OREANDA-NEWS. Fitch Ratings has revised Credit Agricole's (CA) Outlook to Positive from Stable. It has also affirmed the bank's Long-term Issuer Default Rating (IDR) and senior debt ratings at 'A', Short-term IDR at 'F1' and Viability Rating (VR) at 'a'. A full list of rating actions is available at the end of this rating action commentary.

The revision of the Outlook to Positive reflects primarily our expectations of a sustained improvement in CA's risk profile, as management's focus on core businesses continues, and in the group's capitalisation.

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 supports diversified earnings, and generally moderate risk appetite. They also reflect the group's sound asset quality, in line with domestic peers', and its improving capitalisation.

CA is one of Europe's largest banking groups by deposits; however, it primarily operates in France, where it is the leading domestic retail banking group (around 25% market share). CA's domestic retail banking activity generates solid and stable earnings and is the largest contributor to operating profit. Its subsidiary Amundi is a leading asset manager in Europe.

Risk appetite is moderate, in Fitch's view, and the group's strategy to focus on core businesses and limit strategic expansion abroad should reduce risks and partly drive the Positive Outlook on CA's Long-term IDR. CA's loan portfolio is mainly concentrated in France with a large portion of low-risk housing loans. The higher-risk exposures in Italy, which made up around 7% of total risk exposure at end-2014, are manageable for the group.

CA's impaired loans/gross loans ratio is in line with domestic peers', although reserves for impaired loans compare well with its French peers'. The group's domestic loan book is of sound quality, which partly mitigates the poor quality at CA's Italian entities. Fitch believes that impaired loans in these entities will remain high in 2015, although further deterioration is expected to remain limited in Fitch's base case.

Operating profitability has been resilient, supported by cost-cutting and de-risking measures, and has driven solid internal capital generation. CA's capital ratios are in line with similarly rated peers', and further improvements are expected on the back of solid earnings retention and stable risk exposure amount.

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.

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, Credit Agricole S.A. (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 of an extremely high probability of support for LCL from CA S.A., and in turn from CA, if required. The Positive Outlook revision on LCL reflects that on CA's.

VR - LCL
Fitch has affirmed LCL's VR at 'a-'. LCL's moderate franchise and focus on retail banking in France (market shares of 7% in housing loans and 5% in deposits) are key rating drivers with a high influence on the VR. The VR also reflects the bank's moderate risk appetite, adequate capitalisation and satisfactory funding.

LCL's operating returns have been resilient and satisfactory despite the subdued French economy, lower demand for housing loans, and intense competition in the French retail banking market. Fitch expects profitability to remain under pressure and the cost-to-income ratio to remain fairly high in 2015, but loan impairment charges to remain low.

LCL's overall risk appetite is moderate. Its impaired loans/gross loans ratio compares well with domestic peers', reflecting the bank's prudent underwriting procedures and overall low-risk loan book.

Customer deposits form the bulk of LCL's funding and are largely retail, leading to a healthy loan-to-deposit ratio, with limited need for wholesale funding.

Capital is managed at CA level, and dividend payout ratios are high. Capital ratios are adequate, given LCL's moderate risk appetite, and Fitch expects these to be maintained at their current level. Fitch considers the unreserved impaired loans-to-equity ratio as acceptable given LCL's track record of small losses.

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 in the event that CA 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 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 (1 notch for loss severity) as well as a higher risk of non-performance (an additional 2 notches for non-performance).

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 as reflected in the VR, due to the 7% CET1 ratio trigger. Fitch has assigned 100% equity credit to those securities.

OTHER SUBSIDIARIES AND AFFILIATED COMPANIES
CA is not a single entity, but a cooperative banking group. Its 39 regional banks (caisses regionales; CRs), CA S.A., and Credit Agricole Corporate and Investment Bank (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 has rated them.

The Long- and Short-term IDRs and SRs of other subsidiaries - CA Consumer Finance and Credit Agricole Leasing & Factoring - 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
CA's ratings factor in Fitch's expectation that the group will continue to focus on its core domestic retail franchise. Expansion into higher-risk business, especially abroad, deteriorating capital position or asset quality could lead to negative rating pressure. An upgrade of the VR would be contingent on evidence of better asset quality, notably of CA's Italian entities, improved profitability, and stronger capitalisation.

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 Revised to Positive from Stable
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 Revised to Positive from Stable
Short-term IDR: affirmed at 'F1'
Senior debt: 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 Revised to Positive from Stable
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'

CA Preferred Funding Trust III
Preferred stock: affirmed at 'BBB-'

Credit Agricole Corporate and Investment Bank
Long-term IDR: affirmed at 'A'; Outlook Revised to Positive from Stable
Short-term IDR: affirmed at 'F1'
Senior debt: affirmed at 'A'
Senior debt: affirmed at 'AAA(tha)'
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'
Market-linked guaranteed securities: affirmed at 'A(emr)'
Senior guaranteed securities: affirmed at 'A'
Short-term debt: affirmed at 'F1'

CA Consumer Finance
Long-term IDR: affirmed at 'A'; Outlook Revised to Positive from Stable
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 Revised to Positive from Stable
Short-term IDR: affirmed at 'F1'
Support Rating: affirmed at '1'