Banque Fédérative du Crédit Mutuel SA

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1 4 August 2017 Financial Institutions Banque Fédérative du Crédit Mutuel SA Banque Issuer Fédérative Rating Report du Crédit Mutuel SA STABLE OUTLOOK A+ Scope Ratings assigns an Issuer Rating of A+ and a short term debt rating of S-1 to Banque Fédérative du Crédit Mutuel SA (BFCM), both with Stable Outlook. On 21 December 2016, following passage of the Sapin II law, which addresses the provisions of BRRD in France by introducing a new class of non-preferred senior unsecured debt, we upgraded the Issuer Rating and the rating of senior unsecured debt not eligible for TLAC and/or MREL to A+ from A. These rating actions are in line with our latest bank rating methodology (May 2017) and take into account the ranking of TLAC/MREL senior unsecured debt. While the credit fundamentals of the group did not change, Scope is of the view that going forward the Issuer Rating and senior unsecured liabilities not eligible for TLAC/MREL should benefit from the protection of a materially more ample capital structure in a default-like scenario. Lead Analyst Jennifer.Ray j.ray@scoperatings.com Team Leader Sam Theodore s.theodore@scoperatings.com Highlights The ratings are based on the overall stability and predictability of the entire Crédit Mutuel Group (CM), one of France s large retail banking and financial services networks. CM s reassuring credit fundamentals are also a key driver for the ratings at their current high level. We have assigned ratings to BFCM as it has been delegated capital markets functions for the major part of the group. The ratings are not applicable to unguaranteed debt issued by subsidiaries of BFCM, or to other entities of CM not guaranteed by BFCM. Scope s ratings also take into account the existing challenges to the entire group s operational and strategic cohesion, notably the dynamics of Crédit Mutuel Arkea s strategic evolution. At the same time, we point out that divergent strategies within the group do not necessarily represent a structural weakness but an area of relative uncertainty; this holds to the extent that neither diverging party engages in risky activities that are incompatible with the group s conservative culture. The ratings were not solicited by the issuer. Both ratings and analysis are based solely on publicly available information. The issuer has not participated in the process. For the full list of ratings, see the Ratings section at the end of this report. Rating drivers (Summary) The rating drivers, in decreasing order of importance in the rating assignment, are: 1. A very strong franchise: on a combined basis the CM and CIC networks have the third-largest market share in French loans and deposits. 2. Challenges to CM s operational and strategic cohesion: a growing area of relative uncertainty but not a structural weakness to the extent that any diverging entity does not engage in risky activities which are incompatible with the group s conservative culture. 3. Low risk group balance sheet and reassuring prudential metrics. Scope Ratings AG Suite Angel Square London EC1V 1NY Phone Headquarters Lennéstraße Berlin Phone Fax Service info@scoperatings.com Bloomberg: SCOP 4 August /10

2 Rating change drivers As is the case for French and European peers, CM faces the challenge of excess capacity, as technology advances and customers seek alternative ways off accessing banking services. We consider CM to be technologically aware (investing in blockchain, fintechs, etc.). Financial metrics and the franchise strength in relation to evolving customer habits could be enhanced by CM positioning itself at the leading edge of technology. Credit ratings could also be positively affected, especially if this leads to lower costs and supports revenues on a recurring basis. The diverging strategy of Crédit Mutuel Arkéa (the combination of the Brittany, South-West and Massif Central federations), underpinned by its desire to leave the group, may lead to some strategic uncertainties but should not represent an existential threat. To complicate the picture further he Massif Central federation has expressed its wish to leave Crédit Mutuel Arkéa and join the main CM-CM11 grouping. If the dispute between Crédit Mutuel Arkéa and CM becomes more materially disruptive and is prolonged unnecessarily, with less desirable outcomes, the overall commercial and financial cohesiveness of CM might be affected. Such a scenario is unlikely, but if in time it becomes more plausible it could affect BFCM s ratings negatively. CM s operations are primarily domestic, thus potential negative macro trends in France could harm the group s recurring profitability on a more structural basis.. Rating drivers (Details) 1. A very strong franchise Crédit Mutuel s business displays several characteristics reassuring characteristics: The two main networks of the group (the regional banks of Crédit Mutuel and the regional banks of the CIC group) represent the third-largest market share in loans and deposits in France (Figure 1). Interestingly, while CM s market shares in loans have not changed materially over the years, the group has nonetheless increased its weight in deposits. During 2016 deposits grew by an encouraging 8.9% and loans by 7.5%. Deposit growth has had a healthy effect on the Group s funding profile, with deposits rising from 50% of total funding in 2008 to 64% in 2016 (see Figure 2). Figure 1: Group loan and deposit market shares Figure 2: Group funding and equity evolution, (EUR bn) Source: Company data, Scope Ratings Although CM s business is predominantly domestically focused, within this we consider the business mix to be well balanced. CM is a leading player in the mortgage market, and the market leader in France in property & casualty bancassurance. Insurance therefore contributes more than 30% to the group s net attributable income. CM also has a presence internationally, being the third-ranked player in consumer credit in Europe and owning Banque Européenne du Crédit Mutuel, which serves corporate customers nationally and in Germany. CM also maintains (through Targobank) a presence in Spain and an international private banking business. Some 18% of loans are outside France. 4 August /10

3 A key competitive advantage of CM versus other French peers has been its proven technology leadership; most evident in electronic and digital banking. The group is number two in electronic payments in France. In this context, we note that in September 2015 CM bought the fintech Leetchi (through CM Arkéa), and in June 2016 it announced the first-time use of new blockchain technology for customer ID validation (a joint-venture with IBM which we understand is a first in retail banking).in July 2017 CM Arkéa bought the fintech Pumpkin. As well, the group s product offerings include an integrated mobile phone network service and alarms systems through its subsidiary EPS, the market leader. Figure 3: Group revenue breakdown (FY16 versus FY15) 12% 5% 3% 6% 7% 5% 13% 1% % 74% Retail banking Corporate & investment banking Other & intragroup Insurance Private banking & asset management Source: Company data, Scope Ratings 2. Challenges to the group s operational and strategic cohesion There is no legal entity called Crédit Mutuel Group (or even Groupe Crédit Mutuel-CIC, as the Group styles itself) rather, this is the name used to describe this complicated collection of both mutualized and non-mutual banks. From the perspective of the French Monetary and Financial Code, the Confederation Nationale du Crédit Mutuel (CNCM) is the central body of the entire group, which includes 2,107 local co-operative banks, 18 regional federations and six federal banks, as well the 2,085-branch CIC network. CNCM, a non-profit association sitting at the top of the CM hierarchy, represents CM vis-à-vis public authorities and is responsible for the proper operation and overall cohesion of the network. Also at the top level of the CM hierarchy, the Caisse Centrale du Crédit Mutuel (CCCM) manages treasury operations for the group and organizes CM s mutual financial support mechanism. As required by Article L of the French Monetary and Financial Code, CM s mutual support system is designed to continuously ensure the liquidity and solvency of all entities affiliated with CNCM. As BFCM is not part of the mutualist grouping, it also does not benefit directly from the mutual support mechanism administered by CNCM, although its core status within the Group makes any necessary support highly probable, in Scope s view. We view the CM Group as being fairly decentralized; more so than other French mutualist bank groups. Below the top level the Group divides into the following segments: The so-called Crédit Mutuel-CM11 Group (CM-C11), made up of a mutual banking division and Strasbourg-based BFCM and its non-mutual subsidiaries. The mutual banking division comprises 11 regional banking federations plus 1,380 Caisses de Credit Mutuel, which are local co-operative banks belonging to their respective federations, and the Caisse Fédérale de Crédit Mutuel (CF de CM), collectively owned by its members. CF de CM co-ordinates services required by the mutual network banks and centralizes and allocates the deposits they gather. It owns 93% of BFCM, with a further 5.1% owned by its member banks. The BFCM Group is principally made up of the CIC network, acquired in 1998, and subsidiaries operating in insurance, finance, electronic banking and IT. BFCM acts as the central funding arm for the whole of the CM-C11 Group and is also responsible for relationships with large corporates and public sector customers. 4 August /10

4 Crédit Mutuel de Bretagne (by far the principal partner), Crédit Mutuel du Sud-Ouest and Crédit Mutuel Massif Central created Crédit Mutuel Arkéa in 2002, built on the same principles but on an inherently smaller geographic scale. The remainder of the group is comprised of four smaller unaffiliated regional federations. As seen in Figure 3, CM11 represents 77% of the group s assets with Crédit Mutuel Arkéa accounting for another 15%. Figure 4: Breakdown of total CM group assets year-end % 15% CM11 Group Credit Mutuel Arkea Others 77% Source: Company data, Scope Ratings We do not consider the relative decentralization of CM to be a credit weakness. First, this is a historical reality and the group has performed well over the years with this structure. CM has managed to preserve a fairly conservative culture and, unlike other French mutualist groups, avoided financial excesses in the years before the crisis. Second, as mentioned above, as long as decentralization and its deepening (caused by Crédit Mutuel Arkea s desire to leave the group, complicated by Crédit Mutuel Massif Central s recently expressed desire to leave Arkéa and rejoin the CM11 group) does not lead any member of the group to embrace unduly risky activities and thus go against the group s culture, we consider Crédit Mutuel Arkea s moves as creating internal uncertainties but not an existential weakness for the group. 3. Low-risk balance sheet and reassuring prudential metrics Figure 5 Prudential and financial metrics for five large French banks (year-end 2016) Crédit Groupe BNP Mutuel BPCE Paribas Group Société Générale Crédit Agricole Group Total Assets (EUR bn) , , , ,722.8 Common Equity Tier 1 Ratio (transitional) 16.3% 14.1% 11.6% 11.8% 14.5% Total Capital Ratio (transitional) 18.9% 18.5% 14.4% 18.2% 19.3% Common Equity Tier 1 Ratio (fully loadedl) 15.7% 14.3% 11.5% 11.5% 14.5% Total Capital Ratio (fully loaded) 18.5% 19.4% 14.2% 17.9% 18.5% Tier 1 Leverage Ratio 6.1% 5.0% 4.4% 4.2% 5.7% Gross NPLs/Total Loans 3.9% 3.4% 5.7% 5.4% 3.4% NPLs/Tangible Equity and Reserves 30.4% 30.9% 40.3% 33.8% 26.4% Coverage Ratio 62.4% 52.4% 56.5% 62.7% 79.5% Loan Loss Provisions (LLP)/Average Loans 0.2% 0.2% 0.5% 0.4% 0.3% ROAE 6.7% 6.8% 8.5% 6.8% 5.1% ROAA 0.4% 0.4% 0.4% 0.3% 0.3% Cost/income ratio 64.2% 69.7% 67.0% 26.5% 28.4% LLP/Pre-impairment Operating Profit 16.3% 21.2% 25.1% 25.7% 24.3% Source: Company Reports, SNL 4 August /10

5 Prior to the financial crisis, CM was one of the few large European banking groups, and among the very few in France, which was not involved in the excessive risk-leverage spiral that brought many peers into difficulties and subsequently necessitated some form of external support. Thus the group s balance sheet continues to have a low risk profile, and its financial and prudential metrics compare well to those of French peers (Figure 5). CM is a leading player in the French mortgage market through several specialised subsidiaries, and at year-end 2016, home loans represented 50% of the EUR 415bn net loan portfolio with another 21% being lease financing for professional and corporate customers, and 10% representing consumer credit. Nearly 82% of CM Group s lending is in France with 6% being in Germany and another 7% in other European countries, including Spain. The non-performing loan ratio has improved to 3.9%, from 4.1% in FY15. Coverage is reassuring at 62%, especially given the focus on retail mortgage lending. As shown in Figure 6, the sectoral breakdown of loans for the CM11 group (as opposed to CM Group as a whole, for which the same data is unavailable in full) shows a similar proportion of home loans, while over a quarter of loans are other retail loans and 22% are to corporates and large corporates. Figure 6: Sectoral breakdown of CM11 group loans by customer type year-end % 2% 21% 27% 49% Housing Loans (Retail) Other (Retail) Corporates Large corporates Specialized financing and other Source: Company data, Scope Ratings The group s fully loaded CET1 ratio and leverage ratio stood at 15.7% and 6.1% at YE16. The ratios declined marginally compared to YE15 (from 15.8% and 6.2%, respectively).going forward, we expect CM to maintain its reassuring balance-sheet fundamentals, despite the challenges it faces in maintaining profitability against a backdrop of sluggish economic growth and very low interest rates. 4 August /10

6 Appendix A: Peer comparison Loan-loss reserves % impaired loans Amortised Loans % Deposits Asset risk intensity (RWAs % total assets) Return on average equity (ROAE) (%) Common equity tier 1 ratio (%, transitional) Impaired & Delinquent Loans/ Loans (%) National peers: BNP Paribas, Societe Generale, Credit Agricole Group, Groupe BPCE, Credit Mutuel Group, La Banque Postale. Cross-border peers: Credit Agricole, BPCE, La Banque Postale, Credit Mutuel Group, Lloyds, RBS, ABN Amro, Rabobank, Intesa, Commerzbank, Danske Bank, Caixabank, Bankia, Handelsbanken, SEB, Swedbank, DNB, Bank of Ireland, AIB. Source: SNL, Scope Ratings 4 August /10

7 Appendix B: Selected Financial Information Crédit Mutuel Group 2012Y 2013Y 2014Y 2015Y 2016Y Balance sheet summary (EUR m) Assets Cash and interbank assets 81, , , , ,159.0 Total securities 174, , , , ,528.0 of which, derivatives 6, , , , ,066.0 Net loans to customers 347, , , , ,065.0 Other assets 41, , , , ,770.0 Total assets 645, , , , ,522.0 Liabilities Interbank liabilities 50, , , , ,064.0 Senior debt 123, , , , ,794.0 Derivatives 6, , , , ,717.0 Deposits from customers 277, , , , ,279.0 Subordinated debt 6, , , , ,544.0 Other liabilities 141, , , , ,620.0 Total liabilities 606, , , , ,018.0 Ordinary equity 37, , , , ,540.0 Equity hybrids Minority interests 1, Total liabilities and equity 645, , , , ,522.0 Core tier 1/ common equity tier 1 capital 25, , , , ,859.0 Income statement summary (EUR m) Net interest income 6, , , , ,899.0 Net fee & commission income 3, , , , ,939.0 Net trading income 1, , ,494.0 Other income 3, , , , ,157.0 Operating income 14, , , , ,489.0 Operating expense 9, , , , ,580.0 Pre-provision income 4, , , , ,909.0 Credit and other financial impairments 1, , , Other impairments Non-recurring items Pre-tax profit 3, , , , ,929.0 Discontinued operations Other after-tax Items Income tax expense 1, , , , ,695.0 Net profit attributable to minority interests Net profit attributable to parent 2, , , , ,253.0 Source: SNL, Scope Ratings 4 August /10

8 Appendix C: Ratios Credit Mutuel Group 2012Y 2013Y 2014Y 2015Y 2016Y Funding and liquidity Loans/deposits (%) 123.8% 119.0% 119.5% 117.4% 115.9% Liquidity coverage ratio (%) NA NA 115.6% 144.1% 144.3% Asset mix, quality and growth Loans/assets (%) 53.9% 54.1% 51.6% 52.2% 52.3% Impaired & delinquent loans/loans (%) 6.2% 5.9% 6.0% 5.2% 5.1% Loan-loss reserves/impaired loans (%) 67.2% 66.1% 64.2% 63.9% 62.4% Net loan growth (%) 1.5% 2.5% 2.8% 5.8% 7.5% Impaired loans/tangible equity & reserves (%) 36.3% 35.2% 33.0% 30.8% 30.4% Asset growth (%) 6.6% 2.1% 7.1% 4.7% 7.3% Earnings and profitability Net interest margin (%) 1.1% 1.2% 1.1% 1.0% 0.9% Net interest income/rwas (%) 3.1% 3.8% 3.3% 2.9% 2.7% Net interest income/revenues (%) 44.1% 50.4% 46.6% 43.6% 41.8% Fees & commissions/revenues (%) 22.8% 23.3% 22.9% 23.9% 23.9% Cost/income ratio (%) 66.8% 63.5% 63.8% 63.4% 64.2% Operating expenses/rwas (%) 4.8% 4.8% 4.4% 4.3% 4.1% Pre-provision income/rwas (%) 2.4% 2.8% 2.5% 2.5% 2.3% Loan-loss provision charges/pre-provision income (%) 25.6% 23.9% 18.2% 14.7% 16.3% Loan-loss provision charges/gross loans (%) 0.3% 0.4% 0.3% 0.3% 0.2% Pre-tax profit/rwas (%) 1.7% 2.1% 2.1% 2.1% 1.9% Return on average assets (%) 0.4% 0.4% 0.4% 0.4% 0.4% Return on average RWAs (%) 1.1% 1.3% 1.4% 1.3% 1.3% Return on average equity (%) 6.1% 6.8% 7.0% 6.7% 6.7% Capital and risk protection Common equity tier 1 ratio (%, fully loaded) 13.3% 13.4% 15.5% 15.8% 15.7% Common equity tier 1 ratio (%, transitional) 13.3% 13.4% 15.3% 15.7% 15.7% Tier 1 capital ratio (%, transitional) 14.5% 14.5% 16.1% 16.4% 16.3% Total capital ratio (%, transitional) 14.5% 15.9% 18.3% 18.5% 18.9% Tier 1 leverage ratio (%) 4.1% 4.4% 5.2% 5.4% 5.4% Asset risk intensity (RWAs/total assets, %) 30.0% 31.9% 32.9% 33.5% 33.5% Source: SNL, Scope Ratings 4 August /10

9 Ratings Issuer Rating Outlook Senior unsecured debt (non-mrel/tlac eligible) Senior unsecured debt (MREL/TLAC eligible) Tier 2 instruments Short term debt rating A+ Stable A+ A BBB+ S-1 Regulatory Disclosures Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013 Responsibility The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB B, Executive Board: Torsten Hinrichs (CEO), Dr Stefan Bund and Dr Sven Janssen. The rating analysis has been prepared by Jennifer Ray, Executive Director Responsible for approving the rating: Sam Theodore, Managing Director Rating history (Issuer Rating) Date Rating action Rating First rating assignment Upgrade A A+ The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. 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10 Rating issued by Scope Ratings AG Lennéstraße Berlin 4 August /10