OREANDA-NEWS. Fitch Ratings has affirmed Credit Municipal de Paris's (CMP) Long-Term Foreign - and Local-Currency Issuer Default Ratings (IDRs) at 'AA-'. The Outlook is Negative. The Short-Term Foreign-Currency IDR has been affirmed at 'F1+'.

CMP's EUR250m medium-term notes (Bons a moyen terme negociables; BMTN) programme has been affirmed at 'AA-' and its EUR750m short-term notes (Certificats de depots; CD) programme at 'F1+'.

Fitch classifies CMP as a credit-linked public-sector entity of the City of Paris (AA/Negative/F1+), its sponsor authority under public law and its reference shareholder under banking regulations. This is attributable to the entity's strong legal status, and control and oversight by its sponsor. CMP's integration with its sponsor and strategic importance also play a role. As a result, CMP's ratings are notched down once from those of the City of Paris, to which they are credit linked.

KEY RATING DRIVERS

CMP's ratings reflect the strong statutory support and control by the City of Paris stemming from CMP's status as both a local public agency (EPA) and a fully city-owned financial institution. They also take into account CMP's position as a socially oriented organisation, endowed with the regional monopoly on pawnbroking, which is considered a public service under French law. The Negative Outlook reflects that on the City of Paris's Long-Term IDRs.

CMP benefits from a statutory solvency guarantee from the City of Paris. The city committed its full financial support to CMP and subsidiary CMP Banque through a 2004 letter of comfort signed by the Mayor. This support was demonstrated in July 2015 by the city's EUR42m recapitalisation of CMP to enable it to address the run-off procedure of CMP Banque, which is expected to last until 2023.

Fitch believes the city's close monitoring of CMP's cash position prevents liquidity shortfalls and mitigates refinancing risk. The City of Paris heads CMP's board of administrators, defines its overall mission and strategy, and appoints civil servants to key management positions. The city's department for public-sector entities closely monitors CMP's activity and risks.

CMP's operations are low-risk as loans are backed by pawned assets that can be sold at well above loan value and that are guaranteed by auctioneers for 50% of their value. Consumer finance regulation stipulates that pawnbroking loans have to be repaid by debtors, even under debt-relief procedures. Cost of risk is low, although it increased somewhat in 2015 (1.1% of net banking income, from 1% in 2014), due to a voluntary lengthening in the notice period preceding the sale of pawned assets.

CMP recorded a negative EUR36m net result in 2015, resulting from a one-off EUR46.1m impairment of its shares in CMP Banque, after the latter was placed in run-off in June. Calculation of the depreciation is based on a discounted net valuation of CMP shares in its subsidiary at the end of the run-off procedure in 2023. Fitch understands that no further depreciation is expected until then.

Excluding exceptional items, CMP's performance remained sound in 2015. Its activity is typically counter-cyclical. After sharp growth in 2011-2013, CMP's activity is growing more moderately (loan volume grew 3% in 2015) amid a modest economic recovery and lower gold prices. Net banking income increased by a strong 11% in 2015, with cheaper refinancing costs. The cost/income ratio improved to 64%, from 70% in 2014, with stable operating costs.

CMP's refinancing is based on a strong track record in the interbank market and on its EUR250m BMTN programme. Funding is diversified, based on CD issuance and retail savings accounts. At end-2015, the liquidity ratio remained sound (141%). Despite the negative result, CMP's capital base remained strong at end-2015, thanks to the EUR42m capital increase by the City of Paris, with a Basel III solvency ratio of 18.6%.

CMP Banque posted total cumulative losses of EUR16.9m in 2011-2014. Despite restructuring plans aimed at restoring profitability, the run-off procedure was decided in June 2015, along with a redundancy plan. This led to a EUR21m provision as of 2015, leading to the EUR24m recapitalisation by CMP. CMP Banque's solvency ratio remained sound at 14.80% at end-2015 (end-2014: 12.88%), above the 11% threshold set by the supervisory banking authorities. CMP has requested that the banking authorities withdraw CMP Banque's banking licence, which may occur later in 2016.

RATING SENSITIVITIES

A downgrade could result from a weakening of the links between the City of Paris and CMP, or from a downgrade of the city.

An upgrade could be triggered if greater certainty on the extent and timeliness of potential liquidity support from the City of Paris could justify an equalisation of the two entities' IDRs.