Further to the review initiated on 15 June, 2011
Paris, September 14, 2011 -- Moody's Investors Service has announced:
(i) A downgrade of the Bank Financial Strength Rating (BFSR) of Credit
Agricole SA (CASA) by one notch to C from C+, and
(ii) A downgrade of the long-term debt and deposit ratings by one
notch to Aa2 from Aa1.
Moody's believes these ratings are more consistent with the bank's
sizeable exposures to the Greek economy.
At the same time, Moody's announced that CASA's C BFSR
and Aa2 long-term debt and deposit ratings remain on review for
possible downgrade to consider the implications of the potentially persistent
fragility in the bank financing markets, given the continued reliance
on wholesale funding of Groupe Credit Agricole (GCA).
The review is unlikely to lead to a downgrade in the long-term
ratings of more than one notch.
The Prime-1 short-term ratings have been affirmed.
Meanwhile, the Aa3 long-term debt and deposit ratings on
Credit Agricole Corporate and Investment Bank remain on review,
now direction uncertain (previously on review for downgrade), as
they may be aligned with the ratings on CASA following the potential extension
of full cooperative support from GCA to this entity.
Moody's will publish separate press releases on other institutions
covered by the review announced on 15 June, 2011.
RATINGS RATIONALE
In its press release of 15 June, 2011, Moody's announced
a review of the BFSRs and long-term ratings of three French banking
groups (BNP Paribas, CASA and Societe Generale) because of our concerns
about the potential inconsistency between their ratings and their exposures
to the Greek economy (Greece is rated Ca, outlook developing),
either through their holdings of government bonds or the credit they had
extended to the Greek private sector. The review incorporated loss
assumptions that were significantly higher than the impairments the bank
had already recognised.
Moody's has concluded that although GCA has considerable capital
resources to absorb potential losses arising over time from these risks,
the exposures themselves are too large to be consistent with existing
ratings. Moody's has therefore downgraded the BFSR of CASA,
GCA's central body, to C from C+. CASA's
Adjusted BCA, which takes into account co-operative support
and thus the strength of GCA as a whole, has been lowered to A1
from Aa3.
However, during the review, Moody's concerns about the
structural challenges to banks' funding and liquidity profile increased,
in light of worsening refinancing conditions. The continuing review
of the BFSR will focus directly on these funding and liquidity challenges
for CASA, which, given the current environment, could
become long-term constraints to the performance of its franchise.
Greek Exposures Material Issue For Risk Profile
Since the start of the review for downgrade, GCA, along with
many other financial institutions, has expressed its intention to
participate in a proposed restructuring of Greek debt. This led
to its recognition of EUR202 million before tax in impairments in the
second quarter of 2011 (1). GCA's net residual exposure to
Greek government bonds is now relatively low, at EUR891 million
net of policyholders' surplus in its insurance activities (as of
30 June 2011), less than 2% of group Core Tier 1 capital
(2).
GCA's banking and trading book exposures to government bonds issued by
Ireland and Portugal are also relatively modest, at EUR1.0
billion in total, although exposures are greater to the more highly
rated Spain (EUR1.8 billion) and Italy (EUR8.7 billion)
(3). In its review, and in the context of a stress test covering
GCA's global loan book and structured finance exposures, Moody's
considered a severe case scenario for certain government bond holdings,
using haircuts significantly higher than the impairments the bank has
already recognized: 60% for Greece, 50% for
Ireland, 50% for Portugal, 10% for Spain and
7% for Italy. Taking into account the impairments already
made against some Greek bonds, we believe resultant pretax losses
would total around EUR1.5 billion, only 2% of GCA's
core Tier 1 capital after tax and 18bps of risk-weighted assets,
with further mitigation possible via reduced dividends.
Loss assumptions for private sector credit were based upon those previously
published by Moody's, see "European Banking Credit Loss
Assumptions", published on 2 August, 2010. Indeed,
the greater impact on GCA was the result of a material worsening of the
credit quality of GCA's private sector exposures to Greece,
as it booked larger-than-expected credit losses against
its loan book in its local subsidiary, Emporiki Bank of Greece (E
/ Caa1 / B1, on review for possible downgrade), which had
a gross loan book of around EUR24 billion and an NPL ratio of 26%
at year-end 2010 with a coverage ratio of 45% (4).
Emporiki's cost of risk for 2011 year to date is 413 basis points
of loans, further indication of the deep-rooted credit issues
in its loan book. Private sector loan book exposures to Ireland
and Portugal, at EUR3.6 billion and EUR2.1 billion
respectively, do not appear to pose material credit quality problems.
In Moody's view, CASA's exposures to the risks arising
from the deterioration in Greece's credit quality are more consistent
with a BFSR of C than the previous level of C+. The BFSR of
C is equivalent to a standalone Baseline Credit Assessment (BCA) of A3
on the long-term ratings scale. Furthermore, the same
issues had led Moody's to believe that the Adjusted BCA, which
incorporates the mutual support mechanisms available to CASA and therefore
reflects the credit quality of the entire group, is more consistent
with A1 than the previous Aa3.
The Adjusted BCA reflect the group's very strong domestic retail
banking and insurance franchise, its international retail and insurance
activities and other leading positions in selected financial services.
The rating also incorporates the group's diversification,
witnessed by its wide range of products and services offered in various
geographic markets, which partly offsets the weaker overall credit
fundamentals of its capital markets activity, which in common with
those of many other banks, is characterised by a certain complexity
and opacity of risk profile, as well as a relatively confidence-sensitive
customer base. The Adjusted BCA takes into account the Greek and
other peripheral exposures discussed above.
CONTINUED REVIEW OF BFSR TO FOCUS ON FUNDING PROFILE
In addition to the concerns noted above, GCA's wholesale funding,
the majority of which is short-term, is still high in absolute
terms and may pose a vulnerability given considerable market tension.
During the summer, concerns over sovereign exposures and the health
of sovereign balance sheets grew significantly. This was most manifest
in the behaviour of US money market funds, which are an important
source of short-term US dollars for GCA. These funds became
particularly risk-averse, resulting in reduced availability
and shorter tenors for this type of financing. For more details,
see Moody's Special Comment, "EU Banks: Stronger
Liquidity and Central Bank Actions Mitigate Recent Volatility but Longer-Term
Concerns Remain".
Moody's notes that GCA has substantial holdings of central bank
eligible assets (EUR81 billion at 31 July 2011), and other liquid
assets of EUR42 billion (5). In addition, it has full access
to Eurosystem central bank liquidity in major currencies. As such,
Moody's believes that GCA can withstand the short-term credit
negative impact of the contraction in dollar funding, and notes
that euro funding remains plentiful. Even so, the amount
of the bank's wholesale funding requirements makes it vulnerable
to a deterioration in market sentiment. At end--2010,
from a strictly accounting view, debt securities and interbank borrowings
totalled EUR310 billion, or 25% of its total balance sheet
excluding insurance technical reserves and derivatives, 59%
of which falls due within three months, and 76%, within
one year (6).
Moody's expects GCA to continue to enhance the amount and quality
of its liquidity, reduce its reliance on the wholesale markets,
and lengthen the duration of its borrowings, in anticipation of
the challenges posed by the Net Stable Funding Ratio and Liquidity Coverage
Ratio to be introduced by Basel III. However, given the likelihood
that bank financing conditions will remain fragile and prone to disruption
so long as concerns persist over European sovereigns, and the potential
for that disruption to become more marked and sustained over time,
Moody's is maintaining its review on CASA's BFSR. The
extended review will assess the potential for further, increased
disruption to undermine CASA's business model and creditworthiness
given its continued reliance on short-term funding, as well
as the potential impact on other credit considerations, notably
profitability.
LONG-TERM DEBT AND DEPOSIT RATINGS REMAIN ON REVIEW FOR POSSIBLE
DOWNGRADE
Under its Joint-Default Analysis (JDA) methodology, Moody's
assigns two notches of cooperative support to CASA from GCA, reflecting
the greater strength of the group, which notably benefits from a
very strong franchise in French lending and savings. This results
in an Adjusted BCA of A1.
Moody's regards France as a high support country, and GCA
plays a major role as an intermediary in the French economy and is integral
to the banking system. Moody's therefore assesses the probability
of systemic support for CASA in the event of distress as being very high.
As such the bank receives a two-notch uplift from its Adjusted
BCA, which brings the Global Local Currency deposit rating to Aa2.
This remains on review for possible downgrade, as under our JDA
methodology, a reduction in the Adjusted BCA to A2 would result
in a downgrade in the long-term ratings to Aa3.
KEY RATING SENSITIVITIES
Given the current review for potential downgrade on CASA's BFSR and long-term
debt and deposit ratings, an upgrade in either is unlikely.
The main factors which could lead to lower long term ratings include:
- a reconsideration of the bank's funding and liquidity profile
within the context of its broader business model, and the impact
of its current and future funding structure on other credit considerations,
chiefly risk management and profitability;
- a prolongation or intensification of challenges to refinancing
conditions, resulting in a weaker liquidity and / or funding position
in Moody's view;
- increased sovereign risk in the euro area
- a deterioration in GCA's overall risk profile as a result of
risk management failures and/or acquisitions;
- a resurgence of volatility within capital markets activities;
- a deterioration in our assessment of the intra-group support
mechanisms, which we consider unlikely;
- a lowering of our assessment of the probability of systemic support
that would be provided to GCA in the event of need.
The review is unlikely to lead to a downgrade in CASA's long-term
ratings of more than one notch.
CREDIT AGRICOLE CORPORATE AND INVESTMENT BANK (CACIB)
As noted, Moody's Aa3 long-term debt and deposit ratings
on CACIB remain on review, direction uncertain (previously on review
for downgrade). The BFSR of D on CACIB is unaffected. The
review will consider the potential extension from GCA of full cooperative
support to CACIB, which would lead us in turn to align the long-term
ratings with those of CASA. Depending on whether Moody's
would assume full cooperative support and depending on the outcome of
the rating review of CASA's long-term ratings, CACIB's
long-term ratings could therefore either be aligned with CASA's
long-term ratings or be rated up to two notches below CASA,
as has been the case up until now, resulting in long-term
ratings of either Aa2, Aa3, A1 or A2. The Prime-1
short-term rating was affirmed as it would be maintained at each
of these rating levels.
SUBORDINATED OBLIGATIONS AND HYBRID SECURITIES
The ratings on the dated subordinated obligations are notched off the
bank's fully supported, long-term GLC deposit ratings
and therefore remain on review for downgrade.
The ratings on the bank's hybrid obligations are notched off the
Adjusted BCA of A1 for CASA, in accordance with Moody's Guidelines
for Rating Bank Hybrid Securities and Subordinated Debt published on 17
November 2009. The ratings remain on review for downgrade.
KEY RATING FACTORS AND SENSITIVITIES FOR OTHER ENTITIES AFFECTED BY THIS
RATING ANNOUNCEMENT
For all other entities affected by this rating announcement, please
refer to the rationale above.
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.
SOURCES
(1) Source: unaudited interim financial statements
(2) Source: unaudited interim financial statements
(3) Source: unaudited interim financial statements
(4) Source: Emporiki unaudited interim financial statements
(5) Source: unaudited company presentation
(6) Source: audited 2010 financial statements
LIST OF AFFECTED RATINGS
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_135839
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.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following :
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided
to entities rated by MIS's EU credit rating agencies" on the
ratings disclosure page on our website www.moodys.com for
further information.
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.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. 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.
Paris
Nicholas Hill
Senior Vice President
Financial Institutions Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Frankfurt am Main
Carola Schuler
MD - Banking
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Credit Agricole SA?s long-term ratings to Aa2 on Greek exposures, ratings remain on review to consider impact of funding challenges on Credit Profile
