Banque Federative du Credit Mutuel

Transcription

1 CREDIT OPINION 15 June 17 Banque Federative du Credit Mutuel Semi-Annual Update Update Summary Rating Rationale RATINGS Banque Federative du Credit Mutuel Domicile France Long Term Debt A Type Senior Unsecured - Fgn Curr Outlook Stable Long Term Deposit A Type LT Bank Deposits - Fgn Curr Outlook Stable Banque Federative du Credit Mutuel (BFCM) is owned by 11 regional federations of the cooperative Groupe Credit Mutuel (unrated). These 11 regional federations -- together with BFCM -- make up the `Credit Mutuel-CM11' group (Credit Mutuel-CM11, unrated), the largest sub-group within the wider Groupe Credit Mutuel, which accounts for around 8% of its consolidated total assets, loan book and deposits. BFCM is the financing vehicle and holding company of the non mutualist entities of Credit Mutuel-CM11. As a subsidiary that is outside the mutualist perimeter, BFCM does not directly fall within the mutual solidarity mechanisms of Groupe Credit Mutuel; in theory, this means that the group's central body (Confederation Nationale du Credit Mutuel) is not required by law to guarantee the solvency and liquidity of the entity. However in practice, BFCM being core to the strategy and operations of Credit Mutuel-CM11, we believe that it benefits from a very high probability of support from Groupe Credit Mutuel. Exhibit 1 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. Rating Scorecard - Key Financial Ratios Banque Federative du Credit Mutuel (BCA: ) Median -rated banks 16% 5% 14% 45% 4% Yasuko Nakamura -5 VP-Sr Credit Officer yasuko.nakamura@moodys.com Guillaume Lucien-5-5 Baugas VP-Senior Analyst guillaume.lucien-baugas@moodys.com Andreea Prodea -555 Associate Analyst andreea.prodea@moodys.com Alain Laurin -559 Associate Managing Director alain.laurin@moodys.com Nick Hill MD-Banking nick.hill@moodys.com -59 CLIENT SERVICES Americas Asia Pacific Japan EMEA % 1% % 8% 5% 6% % 15% 4% % Liquidity Factors Analyst Contacts Solvency Factors 1% 1% 5.%.% Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets % Solvency Factors (LHS).4% Profitability: Net Income/ Tangible Assets 45.% 8.4% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets 5% % Liquidity Factors (RHS) Source: Moody's Financial Metrics BFCM's A 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 Credit Mutuel-CM11; () affiliate support uplift from Groupe Credit Mutuel resulting in the adjusted BCA of a; and () 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 bond ratings to

2 the unsupported creditworthiness of these instruments results in no rating uplift from the government. BFCM's BCA of reflects the strong retail franchise of its subsidiaries, which results in resilient and predictable earnings, as well as the sound liquidity and capital management centralized at Credit Mutuel-CM11. It also incorporates the institution's somewhat higher risk profile on a standalone basis compared to Credit Mutuel-CM11 associated with the group's consumer lending activities, which are booked at two of the institution's subsidiaries, Cofidis (unrated) and Targobank Germany (unrated). BFCM's adjusted BCA of a 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, which is based on a domestic and robust bancassurance-franchise; and () its ability to retain the majority of these profits and thus regularly increase its capital base. The adjusted BCA 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 its sound liquidity and funding. The CR Assessment of Aa(cr)/Prime(cr) assigned to BFCM 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 activities will continue to generate resilient earnings Credit Mutuel-CM11 has a relatively low risk profile Credit Mutuel-CM11's high capital adequacy results in a solid loss absorption capacity Funding structure and liquidity buffer mitigate reliance on wholesale funding The central role of Credit Mutuel-CM11 in the group results in a very high probability of support from Groupe Credit Mutuel Large volume of deposits, senior and junior debt resulting in very low loss-given-failure for deposit and senior unsecured debt Credit Challenges The low interest rate environment exerts pressure on the bank's profitability Rating Outlook The outlook on BFCM's A 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. Factors that Could Lead to an Upgrade BFCM's adjusted BCA is already at the higher end of banks' BCAs globally, making any further upgrade unlikely. BFCM's deposit and senior unsecured ratings could be upgraded if (1) Groupe Credit Mutuel's liability structure results in lower lossgiven-failure for these liabilities through higher subordination; or () the rating of the government of France is upgraded. Factors that Could Lead to a Downgrade BFCM'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 () a material weakening in France's macro profile. 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. 15 June 17

3 BFCM's deposit and senior unsecured ratings could be downgraded as a result of (1) a deterioration of the standalone financial strength of Groupe Credit Mutuel, resulting in a lower 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 Banque Federative du Credit Mutuel (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 (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) ,15 515,9 17,1 17, ,56 495,961 15,74 17, ,489 5,764 1,91 15, ,78 5,9 8,691 11, CAGR/Avg.4 89,491 51,5 7,67 9, [1] All figures and ratios are adjusted using Moody's standard adjustments [] Basel III - fully-loaded or transitional phase-in; IFRS [] 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. Source: Moody's Financial Metrics Detailed Rating Considerations Please note that the scorecard titled Caisse Federale de Credit Mutuel at the end of this report refers to and is based on the consolidated financials of CreditMutuel-CM11. BFCM is part of Credit Mutuel-CM11, one of the main French bancassurance groups with market share of approximately 1% and 1% in domestic loans and deposits, respectively. In turn, Credit Mutuel-CM11 is a sub-group of Groupe Credit Mutuel, the third largest domestic retail banking group by outstanding home loans and deposit balances. BFCM is fully integrated within Credit Mutuel-CM11 both strategically and operationally, and fulfils a key role as (1) the main issuing vehicle of Credit Mutuel-CM11 and hence an important liquidity provider to the group members; and () the holding company for the group's specialised subsidiaries. Due to this role and its position as an integral part of Credit Mutuel-CM11, we believe that the analysis of the consolidated Credit Mutuel-CM11 better reflects BFCM's creditworthiness than a standalone analysis of BFCM. SOLID DOMESTIC ACTIVITIES WILL CONTINUE TO GENERATE RESILIENT EARNINGS DESPITE THE LOW INTEREST RATE ENVIRONMENT EXERTS PRESSURE ON INTEREST INCOME Credit Mutuel-CM11, which includes the group's cooperative bank network in addition to BFCM, remains predominantly focused on the domestic retail and SME banking sectors and the French insurance sector. Including Credit Industriel et Commercial's (CIC, A/ A stable, ) network, a large subsidiary of BFCM, the group's geographic coverage is nationwide, with particularly high market shares exceeding % in the Eastern and Western regions. The concentration on relatively low risk sectors enables the group to deliver resilient and predictable earnings. Credit Mutuel-CM11 also operates into the European consumer credit market (Targobank in Germany and Spain and Cofidis in France), bringing geographical and business diversification to a portfolio historically focused on French residential loans. We believe these high margin activities have allowed Credit Mutuel-CM11 to improve its overall profitability. Credit Mutuel-CM11 has also developed alternative services (mobile phones, home telemonitoring), which are sold through its banking networks. While rather marginal, these activities provide Credit Mutuel-CM11 with alternative earnings sources, which make it possible for the group to maintain its branch network. 15 June 17

4 Credit Mutuel-CM11's bottom-line profit have been very stable since 9, despite pressure on interest margins over the past two years. The negative impact was offset by the strong performance of consumer finance and further decrease in credit costs. The low interest rate environment has affected the retail banking business' interest income, particularly through material volumes of renegotiations of home loans by the borrowers. We reflect the bank's earnings stability in two-notch positive adjustment on Credit Mutuel-CM11's Profitability score to baa in the group's scorecard. We believe that the resilience of the group's earnings stem from its business mix and an optimal deployment of the bancassurance model which substantially diversify its income streams and reduces the reliance on the sole interest income. These solid earnings also contribute to its cost efficiency, which also reflects the centralised and highly integrated systems in place. Credit costs have consistently represented less than % of Credit Mutuel-CM11's pre-provision income over the past five years (and less than % in both 16 and 15). CREDIT MUTUEL-CM11 HAS A RELATIVELY LOW RISK PROFILE As reflected in the assigned Asset Risk score of a, the group has a low risk profile, characterized by its large exposures to the domestic residential market (approximately 5% of its loan book). Although the cost of risk remains low (4 bps of loans outstanding in 16 and 6 bps in 15), it has the potential to increase on loans to SMEs, which could become vulnerable in a downturn. Consumer credit, representing approximately 1% of the group's consolidated loan portfolio, generate non-negligible credit losses which could also worsen in a more difficult economic environment. The high net interest margins of consumer credit activities exceeding 8% nevertheless provide ample room to absorb further deterioration in these costs. Overall, CM11's cost of risk remains moderate relative to its pre-provision income (16% in 16). CREDIT MUTUEL-CM11'S HAS A HIGH CAPITAL ADEQUACY The Capital score of a assigned to Credit Mutuel-CM11 is driven by the group's high capital ratio, adequate leverage and ability to retain the majority of profits to consistently increase its capital base (which the cooperative structure allows). Credit Mutuel-CM11 has a sound capital adequacy, as reflected by its fully-loaded Common Equity Tier 1 (CET1) ratio of 15% and a leverage ratio of 5.7% at year-end 16. With the introduction of the EU's Capital Requirement Directive IV (CRDIV) and Capital Requirement Regulation (CRR), exposures related to Credit Mutuel-CM11 s insurance activities is reflected in the group's risk-weighted assets (so-called Danish compromise ). In the same way and in line with the European Commission's Delegated Act, the denominator in the leverage ratio only includes the group's investment in the insurance subsidiaries instead of total insurance business-related assets. The group's capital adequacy which benefits the high level of profit retention (historically exceeding 9%) is also bolstered by the issuance of cooperative shares, which we view as high quality capital. Distribution on these instruments, which qualify as core capital (CET1) under the CRR, is capped by law at the average yield of the bonds issued by the French private companies. This resulted in particularly low distributions over the past three years because of low interest rates. In addition, cooperative shareholders have historically reinvested a very high share of dividends into newly issued cooperative shares, further strengthening the group's capital base. FUNDING STRUCTURE AND LIQUIDITY BUFFER MITIGATE RELIANCE ON WHOLESALE FUNDING The loan-to-deposit ratio was 1% at year-end 16 and has remained stable since 1 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 7% 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 June 17

5 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%. Our Combined Liquidity score of reflects these factors. Notching Considerations Affiliate Support We assign an adjusted BCA of a to BFCM, incorporating two notches of uplift from its BCA of for affiliate support provided by Groupe Credit Mutuel. Although BFCM does not fall under the legal scope of the Credit Mutuel group's solidarity mechanisms, BFCM is fully integrated within Credit Mutuel-CM11 both strategically and operationally. We therefore consider that a stress situation affecting BFCM would likely exert negative pressure onto the credit strength of Credit Mutuel-CM11 and by extension to Groupe Credit Mutuel. 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 BFCM, 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 % 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 and junior 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. We also incorporate additional notching for junior subordinated and preference share instruments reflecting the coupon features. Government Support Groupe Credit Mutuel is subject to the BRRD. We expect a moderate probability of government support for both deposits and senior unsecured debt issued by BFCM because of Groupe Credit Mutuel s 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 and other junior securities do not benefit from government support. Junior securities also include additional downward notching from the BCA reflecting coupon suspension risk ahead of a potential failure. Counterparty Risk Assessment The CR Assessment is positioned at Aa(cr). The CR Assessment, prior to government support, is positioned three notches above the Adjusted BCA of a, based on the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments. 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 June 17

6 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 probability 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 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 Banque Federative du Credit Mutuel Macro Factors Weighted Macro Profile Strong + Factor Solvency Asset Risk Problem Loans / Gross Loans 1% Historic Macro Ratio Adjusted Score 5.% Capital TCE / RWA Profitability Net Income / Tangible Assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 45.% Liquid Resources Liquid Banking Assets / Tangible Banking Assets 8.4% 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 Balance Sheet 6.4% 15 June 17 Credit Trend Assigned Score Key driver #1 Key driver # baa baa Quality of assets Long-run loss performance ca a Capital retention Risk-weighted capitalisation ba ba Earnings quality Loan loss charge coverage baa Term structure Market funding quality Stock of liquid assets b1 b1 a1 ba in-scope (EUR million) Aa a- -a % in-scope at-failure (EUR million) % at-failure

7 Equity 7 15 June 17.%

8 Debt class 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 Counterparty Risk Assessment aa (cr) Deposits a Senior unsecured bank debt a Dated subordinated bank debt Non-cumulative bank preference shares.%.% - baa (hyb) Instrument class Counterparty Risk Assessment Deposits Senior unsecured bank debt Dated subordinated bank debt Non-cumulative bank preference shares Loss Given Failure notching Additional Preliminary Rating Notching Assessment - aa (cr) a a baa (hyb) Government Support notching Local Currency Rating Aa (cr) A A A Baa (hyb) Foreign Currency Rating -A A --- Source: Moody's Financial Metrics 8 15 June 17

9 Rating Methodology and Scorecard Factors Exhibit 4 Caisse Federale de Credit Mutuel Macro Factors Weight ed Macro Profile St rong + Financial Profile Fact or Hist oric Rat io Macro Adjust ed Score 4.% Credit Trend Assigned Score Key driver # 1 Key driver # a Quality of assets Long-run loss performance 14.7% a1 a Capital retention Risk-weighted capitalisation.4% ba1 baa Earnings quality Loan loss charge coverage a.6% ba1 baa Term structure Market funding quality 8.% Stock of liquid assets Additional liquidity resources baa Solvency Asset Risk Problem Loans / Gross Loans Capit al TCE / RWA Profit abilit y Net Income / Tangible Asset s Combined Solvency Score Liquidit y Funding St ruct ure Market Funds / Tangible Banking Asset Liquid Ressources Liquid Banking Asset s / Tangible Banking Asset s Combined Liquidit y Score Financial Profile Opacit y and Complexit y Corporat e Behaviour Tot al Qualit at ive Adjust ment s Sovereign or Affiliat e const raint : Aa Scorecard Calculat ed BCA range a- Assigned BCA Private Affiliat e Support not ching Adjust ed BCA -Private Source: Moody's Financial Metrics 9 15 June 17

10 Exhibit 5 Groupe Credit Mutuel Balance Sheet: Groupe Credit Mutuel in-scope (EUR million) % in-scope at-failure (EUR million) Other liabilities 175,65 1.% 8,1 6.7% Deposits 19, % 86, % 6,4 41.7% 4,58 9.6% Preferred deposits Junior deposits % at-failure 8, % 6,95 11.% 47,64 8.% 47,64 8.% 7,51 1.% 7,51 1.% Junior subordinated (bank).%.% Preference shares (bank).%.% Senior long-term debt (holding company).%.% Dated subordinated debt (holding company).%.% Junior subordinated (holding company).%.%.% Senior long-term debt (bank) Dated subordinated debt (bank) Preference shares (holding company).% Equity 17,6.% 17,6.% Total Tangible Banking Assets 566,871 1.% 566,871 1.% De jure wat erfall Debt Class De fact o wat erfall Inst rument Inst rument volume + Subordinat volume + Subordinat subordinat i ion subordinat i ion Not hcing De jure De fact o Assigned LGF not ching Preliminary Addit ional Rat ing not ching Assessmen t Counterparty Risk Assessment.7%.7%.7%.7% - Deposits.7% 4.%.7% 1.7% - Senior unsecured bank debt.7% 4.% 1.7% 4.% 1 - Dated subordinated bank debt 4.%.% 4.%.% - Non-cumulative bank preference shares.%.%.%.% - - Source: Moody's Financial Metrics 1 15 June 17

11 Ratings Exhibit 6 Category BANQUE FEDERATIVE DU CREDIT MUTUEL Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk 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 Moody's Rating Stable A/P a Aa(cr)/P(cr) (P)A A A Baa (hyb) P (P)P CREDIT INDUSTRIEL ET COMMERCIAL Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Senior Unsecured -Dom Curr Subordinate MTN Commercial Paper -Dom Curr Other Short Term Stable A/P a Aa(cr)/P(cr) A (P)A P (P)P Source: Moody's Investors Service June 17

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