Turns out it is not France. Instead, it is its most insolvent bank (although with SocGen and BNO around, who really knows)
- CREDIT AGRICOLE CUT 1 LEVEL TO A+ FROM AA- BY FITCH :ACA FP
As a reminder, it is our hypothesis that it was none other than Credit Agricole who was bailed out by the coordinated central bank action two weeks ago: "Dollar Libor Market Hints 66x Leveraged Credit Agricole Was Bank X"
FITCH DOWNGRADES CREDIT AGRICOLE TO 'A+'; OUTLOOK STABLE
Fitch Ratings-Paris/London-14 December 2011: Fitch Ratings has downgraded Credit Agricole's (CA) Long-term Issuer Default Rating (IDR) to 'A+' from 'AA-' and its Viability Rating to 'a+' from 'aa-' and simultaneously removed them from Rating Watch Negative (RWN). The Outlook on the Long-term IDR is Stable. Fitch has also downgraded certain entities of the group. A full list of rating actions is at the end of this comment.
The rating actions should be viewed in conjunction with a broader review of the larger and relatively highly rated European banks in Fitch's rating portfolio (see 'Fitch Downgrades Five Major European Commercial Banks and Banking Groups'
dated 14 December 2011 at www.fitchratings.com) and reflect stronger headwinds facing the banking industry as a whole. Factors that were a main consideration for the rating actions on CA include: exposure to the eurozone problems; impact on funding of capital markets that are not functioning effectively; and only adequate capital ratios compared with highly rated peers. CA's Long-term IDR, which is driven by its intrinsic creditworthiness as measured by its Viability Rating, continues to reflect the group's dominant French retail franchise, solid asset quality, limited market risk and solid funding and liquidity.
While CA's exposure to the Greek sovereign is low, it has significant exposure to non-sovereign risk through its Greek subsidiary, Emporiki (EUR21bn at end-June 2011), whose asset quality is poor (impaired loan ratio of 31%). As Emporiki has a large local deposit base and uses ECB funding, CA's funded exposure was EUR8bn at end-September 2011. CA also has exposure to the Italian sovereign (EUR6.7bn at end-September 2011) as well as non-sovereign risk through a retail bank, Cariparma, and a consumer finance subsidiary, Agos Ducato. Asset quality remains manageable, but the loan book is likely to deteriorate and impairments are likely to rise as the economy slows.
Given the more difficult access to funding, especially in USD, CA announced it will de-leverage its balance sheet and increase the proportion of long- vs.
short-term funding (targeted reduction of long-term debt by EUR5bn, short-term by EUR45bn by end-2012). This means that the group will have to reduce its activities (especially in Corporate and Investment Banking), which will lead to a reduced franchise and lower revenue. In addition, increasing the proportion of long-term financing will increase average funding costs, which have already risen in line with those of the banking industry as a whole. The loss of business and higher funding costs will weigh on CA's profits, which have never been one of the group's strengths, although this will be partially compensated by a reduction in expenses.
CA's Fitch Core Capital ratio is not at the top of its peer group range. The difference between CA's Fitch Core Capital ratio and its Core Tier 1 regulatory ratio is largely due to the treatment of the group's insurance subsidiary. Fitch deducts the insurance subsidiary's net asset value from Fitch Core Capital, whereas CA deducts the capital held in the insurance business from total capital. Nevertheless, CA's lower capital ratio is mitigated by its above-average coverage ratio of impaired loans. In addition, the capital deduction related to the insurance subsidiaries could decrease if CA decided to introduce some leverage in its insurance activities.
Hybrid capital instruments remain on RWN pending the completion of Fitch's review of how it rates bank regulatory capital as explained in the exposure draft "Rating Bank Regulatory capital Securities" published on 28 July 2011.