Credit Agricole : We reiterate our Buy recommendation on this solid credit

>Strengths/Opportunities - - Crédit Agricole is the European leader in bancassurance and the leading asset management group. It is the largest life insurer in France and boasts genuine development capacities in non-life insurance. In retail banking, in France, Crédit Agricole's distribution capacity is strong, with more than 9,000 branches and complementary banners (39 Caisses régionales, 7,000 branches, LCL, over 2,000 sales offices, and BforBank, its 100% online bank) serving 27 million retail customers (52 million worldwide). Its market shares stand at 24.5% in loans and 21.3% in deposits at end-2016. Crédit Agricole Cariparma is the no. 7 bank in Italy, its second largest domestic market.- Crédit Agricole SA, the savings banks and CACIB are bound through an internal mutual-support mechanism.- The transaction to simplify the group's structure, launched in 2016, has enhanced intragroup clarity and strengthened CASA's capital adequacy. The phase-in and non-phased CET1 ratios stood at 12% and 11.9% at 31/12/17, and even after the -60bp impact of the Pioneer deal from mid-2017, they remain above the 11% targeted in the strategic plan, topping the 2017 CET1 requirement of 7.250%. The group's capital position is adequate (CET1 of 14.5%) and is set to improve further (end1e2019 target of 16%). - The TLAC is estimated at 20.5% at 31 March 2017, excluding 2.5% of senior preferred debt, hence above the 19.5% that could be required in 2019. Likewise, the MREL stands at around 8.4% of the prudential balance sheet, before use of short-term senior debt. The end1e2019 internal target TLAC ratio is currently achievable (the internal MREL ratio target of 8% is reached but the requirement is not definitively set) by Crédit Agricole without increasing its footprint in the bond market. - Weaknesses/Threats - - The jury is still out on LCL's margins, while in Q1 2017, renegotiation volumes remained lofty and prepayments were strong. Management anticipates stabilisation in LCL's revenues in 2017: pressure on revenues following renegotiations and lower prepayment and renegotiation fees should be offset by the sharp rise in higher-margin SME loans and consumer loans outstanding and brisk sales in P&C insurance. - Regulatory uncertainty influences strategic and business-line decision-making. The lack of an agreement at last week's Basel Committee meeting on the introduction of a floor is good news for banks like Crédit Agricole in which credit risk represents around 80% of RWA. However, talks are ongoing, with a potentially negative impact for European banks and continuing uncertainty about the regulatory environment. - Credit opinion: Stable; Market recommendation: Buy - Like other European banks, the most important credit problem facing Crédit Agricole today is linked to the likely revision of RWA methodologies. However, given the transition period to be granted and the bank's business structure (80% of net income deriving from recurring activities: retail, AM, SFS), which gives it a strong capacity to retain earnings regularly, we believe these impacts should be absorbed fairly easily.The issue will be more challenging for the TLAC, since this assumes increased growth in the bond market. Crédit Agricole Group has also started out with an advantage, with a TLAC level that is already in compliance, hence its forthcoming issuances should be lower than others. We reiterate our Buy recommendation on this clearly strong credit, highlighting the attractive spreads of the senior retail and Tier 2 retail bonds (vs. benchmark) and AT1 vs. a highly comfortable distance to MDA.