Domino #2: S&P Downgrades Largest French Retail Banking Group, Credit Agricole, To A+ From AA-, Due To "Greek Exposure"

Yes, banks are indeed on the hook should Greece file. Keep an eye on those Deutsche Bank puts.

From S&P:


  • On May 9, 2011, we lowered our sovereign ratings on Greece to 'B/C' from 'BB-/B' and maintained them on CreditWatch negative, reflecting rising rescheduling risk for Greece's sovereign debt.
  • We consider that French banking group Crédit Agricole (GCA) has a significant sensitivity to Greece's creditworthiness and economic prospects, primarily through subsidiary Emporiki's funding needs and exposure to local credit risk.
  • We are lowering our ratings on Crédit Agricole S.A. and its related core subsidiaries to 'A+/A-1' from 'AA-/A-1+'.
  • The stable outlook reflects our view that GCA's businesses are performing well, and that the group has a strong retained earnings capacity which would allow it to absorb possible losses from Greek exposures and build up capital at a pace, and up to a level, which we see as consistent with the 'A+' rating.

Rating Action

On May 20, 2011, Standard & Poor's Ratings Services lowered to 'A+/A-1' from  'AA-/A-1+' its long- and short-term counterparty credit ratings on French bank  Crédit Agricole S.A. and all Caisses Regionales de Crédit Agricole, core subsidiaries Crédit Agricole Corporate and Investment Bank (CACIB), CA Consumer Finance, CACEIS, Crédit Lyonnais (LCL), and Cassa di Risparmio di Parma e Piacenza SpA (Cariparma). The outlooks on all of these ratings are stable.

At the same time, we lowered the long-term counterparty credit ratings to 'A' from 'A+' on subsidiaries Banque de Financement et de Trésorerie and Agos-Ducato SpA. The outlook on both entities is stable. Under our group rating methodology, we cap the long-term ratings on both entities, which in our view benefit from extraordinary parental support, at one notch below that on their parents.


The downgrades reflect our view that reduced creditworthiness of the Greek sovereign puts pressure on GCA's financial profile, given its exposure to the troubled Greek economy, mostly through its subsidiary Emporiki Bank of Greece (not rated).

We lowered our long- and short-term sovereign credit ratings on Greece to 'B/C', from 'BB-/B' on May 9, 2011 ("Ratings On Greece Lowered To 'B/C' From 'BB-/B' On Rising Rescheduling Risk; CreditWatch Negative Maintained"). Both the long- and short-term ratings on Greece remain on CreditWatch, with negative implications. Our projections suggest that a restructuring of Greece's sovereign debt could involve an estimated 30%-50% recovery to restore Greece's government debt burden to a sustainable level.

The downgrade reflects our view that persistent deterioration of the Greek economy induces negative prospects for the local banking sector, which could translate into further material credit losses at Emporiki and/or a sharp decrease in its customer deposits. At end-March 2011, Emporiki's net customer loans exceeded €21 billion and customer deposits were close to €12 billion. We believe that under an aggravated negative scenario for Greece, GCA would be led to provide additional financial support to Emporiki, which might delay the achievement of a core capital position consistent with the 'A+' rating. The impact of a potential rescheduling of Greek sovereign debt on the Greek economy and on Emporiki would depend on how the potential rescheduling plan is organized, though.

In our view, GCA's direct exposure to Greek sovereign debt in its banking and trading books is much more limited than that resulting from Emporiki's operations. The insurance division also bears some net exposure to the Greek sovereign (the last amount publicly disclosed by the group, in May 2010, was slightly less than €400 million, net of policy-holder profit-sharing and tax). We believe that GCA would have the flexibility to absorb losses if Greek sovereign debt was restructured, even with a 30%-50% recovery.

Our ratings on Crédit Agricole S.A. don't include any explicit uplift above the group's stand-alone credit profile for potential external institution-specific support. We see GCA as having high systemic importance in France's banking sector, which we classify as supportive under our methodology.

In our view, GCA's risk profile is average. It combines relatively low-risk domestic retail banking activities in France and limited exposure to emerging markets, with riskier corporate and investment banking (CIB) business and significant exposure to the Greek economy through Emporiki.

We expect that GCA will demonstrate a resilient performance in 2011 but that  Emporiki will continue to weigh on earnings. The net income group-share for the first quarter of 2011 was a solid €1.5 billion, but still included a high €220 million in cost of risk from Emporiki. In 2010, GCA's net income group-share had already improved substantially to €3.6 billion, reflecting a 9.3% rise in revenues and a moderate increase in expenses. Credit risk was still high but 20% below the 2009 peak. In addition, the group's performance was hurt by a €1.2 billion impairment on its stake in Intesa Sanpaolo SpA (A+/Stable/A-1) after reclassification of the investment to available-for-sale financial assets from equity affiliates. We exclude this impairment from our definition of the group's core profit. Revenues from the group's ongoing CIB activities decreased 11% in 2010 to €5.7 billion after adjustments for changes in fair value of own debt and credit default swaps that CACIB bought to protect its corporate loans. This performance reflected a positive trend in the structured finance business and sluggish revenues from capital market activities. Lower losses from discontinued operations helped net CIB income to recover to €1 billion from negative figures in previous years.

GCA's liquidity and funding benefit from its ample deposit base, strong network placement capacity, and conservative risk management. The bank is also reliant on wholesale funding given the size of its consumer lending and CIB activities. Although GCA could be led to provide significant additional funding if deposit outflows at Emporiki continue or accelerate, we believe the group's large liquidity reserves could cushion negative effects.

At end-2010, Standard & Poor's estimated a risk-adjusted capital ratio for GCA at about 6% before diversification benefits and about 8% after diversification. In light of a likely increase in capital requirements under Basel III, we expect GCA to gradually strengthen its capital base up to a level more consistent with the 'A+' rating.


The stable outlook reflects our view that GCA will sustain its overall solid performance, and that CACIB will manage to deliver resilient earnings in line with the current satisfactory level. The outlook factors in our expectations that Emporiki will continue to weigh on the group's financial profile, but also that, in our view, GCA benefits from strong retained earnings capacity. This would allow it to absorb possible losses related to its operations in Greece, and to continue building up capital at a pace, and up to a level, which we see as consistent with the 'A+' rating.

We could lower the ratings if impacts stemming from the group's exposures to the troubled Greek economy go beyond our current expectations and hamper a strengthening of capitalization to the level that we expect. We could move the ratings up if the risks related to Greek sovereign creditworthiness are alleviated or become remote, if Emporiki turns around legacy asset quality and profitability concerns, and if GCA strengthens its capital position beyond our current expectations.