OREANDA-NEWS. Fitch Ratings has affirmed Credit Agricole's (CA) Long-Term Issuer Default Rating (IDR) and senior debt ratings at 'A', Short-Term IDR at 'F1', and Viability Rating (VR) at 'a'. The Outlook on the Long-term IDR is Positive.

Fitch has also affirmed the ratings of Credit Agricole S. A. (CA S. A.) and Credit Agricole Corporate and Investment Bank (CACIB). CA is not a single entity, but a cooperative banking group. Its 39 regional banks (caisses regionales; CRs), CA S. A., and CACIB are bound by a cross-support mechanism according to the French Financial and Monetary Code. Accordingly, Fitch has the same IDRs for CA, CA S. A. and CACIB. The IDRs would also apply to the CRs if Fitch rated them.

The ratings actions are part of a periodic portfolio review of the three large French cooperative banking groups rated by Fitch.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS, VR AND SENIOR DEBT - CA

CA's ratings are supported by the group's leading position as a bancassureur in France, which provides it with resilient earnings streams, sound asset quality, and sound funding and liquidity profile.

The Positive Outlook reflects strengthened capitalisation and a track record of a lower risk appetite. CA's capital trajectory, including strengthened internal capital generation and a fully loaded common equity Tier 1 ratio target of 16% by 2019, is becoming in line with that of 'a+' rated banks.

The group's strategy to focus on core businesses and limit strategic expansion abroad is contributing to a risk appetite increasingly in line with its two domestic cooperative peers. Italy remains central in CA's international retail strategy, but performance there will largely depend on the pace of the economic recovery. We expect improved performance in Italy to support a sustained improvement in CA's risk profile.

CA is one of Europe's largest banking groups by deposits, although it primarily operates in France, where it is the leading domestic retail banking group (around 25% market share). The group's strategy is to reinforce its leading domestic position in retail banking by achieving organic growth, revenue synergies through high cross selling across group entities, and further costs savings, including in IT. Growth through acquisitions outside the domestic market will essentially be achieved through Amundi, its asset manager, and in private banking.

CA's domestic retail banking activity generates solid and stable earnings and is the largest contributor to operating profit. Competitive pressures in the French housing lending market have been exacerbated by the low interest rates, leading to high amount of renegotiations and lower net interest income. The focus on cross-selling of savings and insurance products, and increase of higher margin consumer finance and other specialised financing are among the tools the group has to offset the pressure in retail banking. Fitch expects the group to be able to report resilient earnings generation despite the revenue pressure from the low interest rates, without increasing its risk appetite.

CA's loan portfolio is mainly concentrated in France, with a large portion of low-risk housing loans. CA's impaired loans/gross loans ratio is broadly in line with domestic cooperative peers, although reserves for impaired loans compare well with its French peers. The exposures in Italy, considered as higher risk by Fitch, are manageable for the group, and Fitch expects further improvements.

Fitch core capital to risk-weighted assets ratio was a solid 13.8% at end-2015 and the ratings take into account further improvement in the capital ratios. Capitalisation should be supported by solid earnings retention, the group's recent upwards revision of its capital targets and its TLAC strategy, including meeting the requirements without senior unsecured debt. The group has announced that it intends to issue the proposed new French class of senior debt, the non-preferred senior debt.

Stable customer deposits form the bulk of funding. CA's funding and liquidity profile is solid, and the group has reduced its reliance on short-term wholesale funding while maintaining its large liquidity buffer. In Fitch's view, compared with similarly rated international peers, its liquidity reserve has a lower proportion of high quality liquid assets as a proportion of total assets.

IDRS AND SUPPORT RATING - LE CREDIT LYONNAIS (LCL)

LCL's Long - and Short-term IDRs are equalised with those of CA and those of CA's central body, CA S. A., which holds 95% of LCL's shares. The rating alignment reflects Fitch's opinion that LCL is a core subsidiary of CA given its ownership structure and integration with its parent.

LCL's Support Rating reflects Fitch's opinion that there is an extremely high probability of support for LCL from CA S. A., and in turn from CA, if required. The Positive Outlook on LCL's Long-term IDRs reflects that on CA's.

VR - LCL

Fitch has affirmed LCL's VR at 'a-', which reflects LCL's moderate franchise in France, retail-driven business model, moderate risk appetite, adequate capitalisation and satisfactory funding.

LCL focusses on profitable domestic retail banking in urban areas, as well as providing services to SMEs and larger corporates. In the context of low interest rates and intensive competitive pressure on the housing loan market in France, LCL is further strengthening its customer relationships and increasing cross-selling, including products from the group. Maintaining net income in 2016 compared with 2015 will be a challenge. Margin pressure and high volumes of loan renegotiations have led to lower revenues so far in 2016. Cost containment measures are on-going and loan impairment charges are expected to remain low. LCL's cost to income ratio is higher than most French peers, but overall profitability is good.

LCL's risk appetite is moderate, reflected in a fairly stable asset quality, with lower impaired loans than most of the French universal banks. Prudent underwriting standards and its retail focus support loan quality, and over half of the loan book is to French households, mostly in the form of housing loans.

Customer deposits form the bulk of LCL's funding and are largely retail, with limited need for wholesale funding. Liquidity is managed at group level and is healthy. Capital is also managed at CA level, and dividend payout ratios are high. The capital ratios are adequate, considering LCL's sound risk profile, sound asset quality and low exposure to market risk. Fitch expects further improvement in line with that at the group level, as demonstrated by the increase in the Tier 1 and total capital ratios over 2015.

SUPPORT RATING AND SUPPORT RATING FLOOR - CA

CA's Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign if the group becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by CA S. A. and CA Preferred Funding Trust III are all notched down from CA's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

Subordinated lower Tier 2 debt is rated one notch below CA's VR to reflect higher than average loss severity of this type of debt.

Subordinated upper Tier 2 instruments are rated three notches below the VR to reflect higher than average loss severity (one notch) as well as a higher risk of non-performance (an additional two notches).

Legacy hybrid Tier 1 securities are rated four notches below CA's VR (two notches for loss severity and two notches for non-performance).

CA S. A.'s Tier 2 contingent capital notes are rated four notches below CA's VR - two notches for loss severity to reflect the principal write-down feature, and two notches for non-performance to reflect high incremental risk compared with the risk as reflected in the VR, as a result of the 7% CET1 ratio trigger. Fitch has assigned 50% equity credit to the securities to reflect that the notes are not perpetual but with a long maturity.

Additional Tier 1 notes are rated five notches below CA's VR - two notches for loss severity and three notches for non-performance to reflect the fully discretionary coupon and incremental risk compared with the risk reflected by the VR, due to the 7% CET1 ratio trigger. Fitch has assigned 100% equity credit to those securities.

OTHER SUBSIDIARIES AND AFFILIATED COMPANIES

The regional banks, CA S. A. and CACIB are bound by the group's cross-support mechanism according to the French Financial and Monetary Code. Fitch has the same IDRs for CA, CA S. A. and CACIB. The IDRs would also apply to the 39 CRs if Fitch rated them.

The IDRs of other subsidiaries, CA Consumer Finance and Credit Agricole Leasing & Factoring, have also been affirmed. Their IDRs and SRs are based on an extremely high probability of support from CA if needed. CA Consumer Finance's and Credit Agricole Leasing & Factoring's Long-and Short-Term IDRs are equalised with those of CA as we view them as core subsidiaries given their strategic importance to and integration with their parent.

Credit Agricole CIB Finance (Guernsey) and Credit Agricole CIB Financial Products (Guernsey) are wholly owned financing subsidiaries of CACIB. Their debt ratings are aligned with those of CACIB, based on an extremely high probability of support from the latter if required.

RATING SENSITIVITIES

IDRS, VR AND SENIOR DEBT - CA

The Positive Outlook on CA's ratings reflects Fitch's expectation that the group will maintain its fairly low risk appetite and continue to improve its capitalisation. Deviation from the focus on domestic retail banking, such as expansion into higher-risk business, especially abroad, and from the current capital trajectory would lead to negative rating pressure.

An upgrade of the VR would be contingent on evidence of better asset quality in CA's Italian subsidiaries. Improvement in profitability metrics would support an upgrade.

IDRS AND SUPPORT RATING - LCL

Unless LCL's ownership changes or its strategic importance to and integration within CA weakens, the bank's SR is unlikely to change and its IDRs will continue to move in tandem with those of CA.

VR - LCL

An upgrade is unlikely in the near future, given the bank's limited ability to grow its franchise and high dividend pay-out ratios. A marked deterioration in asset quality or in capital ratios would adversely affect the VR.

SUPPORT RATING AND SUPPORT RATING FLOOR - CA

An upgrade to CA's SR and upward revision to its SRF would be contingent on a positive change in the French sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt and other hybrid capital are primarily sensitive to a change in CA's VR.

Legacy hybrid Tier 1 notes, Tier 2 contingent capital securities and additional Tier 1 capital notes are also sensitive to Fitch changing its assessment of the probability of their non-performance relative to the risk captured in CA's VR.

OTHER SUBSIDIARIES AND AFFILIATED COMPANIES

CACIB's ratings are sensitive to the same factors that might drive a change in CA's IDRs unless there is a change in the affiliation status, which Fitch views as extremely unlikely.

CA S. A.'s IDRs and senior debt ratings would be sensitive to a change in those of CA.

All other subsidiaries ratings are sensitive to changes in CA's IDRs and changes in the subsidiaries' importance to the group.

The rating actions are as follows:

Credit Agricole

Long-Term IDR: affirmed at 'A'; Outlook Positive

Short-Term IDR: affirmed at 'F1'

Viability Rating: affirmed at 'a'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'

Credit Agricole S. A.

Long-Term IDR: affirmed at 'A'; Outlook Positive

Short-Term IDR: affirmed at 'F1'

Senior debt: affirmed at 'A'

Extendible commercial notes - affirmed at 'A'

Short-Term debt: affirmed at 'F1' Lower Tier 2: affirmed at 'A-'

Upper Tier 2: affirmed at 'BBB'

Innovative Tier 1: affirmed at 'BBB-'

Non-Innovative Tier 1: affirmed at 'BBB-'

Tier 2 contingent capital notes: affirmed at 'BBB-'

Additional Tier 1: affirmed at 'BB+'

Le Credit Lyonnais

Long-Term IDR: affirmed at 'A'; Outlook Positive

Short-Term IDR: affirmed at 'F1'

Viability Rating: affirmed at 'a-'

Support Rating: affirmed at '1'

Senior Debt: affirmed at 'A'

Certificate of deposit: affirmed at 'F1'

Bons a Moyen Terme Negociables (BMTN): affirmed at 'A'

Credit Agricole Corporate and Investment Bank

Long-Term IDR: affirmed at 'A'; Outlook Positive

Short-Term IDR: affirmed at 'F1'

Senior debt: affirmed at 'A'

Market-linked securities: affirmed at 'A(emr)'

Short-term debt: affirmed at 'F1'

Credit Agricole CIB Finance (Guernsey)

Senior debt: affirmed at 'A'

Market-linked guaranteed securities: affirmed at 'A(emr)'

Guaranteed notes: affirmed at 'A'

Short-Term debt: affirmed at 'F1'

Credit Agricole CIB Financial Products (Guernsey)

Senior debt: affirmed at 'A'

Senior guaranteed securities: affirmed at 'A'

Short-Term debt: affirmed at 'F1'

CA Consumer Finance

Long-Term IDR: affirmed at 'A'; Outlook Positive

Short-Term IDR: affirmed at 'F1'

Support Rating: affirmed at '1'

Senior debt: affirmed at 'A'

Short-Term debt: affirmed at 'F1'

Credit Agricole Leasing & Factoring

Long-Term IDR: affirmed at 'A'; Outlook Positive

Short-Term IDR: affirmed at 'F1'

Support Rating: affirmed at '1'