonetheless, in case of a market stress and of a restricted access to BNP Paribas' funding --e.g. as a result of a funding stress affecting its shareholder--, LaSer Cofinoga would have to operate a significant reduction of its loan production, which would have a material impact on its franchise, in our view.

RATINGS RATIONALE -- DEPOSIT AND DEBT RATINGS

LaSer Cofinoga's long-term deposit and debt ratings are Baa2, i.e. three notches above the standalone credit assessment of LaSer Cofinoga.

This reflects our assessment of a very high probability of parental support, as evidenced by the liquidity commitment from BNP Paribas and effectively the ample liquidity provided to LaSer Cofinoga since the beginning of the global financial crisis.

LaSer Cofinoga's ratings do not incorporate any systemic support as the bank does not collect any deposits. In addition, we believe a failure of LaSer Cofinoga would not result in a systemic risk for the French banking system.

The short-term ratings have been lowered to Prime-2 from Prime-1, reflecting the downgrade of the long-term ratings.

RATINGS RATIONALE -- SUBORDINATED DEBT RATINGS

The downgrade of LaSer Cofinoga's dated subordinated debt to Baa3 (i.e. one notch below its adjusted standalone credit assessment of baa2, which incorporates support from BNP Paribas) from A3 reflects the downgrade of LaSer Cofinoga's ratings. The outlook is negative, in line with the outlook on the bank's standalone credit assessment.

In addition, the ratings on the preference shares issued by Cofinoga Funding One and Cofinoga Funding two were downgraded to Ba2 (hyb) from Baa3 (hyb), i.e. three notches below LaSer Cofinoga's adjusted standalone credit assessment of baa2. This reflects (i) their deeply subordinated claim in liquidation; (ii) the issuer's option to skip coupon payments on a non-cumulative basis if no ordinary dividends have been paid in the preceding 12 months; and (iii) the mandatory coupon skip mechanism if no distributable profits are available or in case of breach of minimum regulatory capital requirements. The outlook is negative, in line with the outlook on the bank's standalone credit assessment.

RATIONALE FOR NEGATIVE OUTLOOK

The outlook is negative on LaSer Cofinoga's standalone credit assessment, and reflects our view that LaSer Cofinoga's financial strength may come under further pressure in the event of a more pronounced macro-economic downturn. It also reflects the challenges facing the institution in the implementation of its new strategy and the resulting uncertainty on the benefits associated with it.

The outlook is also negative on long-term deposit and debt ratings, reflecting the negative outlook on the bank's standalone credit assessment.

WHAT COULD CHANGE THE RATING UP/DOWN

LaSer Cofinoga's standalone financial strength could benefit from an durable improvement of its financial fundamentals, notably by restoring its profitability and improving its asset quality, while improving its standalone liquidity and funding profile.

Given the high reliance on funding provided by BNP Paribas and the absence of any systemic support in our view, LaSer Cofinoga's debt and deposit ratings are constrained by BNP Paribas' standalone financial strength of baa2.

Conversely, LaSer Cofinoga's standalone financial strength may be negatively impacted by (i) signs of a weakening franchise, notably as a result of a further deterioration of the macroeconomic outlook, of competitive or regulatory pressure or of funding constraints; (ii) a further deterioration of its financial fundamentals; or (iii) any material adverse change in the funding commitment from BNP Paribas.

LaSer Cofinoga's debt and deposit ratings may be negatively affected by a deterioration in the issuer's standalone financial strength, or by a change in Moody's perception of LaSer Cofinoga's strategic importance to BNP Paribas. Similarly, a deterioration of BNP Paribas' own standalone financial strength rating would also exert pressure on LaSer Cofinoga's debt and deposit ratings.

The principal methodology used in these ratings was Finance Company Global Rating Methodology, published on March 2012. Please see the Credit Policy 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 relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

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Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Stephane Herndl
Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's downgrades LaSer Cofinoga's debt ratings to Baa2/Prime-2
No Related Data.
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