The rating actions conclude the review initiated on 15 June 2011 and extended on 14 September 2011. The lower BFSR reflects our view that CASA's prior credit-positive factors (strong domestic retail banking franchise, good diversification, stable earnings) are now offset by liquidity and funding constraints.
The outlooks on the BFSR and long-term ratings are negative. The Prime-1 short-term rating was affirmed. Dated subordinated debt securities were also downgraded by one notch to A1 and remain on review for downgrade pending our reassessment of systemic support for such debt.
As stated in our recent report "Rising Severity of Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns", since the initiation of our review in June 2011, the severity of the crisis facing the euro area has increased. As a large bank in the euro area, the creditworthiness of CASA is necessarily affected by the fragile operating environment for European banks.
Following our review of CASA's ratings, Moody's has concluded that:
(1) Liquidity and funding conditions have deteriorated significantly for CASA and Groupe Credit Agricole (GCA), which have made extensive use of wholesale funding markets. The probability that the group will face further funding pressures has risen in line with the worsening European debt crisis.
(2) GCA's deleveraging plan will likely help somewhat reduce its need for wholesale funding. However, given that many other banks around Europe are engaged in similar programmes, there is a mounting risk that the asset sales, where required, could be detrimental for capital.
(3) GCA retains significant, albeit reduced, exposures to sovereigns and their economies that are themselves experiencing tighter refinancing conditions and declining creditworthiness, notably Greece, which in turn expose the bank to heightened credit and liquidity risks.
These considerations resulted in a lowering of the BFSR by one notch to C-. CASA's Adjusted baseline credit assessment (BCA), which continues to incorporate full cooperative support and thus the strength of GCA as a whole, has been lowered by two notches to A3 from A1.
We also believe that:
- The likelihood that GCA would benefit from government support (if needed) remains very high; this leads to a one-notch downgrade in the senior debt and deposit ratings, despite the two-notch reduction in CASA's Adjusted BCA; and,
- Conditions in the euro-area sovereign debt and banking markets -- as well as macroeconomic conditions overall -- lead us to assign a negative outlook to CASA's standalone and long-term debt and deposit ratings.
Moreover, Moody's will continue to monitor developments in the European bank debt markets and incorporate in GCA's and CASA ratings (i) any further deterioration; or (ii) an increase in the likelihood of such deterioration.
RATINGS RATIONALE
In its press release of 14 September 2011, Moody's concluded that although GCA had considerable resources to absorb potential losses it was likely to incur on its Greek government bonds (Greece is rated Ca, outlook developing) and its Greek subsidiary Emporiki Bank of Greece (B3/NP/E outlook negative), the exposures themselves were too large to be consistent with the existing ratings. As a result, CASA's BFSR was downgraded to C from C+ and its adjusted BCA, which takes into account cooperative support and thus the overall strength of GCA, was lowered to A1 from Aa3.
Since then, GCA has realised significant impairments on its Greek bond holdings, commensurate with Moody's own expectations earlier this year, and has now written-down 60% of its gross exposures, of which a material part are held by its insurance subsidiaries. GCA was able to do this while remaining profitable in the third quarter. In addition, Moody's continues to recognise important credit strengths, notably CGA's leading position in the domestic retail banking market, good diversification, stable earnings, sound capital, solid efficiency and strong overall loan book quality.
However, Moody's also noted the challenges to GCA's funding and liquidity profiles in light of worsening refinancing conditions, as well as the potential for these conditions to constrain GCA's franchise. This resulted in the extension of the review on CASA's ratings announced in September 2011.
-- Difficult refinancing conditions have reduced GCA's liquidity
Since June, GCA, in common with many other banking groups, has encountered materially more difficult refinancing conditions, due principally to investor concerns surrounding the European sovereign crisis and the consequent reduction in their appetite to invest in banks such as GCA, given its direct and indirect exposure to distressed sovereigns and countries. CASA has been able to issue some long-term debt (EUR6.6 billion between June and October), and has exceeded its refinancing plans for 2011. However, funding has proven to be more scarce, more expensive and shorter term than anticipated earlier in the year. This is particularly true of US dollar funding, since money market funds have significantly reduced their exposure to many European banking groups including GCA.
This has resulted in a reduction in the availability of funding to GCA, which has in turn contributed to a reduction in its pool of highly liquid reserves to EUR103 billion (post haircut) at end-September from EUR123 billion at end-July, although we understand it has since increased. We expect that central bank actions will ensure the availability of liquidity to the banking sector, and indeed we note that French banks' borrowing from the Bank of France materially increased in September. This is one indicator of the tension in funding markets, which is credit negative for GCA. Structurally, Moody's believes that liquid assets cover only a portion of short-term wholesale borrowing, even net of interbank assets, which renders GCA vulnerable to a continued lack of investor appetite for bank debt. Given the high and sustained disruption to funding markets, it is unlikely that term debt markets will return to any degree of normality in the near future; overall, Moody's believes that the risks are skewed to the downside.
-- Resulting deleveraging is challenging and poses risks
GCA has announced a deleveraging plan in response to these challenges, which it expects will reduce its wholesale funding requirement by EUR50 billion through asset reductions by the end of 2012. However, given that many banks in France and elsewhere are now engaged in deleveraging efforts, Moody's believes that there is a risk that, where asset sales are required, a lack of market appetite could lead to a shortfall against the targeted reduction, or it may be possible only at depressed prices. This could mean that the deleveraging plan might either fall short of its objectives and/or turn net-negative for capitalisation -- rather than positive -- should losses exceed expectations.
-- Some sovereign and related country exposures have become riskier
GCA has taken large impairment charges on its Greek government bonds, totalling EUR1.1 billion in the second and third quarters, leaving EUR0.2 billion of net exposure on its own bank balance sheet and EUR2.7 billion in its insurance subsidiaries. In the context of GCA's loss-absorption capacity, these exposures, together with those to Ireland and Portugal -- EUR0.2 billion and EUR0.7 billion for GCA and EUR1.5 billion and EUR2.2 billion for the insurance subsidiaries -- remain significant but manageable.
However, during the review Moody's concluded that the probability of multiple defaults (in addition to Greece's private-sector involvement programme) by euro-area countries is no longer negligible. In Moody's view, the longer the liquidity crisis continues, the higher the likelihood of sovereign or bank defaults, and ultimately the potential exit of one or more countries from the euro area. In particular, GCA retains a Greek banking subsidiary, Emporiki Bank of Greece, which had a gross loan book of around EUR24 billion and an NPL ratio of 31% at end-September 2011, with a cost of risk for 2011 year-to-date of about 520 basis points of loans, indicating the severity of credit issues in its lending. In addition, GCA provides significant cross-border funding to Emporiki (EUR7.8 billion at 30 September 2011), which would likely be subject to impairment in a scenario of a Greek exit from the euro area. Moreover, GCA retains a large exposure to Italy, which Moody's downgraded on 4 October to A2 from Aa2. Banking and trading-book holdings fell to EUR6.7 billion in the third quarter, but given the size of this exposure, GCA's creditworthiness is sensitive to a further deterioration in Italy's sovereign credit strength.
PROBABILITY OF SYSTEMIC SUPPORT REMAINS VERY HIGH, SUPPORTING Aa3 LONG-TERM RATINGS
Moody's regards France as a high support country and GCA plays a major role as intermediary in the French economy and is integral to the banking system. Moody's assess 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 Aa3. The outlook is negative, in line with the outlook on the BFSR.
KEY RATING SENSITIVITIES
Given the negative outlook on the BFSR and long-term ratings, the probability of an upgrade in either is unlikely. The main factors that could lead to a downgrade of the long-term ratings include:
-- Any broader reappraisal of the implications of the highly fragile funding environment for banks that rely on wholesale funding and are vulnerable to a loss of investor confidence;
-- A deterioration in sovereign creditworthiness, especially of Greece and/or Italy;
-- An increase in our expectation of losses resulting from deleveraging;
-- An inability to meet capital targets;
-- Unexpected losses within the bank's capital markets activity;
-- A further material increase in the probability of a recession leading to higher credit losses; and
-- A deterioration in the creditworthiness of the support provider, France, or its ability and/or willingness to provide support to the benefit of creditors.
SUBORDINATED OBLIGATIONS AND HYBRID SECURITIES
The ratings on the dated subordinated obligations of CASA are currently positioned one notch below the senior unsecured ratings. However, they are included within the reassessment of subordinated debt announced on 29 November 2011. This may lead us to withdraw entirely the systemic support of three notches from these securities and notch them from the bank's adjusted BCA, currently A3. For more details, please see our note "Moody's reviews European banks' subordinated, junior and Tier 3 debt for Downgrade", dated 29 November 2011.
The ratings on the bank's hybrid obligation are notched off the Adjusted BCA of A3. Junior subordinated obligations currently rated at one notch below the Adjusted BCA remain on review for downgrade in conjunction with the above review. The ratings on other hybrid obligations are not on review and their notching from the Adjusted BCA is expected to remain as before.
CREDIT AGRICOLE CORPORATE AND INVESTMENT BANKING (CACIB)
The Aa3 long-term debt and deposit ratings were confirmed at Aa3 with negative outlook, in line with those of CASA. Moody's now assumes full cooperative support to CACIB from GCA, further to the publication of the decree by the French government confirming the modification of banking law, allowing completion of the affiliation process initiated by CASA in September. Moody's notes that CACIB will become formally affiliated to CASA after approval by the CASA Board of Directors, which we expect to take place in mid-December. At this point, CASA will, under French law, assume a legal responsibility for the solvency and liquidity of CACIB. In the unlikely event that affiliation does not take place as expected, CACIB's ratings may be lowered.
LE CREDIT LYONNAIS SA (LCL)
Moody's has also downgraded LCL's long-term debt and deposit ratings by one notch to Aa3 from Aa2 and affirmed its Prime-1 short-term rating. The subordinated debt ratings were also downgraded by one notch to A1 from Aa3 and remain on review for possible downgrade. The outlook on the debt and deposit ratings is now negative, in reflection of the negative outlook assigned to the debt and deposit ratings of parent CASA. LCL's BFSR of C+, mapping to a BCA of A2, is unaffected by the current rating actions and its outlook remains stable. LCL's adjusted BCA, including parental support, is changed to A2 from A1, reflecting CASA's lower adjusted BCA of A3. As a result, its junior subordinated MTN program has been downgraded by one notch to (P)A3 from (P)A2 and remains on review for possible downgrade.
METHODOLOGIES
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 methodologies.
LIST OF AFFECTED RATINGS
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_137995
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entities or its designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.
In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.
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Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
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Nicholas Hill
Senior Vice President
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
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Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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