Fitch Credit du Nord at 'A'; Outlook Stable
KEY RATING DRIVERS
IDRS, SUPPORT RATING AND SENIOR DEBT
CN's IDRs and senior debt ratings are aligned with the bank's 100% shareholder, Societe Generale (SG, A/Stable/F1). The Support Rating of '1' reflects Fitch's belief that CN is a core subsidiary of SG, and that there is an extremely high probability that CN would receive support from its parent if required.
Fitch's view of CN's status as a SG core subsidiary is underpinned by its (and its eight regional commercial banking subsidiaries') integral role in SG's domestic retail banking strategy, its full ownership by SG, its strong integration within SG, and its material contribution to SG's retail banking profitability (around one quarter of operating profit in 2014). In addition, CN's limited size relative to SG (4% of total assets at end-2014) should make financial support from SG manageable even should SG face financial stress.
VR
CN's VR reflects the bank's strong regional franchise, which has enabled it to deliver resilient earnings even in a challenging operating environment, and its solid funding and liquidity profiles. The VR also reflects CN's weaker asset quality than domestic peers, which constrains the VR.
CN's large share of high-risk/high-return SME and professional lending supports earnings, but has resulted in a high impaired loans ratio compared with similarly rated peers. Coverage of impaired loans is moderate, making the bank dependent on collateral values; unreserved impaired loans amounted for almost two-thirds of its Fitch Core Capital at end-2014.
CN's domestic market share is limited (around 2% at end-2014), although its franchise in some regions is significantly stronger. Its focus on domestic retail banking has supported fairly stable earnings, but Fitch expects earnings will remain under pressure in the near term due to subdued economic prospects in France and low interest rates. Nonetheless, we believe that CN's comfortable margins and sound track record in adjusting its cost base should enable it to maintain satisfactory profitability in 2015.
CN's funding profile is underpinned by the bank's solid retail deposit base, which accounted for around two-thirds of total funding at end-2014. CN has made significant progress since 2011 in reducing its dependence on wholesale funding, and its loan/deposit ratio is now in line with its domestic peers'. Fitch also takes comfort from CN's large liquidity buffer. CN does not depend on SG for financing.
CN's capitalisation is only acceptable, in Fitch's view, given the bank's large volume of unreserved impaired loans and historically limited internal capital generation. Capital is managed at SG level, with fairly high dividend pay-out ratios as a result, which has limited the build-up of retained earnings in the bank. However, we also factor in potential ordinary capital support from SG.
RATING SENSITIVITIES
IDRS, SUPPORT RATING AND SENIOR DEBT
CN's IDRs and senior debt ratings are sensitive to a change in SG's IDRs. As such, the Stable Outlook on CN's Long-term IDR mirrors that on SG's.
While not expected, the ratings are also sensitive to a downgrade of the Support Rating arising from changes in Fitch's assessment of SG's propensity or capacity to provide timely support to CN.
VR
An upgrade of CN's VR would be contingent on a stronger domestic retail franchise and improved asset quality metrics, including lower unreserved impaired loans relative to capital. Conversely, a marked deterioration in asset quality and/or capital ratios would put pressure on the VR.
The rating actions are as follows:
Long-term IDR: affirmed at 'A'; Outlook Stable
Short-term IDR: affirmed at 'F1'
Viability Rating: affirmed at 'bbb+'
Support Rating: affirmed at '1'
Long-term debt: affirmed at 'A'
BMTN programme: affirmed at 'A'
EMTN programme: affirmed at 'A'/'F1'
Certificates of deposits: affirmed at 'F1'
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