OREANDA-NEWS. Fitch Ratings has affirmed CM11's Long-Term Issuer Default Rating (IDR) at 'A+', Short-Term IDR at 'F1' and Viability Rating (VR) at 'a+'. The Outlook on the Long-Term IDR is Stable.

CM11 is not a legal entity, but a cooperative banking group comprising 11 Credit Mutuel (CM) federations. Fitch bases its analysis on consolidated group figures because of the solidarity mechanism in place within CM11.

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 available at the end of this rating action commentary.

KEY RATING DRIVERS

VR, IDRS AND SENIOR DEBT

The ratings of CM11 are underpinned by its healthy franchise in French retail banking, established insurance operations, low risk appetite and strong capitalisation. The ratings also factor in a higher proportion of impaired loans and somewhat lower profitability than similarly rated peers.

CM11 is France's third-largest cooperative banking group. Its cooperative nature is reflected in its business model being geared toward retail banking, which generates the bulk of operating profit. Fitch expects net income to remain stable in 2016, and while operating profitability is lower than similarly rated peers', this is partly mitigated by resilient revenue generation through-the-cycle.

Product diversification is CM11's strength in the current low interest rate environment, and CM11's cross-selling capabilities are a key revenue driver. Higher-risk but higher-margin consumer finance activity supports net interest income, offsetting competitive pressures in the French housing lending market and the low interest rates. Expanding activities in other west European countries should support CM11's ability to grow revenues.

CM11's risk appetite is low, and its loan portfolio is mainly concentrated in France with a large portion of low-risk housing loans. The development of consumer finance reduces the duration of CM11's assets and brings some international diversification. Although consumer finance is higher-risk, this is mitigated by the healthy margins it generates and the group's solid credit management systems, including historically conservative underwriting standards, and our expectation that growth in this market will remain modest.

CM11's impaired loans-to-gross loans ratio is higher than at similarly rated peers. A material part of the group's impaired loans relates to the consumer finance portfolio, which is more than adequately reserved, in Fitch's view. Lending quality indicators have been resilient over the cycle, and overall, the impaired loans are well covered by impairment reserves. Other earning assets are also of good quality, and exposure to market risk is limited given CM11's small investment banking operations relative to domestic peers.

CM11 is largely funded by deposits, mostly from retail customers, providing it with a stable funding source. Short-term wholesale funding has been reduced to acceptable levels, and CM11 is a regular issuer of senior secured and unsecured bonds.

The group has significantly improved its liquidity in the last two years, in Fitch's view. Its liquidity buffer largely covers wholesale short-term funding. Compared with similarly rated peers, its liquidity reserve has a lower proportion of high quality liquid assets as a percentage of total assets. The Short-Term IDR of 'F1' is the lower of the two possible Short-Term IDRs for a 'A+' Long-Term IDR, reflecting Fitch's view of CM11's solid, although not exceptionally strong, liquidity profile compared with similarly rated European peers. However, a track record of higher liquidity would support an upgrade to 'F1+'.

Capitalisation, and in particular the leverage ratio, is a rating strength for the group. At end-2015, CM11's Fitch core capital-to-risk-weighted assets ratio was a solid 15.4%, which is in line with similarly rated peers'. This is supported by its solid internal capital generation as earnings retention is strong. Its leverage ratio is higher than most peers'.

SUPPORT RATING AND SUPPORT RATING FLOOR

The '5' Support Ratings (SRs) and 'No Floor' Support Rating Floors (SRFs) of CM11 and its main operating entity Credit Industriel et Commercial (CIC) 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 hybrid securities issued by the group's issuing entity, Banque Federative du Credit Mutuel (BFCM), are notched off the group's VR in accordance with Fitch's criteria.

Lower Tier 2 debt is rated one notch below CM11's VR to reflect greater-than-average loss severity of this type of debt. The hybrid Tier 1 securities are rated four notches below CM11's VR to reflect the higher-than-average loss severity risk of these securities (two notches from the VR) as well as a higher risk of non-performance (an additional two notches).

SUBSIDIARIES AND AFFILIATED COMPANIES

Credit Industriel et Commercial (CIC) is CM11's largest subsidiary, representing around half of group assets. CIC's main business is domestic retail banking, and it runs the group's limited corporate and investment banking activities. It is highly integrated with its parent in terms of management, balance sheet fungibility and systems, meaning subsidiary's and parent's credit profiles are highly correlated. CM11 and CIC therefore share common VRs and IDRs.

BFCM's IDRs (and senior debt) are aligned with those of CM11 as BFCM, as the group's main issuing vehicle. It manages the group's liquidity and coordinates the group's subsidiaries. BFCM has not been assigned a VR as it is deeply integrated within CM11 and cannot be analysed on a standalone basis in a meaningful way.

Banque Europeenne du Credit Mutuel (BECM) is a wholly-owned subsidiary of BFCM. Its debt ratings are aligned with those of BFCM based on an extremely high probability of support from BFCM if required.

RATING SENSITIVITIES

IDRS, VR AND SENIOR DEBT

The Stable Outlook on CM11's Long-Term IDR reflects our expectations that the group will continue to maintain good asset quality and sound capital and liquidity positions.

A material deterioration of CM11's capital position, which currently provides a strong buffer, could lead to negative rating pressure, although this is not expected. In addition, a weakening of the liquidity position, which is contrary to the current trend, or a marked deterioration in the risk profile, potentially from a stronger-than-expected expansion in consumer lending, could lead to pressure on the VR.

An upgrade of the VR would be contingent on a demonstration of exceptionally strong and stable financial metrics, in particular stronger profitability and lower impaired loan ratios, but also a track record of stronger liquidity.

SUPPORT RATING AND SUPPORT RATING FLOOR

An upgrade of the SRs and upward revision to the SRFs 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 the subordinated debt and other hybrid capital securities issued by BFCM are primarily sensitive to a change in CM11's VR.

The ratings of legacy hybrid Tier 1 notes are also sensitive to Fitch changing its assessment of the probability of their non-performance relative to the risk captured in CM11's VR.

SUBSIDIARIES AND AFFILIATED COMPANIES

BFCM's, CIC's and BECM's ratings are sensitive to changes in the ratings of CM11 and changes to the subsidiaries' importance to the group.

The rating actions are as follows:

CM11

Long-Term IDR: affirmed at 'A+'; Outlook Stable

Short-Term IDR: affirmed at 'F1'

Viability Rating: affirmed at 'a+'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'

BFCM

Long-Term IDR: affirmed at 'A+'; Outlook Stable

Short-Term IDR: affirmed at 'F1'

Senior unsecured debt: affirmed at 'A+'

Market-linked notes: affirmed at 'A+(emr)'

BMTN programme: affirmed at 'A+'

EMTN programme: affirmed at 'A+'/'F1'

Lower Tier 2: affirmed at 'A'

Hybrid capital Instruments: affirmed at 'BBB'

Commercial paper: affirmed at 'F1'

Certificates of deposit: affirmed at 'F1'

CIC

Long-Term IDR: affirmed at 'A+'; Outlook Stable

Short-Term IDR: affirmed at 'F1'

Viability Rating: affirmed at 'a+'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'

Senior unsecured debt: affirmed at 'A+'

BMTN programme: affirmed at 'A+'

Certificates of deposit: affirmed at 'F1'

BECM

BMTN programme: affirmed at 'A+'