Credit Agricole, Expectedly, Joins SocGen On The Moody's Downgrade Path
...as expected from the previous post. Now, BNP downgrade a matter of seconds.
Moody's downgrades long-term ratings to Aa2 on Greek exposures, ratings
remain on review to consider impact of funding challenges on Credit Profile
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.
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
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
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
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
- 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
For all other entities affected by this rating announcement, please refer
to the rationale above.
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
(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
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