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Crédit Agricole: Group Profit Down By One-Third On COVID-19 Provisions

In 1Q 2020, Groupe Crédit Agricole's (CA or the Group) stated net income group share declined by 33% year on year (YoY) to EUR 908 million. Specific items had a limited impact both this quarter and in 1Q 2019 and the underlying net income group share was EUR 981 million, down 32% YoY. The decline in profits was due mainly to a substantial increase in the cost of risk, reflecting the expected economic impact of the Coronavirus Disease (COVID-19). DBRS Morningstar notes that CA's profits declined sharply YoY, the decrease was more moderate than for some of the Group's European peers, reflecting solid pre-provisioning profitability and the cost of risk rising from relatively low levels.

CA's underlying cost of risk increased more than threefold to EUR 930 million, equivalent to 40 basis points (bps) of average outstandings (annualised basis). The increase in the cost of risk reflected largely the build-up of provisions on performing exposures (61% of the increase) in various Group divisions. The Group increased provisions across its retail and corporate loan portfolios with specific additions for exposures to sectors exposed to COVID-19, such as tourism, automotive, aerospace, energy, and supply chain.

The Group's underlying revenues were EUR 8.4 billion, up by 0.7% YoY. However, excluding the Corporate Centre, operating business line revenues were down by 3.3%. Revenues remained relatively resilient due to still good commercial momentum prior to the outbreak of COVID-19 and a steady net interest margin. However, unfavourable market conditions in March resulted in mark-to-market losses in insurance and in asset management, which adversely impacted the Group's revenues.

Underlying operating expenses excluding the contribution to the Single Resolution Fund (SRF) increased by 3.8% YoY to EUR 5.5 billion, mainly reflecting continued IT investments in the Regional Banks envisaged under the mid-term strategic plan, and the impact of taxes on some of the business lines. The underlying cost/income ratio excluding the SRF contribution was 65.4%, up from 63.4% in 1Q 2019.

The Group's balance sheet fundamentals remained strong. The NPL ratio declined by 10 bps compared to the end-2019 level and was 2.4%. The forward looking provisioning of performing exposures led to an increase in the coverage ratio by 1.7% during the quarter to 84.3%.

Despite a 40 bps drop during the quarter, the CET1 ratio remained a strong 15.5%, corresponding to a substantial 6.6% cushion above the SREP requirement. Its quarterly decline resulted mainly from an increase in RWA (-34 bps), the effect of market valuations on the balance of unrealised gains / losses (-18bps), and regulatory impacts on securitisations (-15bps). These effects were in part offset by the retention of Crédit Agricole S.A. dividend (+16 bps) and retained earnings (+11bps).

Other balance sheet metrics remained solid as well. The phased-in leverage ratio was at 5.3% at end-1Q 2020. At end-1Q 2020, the Group's liquidity reserves were EUR 233 billion and the average LCR ratio was 129.8%.

The full implications of the COVID-19 crisis for the medium to long-term will depend on the evolution of the outbreak, the length of the economic shutdown, as well as the transition phase of the recovery. DBRS Morningstar’s view is that the COVID-19 crisis will continue to impact CA's profitability and asset quality in coming quarters. Nevertheless, DBRS Morningstar also takes into account the Group's well-established and diversified franchise, its robust funding and liquidity profile and strong capital base. In addition, the conservative and diversified risk profile of the Group could help mitigate the negative impact of this crisis on its credit fundamentals. We will continue to monitor the performance of CA during this period of stress.