OREANDA-NEWS. Fitch Ratings has affirmed CM11-CIC'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. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS

VR, IDRS AND SENIOR DEBT
CM11-CIC's ratings reflect the group's healthy franchise in French retail banking, low risk appetite, sound funding and liquidity, and strong capitalisation. The ratings also factor in a higher proportion of impaired loans than at similarly rated peers and satisfactory profitability. In Fitch's view, the group's cooperative ownership structure removes it from excessive pressure for market return, which partly explains its lower profitability, and contributes to a prudent strategy, which defines CM11-CIC's culture.

CM11-CIC is France's third-largest retail banking group. Retail banking consistently generates the bulk of operating profit, but the group also has a strong franchise in insurance, with products sold through the branch network. Operating profitability is satisfactory but lower than at similarly rated peers.

CM11-CIC has a low risk appetite. Its loan portfolio is mainly concentrated in France with a large portion of low-risk housing loans. Impaired loans are higher than at similarly rated peers, somewhat explained by the group's policy not to write off impaired loans before they are fully resolved, which contrasts with some jurisdictions with swifter write-off policy. Nonetheless, the level of impaired loans is manageable and well covered by impairment reserves.

The group is selectively expanding into higher-risk consumer finance, but Fitch takes comfort from the group's historically conservative underwriting standards, healthy margins as well as its solid credit management systems, which allow the group to adapt rapidly in case of larger- than-expected losses.

CM11-CIC has significant stable funding sources (customer deposits and long-term debt), which exceed customer loans. The proportion of short-term funding has significantly decreased over the past years (12% of total funding excluding derivatives at end-2014). The group has significantly improved its liquidity buffer over the last year, in Fitch's view.

The Short-term IDR of 'F1' is the lower of the two Short-term IDRs possible for a 'A+' Long-term IDR, in line with our rating correspondence table, which reflects Fitch's view of CM11-CIC's solid although not exceptionally strong liquidity profile compared with similarly rated European peers. However, building up a track record of higher liquidity would support an upgrade to 'F1+'.

CM11-CIC's capacity to generate capital through earning retention is strong. The group reported a 14.4% fully-loaded common equity Tier 1 capital ratio at end- 2014, which is in line with similarly rated peers. However, its higher-than-peers leverage ratio (Fitch tangible equity to tangible assets of 5.6% at end-2014) is a rating strength.

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

SUPPORT RATING AND SUPPORT RATING FLOOR
CM11-CIC'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 in the event that CM11-CIC becomes non-viable. In Fitch's view, the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) are now sufficiently progressed to 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.

In the EU, BRRD has been effective in member states since 1 January 2015, including minimum loss absorption requirements before resolution financing or alternative financing (eg, government stabilisation funds) can be used. Full application of BRRD, including the bail-in tool, is required from 1 January 2016.

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.

Subordinated lower Tier 2 debt is rated one notch below CM11-CIC's VR to reflect higher-than-average loss severity of this type of debt. The hybrid Tier 1 securities are rated four notches below CM11-CIC's VR to reflect 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-CIC'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 and parent credit profiles are highly correlated. Therefore, Fitch has common VRs, and hence same IDRs, on CM11-CIC and CIC.

CIC's SR and SRF reflect our view that support from the French authorities cannot be relied upon, primarily because of the advance state of resolution legislation in France.

BFCM's IDRs (and senior debt) are aligned with those of CM11-CIC as BFCM is a core subsidiary. BFCM is 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-CIC 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 the latter if required.

RATING SENSITIVITIES

IDRS, VR AND SENIOR DEBT
A material deterioration of CM11-CIC'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, could lead to pressure on the VR.

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

SUPPORT RATING AND SUPPORT RATING FLOOR
Any upgrade to 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-CIC's VR.

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-CIC's VR.

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

The rating actions are as follows:

CM11-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'

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'
Certificate 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: downgraded to '5' from '1'
Support Rating Floor: assigned 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+'