Credit Industriel et Commercial

Transcription

1 CREDIT OPINION 7 June 17 Credit Industriel et Commercial Semi-Annual Update Update Summary Rating Rationale RATINGS Credit Industriel et Commercial Domicile Paris, France Long Term Debt Type Senior Unsecured Dom Curr Outlook Stable Long Term Deposit Type LT Bank Deposits - Fgn Curr Outlook Stable Credit Industriel et Commercial (CIC)is owned by Banque Federative du Credit Mutuel (BFCM, / stable, ), which in turn is owned by 11 regional federations of the cooperative Groupe Credit Mutuel (unrated). These regional federations -- together with BFCM and CIC -- make up the `Credit Mutuel-CM11' group (unrated), the largest sub-group within the wider Groupe Credit Mutuel, accounting for around 8% of its consolidated total assets, loan book and deposits. As a non-mutualist subsidiary, CIC does not directly fall within the cooperative solidarity mechanisms of Groupe Credit Mutuel, implying that the group's central body (Confederation Nationale du Credit Mutuel) does not assume legal responsibility for the solvency and liquidity of the entity. However, CIC is core to the strategyand operations of Credit Mutuel-CM11 group, and thus benefits from a very high probability of support from Groupe Credit Mutuel, in our view. Exhibit 1 Rating Scorecard - Key Financial Ratios Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Guillaume Lucien Baugas VP-Senior Analyst guillaume.lucien-baugas@moodys.com Andreea Prodea Associate Analyst andreea.prodea@moodys.com Alain Laurin Associate Managing Director alain.laurin@moodys.com Nick Hill MD-Banking nick.hill@moodys.com Solvency Factors Yasuko Nakamura VP-Sr Credit Officer yasuko.nakamura@moodys.com Median ba1-rated banks 45% 14% 4% 1% 35% 3% 1% 5% 8% % 6% 15% 4% % Liquidity Factors Analyst Contacts Credit Industriel et Commercial (BCA: ) 16% 1% 3.4% 13.5% % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS).5% Profitability: Net Income/ Tangible Assets 4.4% 3.% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets 5% % Liquidity Factors (RHS) Source: Moody's Financial Metrics CIC's long-term senior unsecured debt and deposit ratings are therefore based on (1) its own BCA of, which, given its strategic and operational integration in Credit MutuelCM11, also partly reflects the fundamentals of the Credit Mutuel-CM11 group; () affiliate support uplift from Groupe Credit Mutuel resulting in the adjusted BCA of ; and (3) two notches of uplift resulting from the application of our Advanced Loss Given Failure (LGF) analysis at the level of Groupe Credit Mutuel. While we consider that the probability of government support for senior unsecured debt and deposits remains moderate, in line with most other systemically important banks in Europe, the proximity of the government's

2 ratings to the unsupported creditworthiness of the entity means that this support does not result in any rating uplift. CIC, owned by and consolidated within BFCM, has its own franchise in the domestic retail, SME and corporate markets. It also operates as the hub for the Credit Mutuel-CM11 group's modest capital market activities. The BCA of reflects the bank's solid franchise and the sound liquidity management centralized at Credit Mutuel-CM11. Although adequate, CIC's lower solvency compared to the rest of the group, as well as the higher single-name concentrations related to its corporate banking business and the marginal risk stemming from its capital market activities constrain its BCA. CIC's adjusted BCA of captures (1) the relatively stable nature of Groupe Credit Mutuel's consolidated profits over the past seven years, reflecting its resilient earnings and low-risk profile based on a domestic and robust bancassurance-focused franchise; and () its ability to retain the majority of these profits to consistently increase its capital base, which the cooperative structure allows. The adjusted BCA of is also underpinned by Groupe Credit Mutuel's sound asset quality, the high solvency it has managed to preserve while achieving reasonable business growth, and the material improvements in liquidity and funding that its main operating sub-groups have achieved since 1 - increasing customer deposits and lengthening the term structure of their wholesale funding. The CR Assessment of A(cr)/Prime-1(cr) assigned to CIC is three notches above the adjusted BCA, reflecting the substantial volume of bail-in-able liabilities protecting operating obligations. The moderate probability of government support assumption no longer results in any additional uplift. Please refer to Moody's report Groupe Credit Mutuel: Mutual Guarantee in a Fragmented Group Drives Our Ratings Approach published on 14 September 16, for a more comprehensive analysis of Groupe Credit Mutuel's structure and ratings construction. Credit Strengths Solid domestic retail and corporate banking franchise generate predictable earnings, CIC has an adequate risk profile, reflecting its focus on domestic retail and corporate lending Adequate capital adequacy resulting in a solid loss absorption capacity Funding structure and liquidity buffer mitigate reliance on wholesale funding CIC's BCA and adjusted BCA are supported by France's `Strong+' macro profile CIC benefits from a very high probability of support from Credit Mutuel group, because of its core role within Credit Mutuel-CM11 group Large volume of deposits, senior and junior debt resulting in deposit and senior unsecured debt ratings benefiting from a very low loss-given- failure rate and two-notch uplift from the adjusted BCA Credit Challenges CIC's financial markets activities and the current environment could entail some volatility CIC's role as a hub for the group's corporate banking and financial markets activities results in a higher standalone risk profile Rating Outlook The outlook on CIC's deposit and senior unsecured ratings is stable as we do not anticipate any significant change in the bank's and Groupe Credit Mutuel's creditworthiness in the near term. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 7 June 17

3 Factors that Could Lead to an Upgrade CIC's adjusted BCA is already at the higher end of banks' BCAs globally, making any further upgrade unlikely. CIC 's deposit and senior unsecured ratings could be upgraded if (1) Groupe Credit Mutuel's liability structure results in a lower loss-given-failure for these liabilities through higher subordination; or () the rating of the government of France is upgraded. Factors that Could Lead to a Downgrade CIC's adjusted BCA could be downgraded in the case of (1) a material weakening of Groupe Credit Mutuel's underlying profitability, chiefly as a result of asset quality deterioration or a structural increase in the cost of funding; or () a weakening liquidity position or funding profile; or (3) a material weakening in France's macro profile. CIC's deposit and senior unsecured ratings could be downgraded as a result of (1) a deterioration in CIC's adjusted BCA; or () a change in Groupe Credit Mutuel's liability structure resulting in higher loss-given failure through a lower instrument volume or reduced subordination for these liabilities. Key Indicators Exhibit Credit Industriel et Commercial (Consolidated Financials) [1] Total Assets (EUR million) Total Assets (USD million) Tangible Common Equity (EUR million) Tangible Common Equity (USD million) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) ,979 81,597 13,6 14, ,878 73,614 1,79 13, ,679 97,85 11,75 14, ,64 39,519 1,84 14, CAGR/Avg.4 35,73 31,787 1,75 13, [1] All figures and ratios are adjusted using Moody's standard adjustments [] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] May include rounding differences due to scale of reported amounts [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [6] Simple average of periods presented for the latest accounting regime. [7] Simple average of Basel III periods presented Source: Moody's Financial Metrics Detailed Rating Considerations Solid domestic retail and corporate banking franchise generate predictable earnings, although CIC's financial markets activities entail some volatility CIC has a sound franchise in the domestic retail segment, with estimated market shares of approximately 6% in both loans and deposits (i.e., in its own right, CIC accounts for half of the market shares of the Credit Mutuel-CM11 group). CIC also has a strong franchise in the domestic SME and corporate segment. We view this strong domestic position as a key credit strength for the issuer, as it accounts for the bulk of the bank's earnings and provides it with a predictable earnings base. CIC's profitability is satisfactory, reflecting the bank's focus on low-risk and stable retail and SME lending activities. We however consider its earnings base is more volatile than for Credit Mutuel-CM11 group overall, as CIC is the hub for the group's capital market activities. These activities are now limited in absolute terms and have been significantly scaled down, but however remain complex. 3 7 June 17

4 CIC has an adequate risk profile, reflecting its focus on domestic retail and corporate lending; however, its role as a hub for the group's corporate banking and financial markets activities results in a higher standalone risk profile At CIC, the bulk of the activities relate to domestic retail and corporate lending, which result in a moderate risk profile, as reflected in its low impaired loan ratio of 3.1% at year-end 16. This risk profile is the main driver for the relatively low cost of risk (11 bps of gross loans in 16 and 14 bps in 15). CIC's home loans account for 45% of its gross customer loans. We expect that this portfolio will continue to incur low default rates because of (1) the highly supportive social safety net; () the cap imposed on debt to income gearing; and (3) the limited proportion of variable rate mortgages. CIC's role as a hub for the Credit Mutuel-CM11 group's capital markets and corporate banking activities raises its standalone risk profile, resulting in a higher concentration on a limited number of large corporate; the sum of single exposures exceeding EUR3 million represented approximately 146% of CIC's Tier 1 capital at year-end 16. In addition, CIC continues to run some proprietary trading activities through a circa EUR1 billion portfolio of fixed income, equity, hybrid and credit spread positions acquired on a medium-term basis and closely monitored to manage risks. Although these activities have been significantly scaled down through the adoption of low limits and stop losses, and despite we recognise these positions are closely controlled with the full awareness of the bank's management, we view them as complex and believe these could entail some P&L volatility. CIC's higher single name concentrations as well as the marginal risk stemming from its trading activities are reflected in the one notch negative adjustment on the Asset Risk score to from the macro-adjusted score of a3. Adequate capital adequacy resulting in a solid loss absorption capacity We consider that the bank's current capital cushion adequately covers potential credit losses under our central scenario. However, CIC has a higher risk profile on a standalone basis than the rest of the group because of (1) the relatively higher proportion of capital markets activities in the business mix; and () its large exposure to the SME sector, which is vulnerable to macroeconomic downturns. The bank reported a fully-loaded Common Equity Tier (CET1) ratio of 1.5% at year-end 16 (year-end 15: 11.7%). Its fully-loaded leverage ratio at year-end 16 was 4.5%. We consider that these ratios are adequate, although below the high levels observed at CM11 group on a consolidated basis. This translates into a Tangible Common Equity Ratio of 13.5% at year-end 16, corresponding to a Capital score of. Funding structure and liquidity buffer mitigate reliance on wholesale funding Our analysis focuses on the liquidity and funding of Credit Mutuel-CM11 group's banking activities, which are managed centrally by BFCM for the whole group, including CIC. The assigned cores for CIC's Funding Structure and Liquid Resources scores in the scorecard are therefore aligned with Credit Mutuel-CM11 group's scores. The loan-to-deposit ratio was 1% at year-end 16 and has remained stable since 13 after a material decrease achieved through the re-intermediation of off-balance sheet customers' savings and the introduction of a policy requiring loan growth to be funded by new deposits. We believe that the group has more limited room for further improvement going forward, as it would likely come at the expense of its own business. Reliance on wholesale funding remains high (around one third of tangible banking assets). However its reliance on short-term wholesale funding is low, and accounts for 37% of wholesale funding (excluding repos), down from more than 6% in 9. This reflects the group's continued efforts to lengthen the term structure of its wholesale funding through the issuance of both secured and unsecured bonds. The risk of a disruption of wholesale funding is adequately covered. The LCR eligible portfolio was EUR68 billion at year-end 16, covering 11% of the entire amount of wholesale funding maturing within the next 1 months. Adding the other central bank eligible assets, the coverage ratio of these liabilities was 159% at year-end 16. At year-end 16, the LCR ratio was 14%. 4 7 June 17

5 Our Combined Liquidity score of reflects these factors. Notching Considerations Affiliate Support We assign an adjusted BCA of to CIC, incorporating two notches of uplift from its BCA of for affiliate support provided by Groupe Credit Mutuel. Although CIC does not fall under the legal scope of the Credit Mutuel group's solidarity mechanisms (1) it is fully integrated within Credit Mutuel-CM11 group both strategically and operationally; and () it holds one of the main franchises of the group. We therefore consider that an adverse scenario affecting CIC would likely exert negative pressure on the credit strength of Credit Mutuel-CM11 group and, by extension, to the Credit Mutuel group. Hence, our ratings incorporate a very high probability of support from Credit MutuelCM11 group and, in turn, from Confederation Nationale du Credit Mutuel (CNCM), the central body of the Credit Mutuel group. Loss Given Failure Groupe Credit Mutuel and its operating entities in France are subject to the EU Bank Resolution and Recovery Directive (BRRD), which we consider to be an Operational Resolution Regime. We assume that resolution if any, would occur at the level of Groupe Credit Mutuel once the said Group has reached the point of non-viability. If financial difficulties occur at the level of CIC, this would be addressed by Groupe Credit Mutuel through affiliate support. Our LGF analysis is therefore based on Groupe Credit Mutuel's consolidated liability structure. We also assume residual tangible common equity of 3% and losses post-failure of 8% of tangible banking assets, a 5% run-off in junior wholesale deposits, a 5% run-off in preferred deposits, and assign a 5% probability to deposits being preferred to senior unsecured debt. The proportion of deposits considered junior is 6%. These are in line with our standard assumptions. We believe that deposits are likely to face very low loss-given-failure, due to the loss absorption provided by the combination of substantial deposit volume and subordination. This results in a two-notch uplift from the adjusted BCA. We believe that senior unsecured debt is also likely to face very low loss-given-failure. This is supported by the combination of senior debt's own volume and the amount of subordination. This results in a two-notch uplift from the adjusted BCA. For subordinated securities, our initial LGF analysis confirms a high level loss-given-failure, given the small volume of debt and limited protection from more subordinated instruments and residual equity. Government Support Groupe Credit Mutuel being subject to the BRRD. We expect a moderate probability of government support for both deposits and senior unsecured debt because of its systemic importance. Due to the proximity of the government's ratings to the unsupported creditworthiness of the bank, this support does not result in any rating uplift. Subordinated securities do not benefit from government support. The CR Assessment is positioned at A(cr). The CR Assessment, prior to government support, is positioned three notches above the Adjusted BCA of, based on the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments amounting to 3.3% of Tangible Banking Assets. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of default on certain senior obligations, rather than expected loss, therefore we focus purely on subordination and take no account of the volume of the instrument class. We assume a moderate government support assumption for the CR Assessment but due to the proximity between the sovereign rating and the CR Assessment prior to government support, this support no longer results in any uplift. The moderate support assumption reflects our view that any support provided by governmental authorities to a bank which benefits senior unsecured debt or deposits is very likely to benefit operating activities and obligations reflected by the CR Assessment as well, consistent with our belief that 5 7 June 17

6 governments are likely to maintain such operations as a going-concern in order to reduce contagion and preserve a bank's critical functions. About Moody's Scorecard Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. Rating Methodology and Scorecard Factors Exhibit 3 Credit Industriel et Commercial Macro Factors Weighted Macro Profile Strong + Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Key driver # Single name concentration Solvency Asset Risk Problem Loans / Gross Loans 3.4% a3 Market risk Capital TCE / RWA 13.5% Risk-weighted capitalisation Profitability Net Income / Tangible Assets.5% ba1 ba1 Earnings quality Loan loss charge coverage ba Term structure Market funding quality a3 Stock of liquid assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 4.4% Liquid Resources Liquid Banking Assets / Tangible Banking Assets 3.% b1 Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA ba1 Balance Sheet in-scope (EUR million) Equity 6 1% 7 June 17 A a3-ba - % in-scope at-failure (EUR million) % at-failure 3.%

7 Debt class Deposits Senior unsecured bank debt Dated subordinated bank debt De jure waterfall De facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe jure De facto notching guidance notching Assessment volume + ordination volume + ordination versus Subordination Subordination BCA 3 a (cr) aa3 aa3-1 a3 Instrument class Loss Given Failure notching Deposits Senior unsecured bank debt Dated subordinated bank debt 3-1 Additional Preliminary Rating Notching Assessment a (cr) aa3 aa3 a3 Government Support notching Local Currency Rating A (cr) -- Foreign Currency Rating - A3 Source: Moody's Financial Metrics Ratings Exhibit 4 Category CREDIT INDUSTRIEL ET COMMERCIAL Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Senior Unsecured -Dom Curr Subordinate MTN Commercial Paper -Dom Curr Other Short Term Moody's Rating Stable /P-1 A(cr)/P-1(cr) (P)A3 P-1 (P)P-1 PARENT: BANQUE FEDERATIVE DU CREDIT MUTUEL Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Senior Unsecured -Fgn Curr Senior Unsecured -Dom Curr Subordinate -Dom Curr Pref. Stock Non-cumulative -Dom Curr Commercial Paper -Dom Curr Other Short Term Stable /P-1 A(cr)/P-1(cr) (P) A3 Ba (hyb) P-1 (P)P-1 Source: Moody's Investors Service 7 7 June 17

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