Training on AMC and NSPF, September 6–7

ACRA affirms ААА(RU) to Credit Agricole CIB AO, outlook Stable

The credit rating assigned to Credit Agricole CIB AO (hereinafter, Credit Agricole or the Bank) stems from a high likelihood of strong support from its main shareholder Credit Agricole CIB. The Bank’s standalone creditworthiness assessment is high, which is supported by strong business profile, substantial capital buffer, adequate risk profile, and adequate funding and liquidity.

Credit Agricole provides integrated banking services (lending, guarantees and letters of credit, trade finance, treasury) to large Russian companies and multinational corporations operating in Russia. As of end-June 2018, the Bank ranked 77th in terms of equity and 111th in terms of assets in the Russian market.

The Bank is 100% owned, directly or indirectly (through Credit Agricole CIB Global Banking), by Credit Agricole CIB, a subsidiary of Credit Agricole S.A., a diversified banking holding, whose assets are located in the EU (predominantly, France, Italy, and the U.K.), the USA, Asia-Pacific (including Japan), and other countries.

Key rating assessment factors

High likelihood of strong shareholder support. ACRA is of the opinion that, in case of need, Credit Agricole S.A. (the Group), acting through Credit Agricole CIB (the Parent Bank or the Supporting Organization), may support the Bank with long-term and short-term funding, and capital injections (currently, the Bank has excessive capital). The Agency assesses as strong both the country risk of jurisdiction of the Supporting Organization compared to the country risk of Russia and the creditworthiness of the Supporting Organization.

The Agency is of the opinion that the degree of association between the Bank and the Supporting Organization is strong, because:

  • 100% shares of the Bank are owned by the Supporting Organization;
  • The Supporting Organization pursues its Russian corporate business strategy through Credit Agricole;
  • The Russian banking market is of high importance for the Supporting Organization;
  • The operational integration between the Bank and the Supporting Organization is significant in corporate management and risk management;
  • The Supporting Organization acts as a guarantor under a range of loans issued by the Bank.

In view of the small size of the Bank compared to the Supporting Organization and the high reputational risks the Group (taking into account the scope of its Russian business) may face in case the Bank goes bankrupt, the resulting credit rating of Credit Agricole is on par with the Russian Federation.

Adequate business profile assessment stems from the strong positions of the Bank in servicing large Russian companies and multinational corporations operating in Russia. The Group's scope of Russian business significantly exceeds the assets of Credit Agricole, because a substantial portion of credit risks is posted on the balance sheet of the Parent Bank or balance sheets of other banks in the Group. The operating income diversification is deemed low by ACRA, in view of the dominating role played by the interest income for corporate loan portfolio and a low share of fee income. The level of corporate management and strategic planning in the Bank is assessed as high and matching the best international practices.

Substantial capital adequacy margin amid low operational efficiency. High capital adequacy (N1.2 averaged to 18.9% for the past 12 months preceding July 01, 2018) allows the Bank to withstand a substantial increase in the cost of credit risk (over 600 bps). As the credit portfolio risks are 100% secured by the guarantees of the Parent Bank, ACRA is of the opinion that the likelihood of the stress scenario is extremely low. At the same time, the Bank's profitability ratios were not high (in 2016–2017, average ROA of 0.4% and average ROE of 4.2%, as calculated based on net income), due to a weak operating efficiency of the business: the average NIM for 2015–2017 amounted to less than 1%, while CTI was 69%.

High risk profile assessment. The risk management contributors include transparency, good regulation, high underwriting standards, and sufficient control on the part of the Supporting Organization and the Group. The core of the portfolio includes loans provided to the largest Russian companies and subsidiaries of multinational corporations, whose credit quality is high. The Bank’s loan portfolio is characterized by a high concentration (as of December 31, 2017, top 10 groups of borrowers comprised about 98% of the portfolio), but the entire loan portfolio is secured by the guarantees issued by the Parent Bank or companies with high credit quality. This factor significantly mitigates credit risks taken by the Bank (the cost of risk was equal to zero in 2016-2018). The quality of the loan portfolio is assessed as high (no non-performing loans). The portfolio of bank loans (4.9% of assets) is dominated by intra-group transactions. The market risk related to derivatives is assessed as low, because the transactions are of market nature and to the benefit of corporate clients who are borrowers of the Bank.

Strong liquidity position. The short-term liquidity shortage indicator has remained to be positive in the base case scenario of ACRA; the liquidity shortage under the stress scenario is minimal and may be eliminated using intragroup interbank loans. The long-term liquidity position is also assessed as strong, as the long-term liquidity shortage indicator is more than 100%.

High-concentrated funding profile. The Bank’s liabilities (net of subordinated loans and derivatives) include corporate funds (90%) and interbank loans (10%) granted mainly by the Group's banks. The concentration of largest lenders is considered as high because, as of December 31, 2017, as the share of funds from the single largest lender was 19% of liabilities (net of subordinated loans and derivatives), while the share of 10 largest lenders was 71%. On the other hand, ACRA assesses positively the mostly stable nature and predictable dynamics of balances on accounts and deposits of the largest corporate lenders.

Key assumptions

  • Credit Agricole S.A. will retain its shareholding and operational control over the Bank;
  • Cost of credit risk within 0–0.5%;
  • NIM within 0.5–1%;
  • Tier 1 ratio (N1.2) above 8.5% on the 12 to 18-months horizon;
  • Current funding profile will remain unchanged.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • a loss of shareholding or operational control by the Supporting Organization or the Group, or a substantial decrease of Bank’s significance within the Group.

Rating components

Standalone creditworthiness assessment (SCA): a-.

Adjustments: no.

Support: on par with RF (ААА(RU)).

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and Supporting Organizations outside the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

A credit rating of Credit Agricole CIB AO was first published by ACRA on August 11, 2017. The credit rating and credit rating outlook are expected to be revised within one year following the rating action (August 8, 2018).

Disclosure of deviations from the approved methodologies. The "funding" sub-factor assessment has been upgraded one notch up, as the low diversification risks caused by a high proportion of legal entities in the liabilities of Credit Agricole CIB AO have been taken into account in the assessment of the concentration on the funds of the largest creditors/depositors.

The credit rating was assigned based on the data provided by Credit Agricole CIB AO, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the consolidated IFRS statements of Credit Agricole CIB AO and the standalone financial statements of Credit Agricole CIB AO drawn up in compliance with Bank of Russia Ordinance No. 4212-U of November 24, 2016. The credit rating is solicited, and Credit Agricole CIB AO participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by Credit Agricole CIB AO in its financial statements have been discovered.

ACRA provided no additional services to Credit Agricole CIB AO. No conflicts of interest were discovered in the course of credit rating assignment.

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