Fitch Ratings has downgraded Groupe BPCE's (GBPCE) Long-Term Issuer Default Rating (IDR) to 'A' from 'A+' and Viability Rating (VR) to 'a' from 'a+'.
The Outlook on the Long-Term IDR is Stable. Fitch has affirmed GBPCE's Short-Term IDR at 'F1'.
Fitch has also downgraded the Long-Term IDRs of GBPCE's main entities, BPCE S.A., the Banques Populaires (BPs), the Caisses d'Epargne et de Prevoyance (CEs), Natixis S.A., Credit Foncier de France S.A. (CFF) and Banque Palatine S.A., to 'A' from 'A+'. Senior preferred debt ratings have been downgraded to 'A+' from 'AA-'.
A full list of rating actions is below.
The downgrades primarily reflect Fitch's expectations of GBPCE's profitability trajectory amid longer-lasting pressure on interest margins in France. GBCPE has been particularly affected by the recent rise in interest rates, due to a business model that remains more focused on domestic retail banking activities and less efficient than most of its French peers. This is the consequence of a less diverse business profile, making profitability less resilient in the current context than similarly-rated peers.
Key Rating Drivers
Leading Retail Franchise, Strong Capitalisation: GBPCE's ratings reflect a strong franchise and fairly diversified business model, strong capitalisation and a focus on generally low-risk businesses and adequate liquidity. The ratings also consider profitability that is weaker than peers and satisfactory asset quality.
Cooperative Structure: GBPCE is a cooperative banking group bound by an effective mutual-support mechanism comprising its 14 BPs, 15 CEs, its central body BPCE S.A., and many affiliates, the largest of which are Natixis, CFF and Banque Palatine. The group publishes consolidated accounts and affiliated entities share a common strategy and risk management functions. Consequently, all these entities have the same IDRs.
Strong Business Profile: GBPCE mainly operates in France, where it is the second-largest domestic retail and commercial bank. The group runs the two large networks of the BPs and the CEs and has a universal bancassurance business model. Its subsidiary Natixis is a niche corporate and investment bank and has decentralised multi-boutique asset management operations. The transition to higher interest rates particularly affects GBPCE's business profile due to its domestic retail banking focus, pressuring the group's profitability.
Conservative Risk Profile: GBPCE's low risk profile reflects the group's cooperative nature, its focus on France, limited exposure to higher-risk consumer finance and the absence of retail-and commercial-banking activities in volatile or emerging countries. Risk controls are centralised and continue to improve, although they remain less comprehensive than at other French cooperative peers, in our view. The group is structurally exposed to interest rate risk like all its French peers, because of the excess of long-term fixed-rate housing loans over fixed-rate liabilities.
Low Asset-Quality Risks: GBPCE's impaired loans ratio is moderately higher than that of similarly-rated European banks, but broadly in line with other French cooperative banks following recent material improvements. The ratio was 2.6% at end-June 2023 and we expect it to remain close to 3% in the next two years. Fitch believes downside asset-quality risks in the corporate portfolios are somewhat mitigated by GBPCE's high share of low-risk housing and public sector loans in France, and adequate loan loss allowance coverage of impaired loans.
Weaker Profitability than Peers: GBPCE's profitability ratios are moderate and lower than 'A+' rated peers. The bank's operating profit was only 1% of its risk-weighted assets (RWA) in 1H23, down 25bp from the four-year average of 1.2% (2019-2022). This is mainly explained by weaker cost efficiency and thinner net interest margins and a less diversified business profile than highly-rated peers. We do not expect the positive impact of rising interest rates on the bank's profitability to materialise before 2024. We expect the bank will continue to focus on delivering cost savings, while selectively growing its businesses and the associated risks, to reduce its performance gap with peers over the medium term.
Strong Capitalisation: Capitalisation remains a rating strength. The common equity Tier 1 (CET1) ratio was 15.2% at end-June 2023 (up 10bp from end-2022), gradually moving towards GBPCE's medium-term target of above 15.5%. We expect further capital accretion in 2H23, despite reduced internal generation capacity due to weak earnings. GBPCE's excess capital above its CET1 capital requirement is one of the largest buffers among large European banks, and low shareholder distributions and regular issuance of cooperative-member shares support capital build-up.
Diversified Stable Funding: GBPCE benefits from the strong deposit franchise of its regional banks in France. However, its loans/deposits ratio remains higher than that of large French peers, as Natixis and CFF, GBPCE's two largest subsidiaries, are mostly wholesale-funded. GBPCE's market funding is diversified by instrument, currency and investor base.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
GBPCE's ratings are sensitive to an unexpected severe setback in economic prospects in France, which is the group's main country of operations, if this leads to Fitch expecting the group's impaired loans ratio to rise materially and sustainably above 3%.
GBPCE's ratings are also sensitive to further setbacks in the recovery of the group's profitability. We would likely downgrade GBPCE's ratings if the bank's operating profit/RWAs ratio remains sustainably below 1%, indicating a weaker business profile and the resulting lower internal capital generation capacity leading to downward pressure on capitalisation.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of GBPCE's VR and Long-Term IDR would require a combination of factors including a material improvement in earnings and cost efficiency metrics, leading to an operating profit/RWAs close to 2%, and a stronger business profile.
GBPCE's ratings are also sensitive to a further material reduction of impaired loans, demonstrating an improvement in asset quality. Capitalisation metrics closer to those of the other French cooperative banks, with a CET1 ratio materially above 16%, would also be credit-positive.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Short-Term IDR
GBPCE's 'F1' Short-Term IDR is the lower of two options that map to a 'A' Long-Term IDR, reflecting our 'a' assessment for the group's funding and liquidity.
Derivative Counterparty Rating (DCR), Deposit Ratings and Senior Debt
GBPCE's buffers of subordinated and senior non-preferred debt sustainably exceed 10% of its RWAs. For this reason, the long-term senior preferred debt of GBPCE entities (including Natixis) is rated 'A+', one notch above the group's Long-Term IDR. We rate the short-term senior preferred debt 'F1', which is the lower of two options that map to a 'A+' long-term senior preferred debt rating, reflecting our 'a' assessment for the group's funding and liquidity.
For the same reason, the senior non-preferred notes issued by BPCE S.A. are rated in line with the central body's 'A' Long-Term IDR.
The DCRs of BPCE S.A. and Natixis are rated at the same level as the issuers' senior preferred debt rating, as derivative counterparties in France have no preferential status over other senior preferred obligations in a resolution.
The long-term deposits of BPCE S.A. are rated 'A+', one notch above BPCE S.A.'s IDRs to reflect the protection that would accrue to depositors from GBPCE's sizeable equity and debt buffers in a resolution. We rate BPCE S.A.'s short-term deposits at 'F1', which is the lower of two options that map to a 'A+' long-term deposit rating, reflecting our 'a' assessment for the group's funding and liquidity.
Subordinated Debt
Fitch rates BPCE S.A.'s subordinated Tier 2 debt two notches below GBPCE's VR, which is the baseline notching for these instruments. This is because of loss severity as we expect recoveries to be poor for this type of debt in the case of default or non-performance of the bank.
We rate BPCE S.A.'s contingent subordinated Tier 2 debt at the same level as plain vanilla Tier 2 debt. We do not believe that the CET1 ratio trigger of below 7% for a partial write-down of these instruments gives rise to incremental non-performance risks and do not apply additional notching to the contingent Tier 2 bonds' rating. Given GBPCE's status as a global systemically important bank and the current CET1 ratio requirement, we believe that GBPCE would likely be close to failure if its CET1 ratio reaches 7%.
Government Support Rating
GBPCE's Government Support Rating (GSR) of 'ns' reflects our view that although external extraordinary sovereign support is possible it cannot be relied upon. Senior creditors can no longer expect to receive full extraordinary support from the government in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that requires senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
GBPCE's Short-Term IDR could be upgraded if we upgrade GBPCE's Long-Term IDR to 'AA-' or if we revise upwards GBPCE's funding and liquidity score to 'aa-', which is unlikely. The Short-Term IDR could be downgraded if GBPCE's Long-Term was downgraded and its funding and liquidity score was also downgraded.
BPCE's DCR, senior debt and deposit ratings and Natixis' DCR and senior debt are primarily sensitive to changes in GBPCE's IDRs. We would downgrade the DCRs, long- and short-term senior preferred, senior non-preferred debt and deposit ratings by a notch if we no longer expect the combined buffer of subordinated and senior non-preferred debt to sustainably exceed 10% of RWAs.
The subordinated debt ratings (including the contingent subordinated Tier 2 notes) are primarily sensitive to a change in GBPCE's VR. In addition, we could widen the notching between the ratings of the contingent subordinated Tier 2 debt and GBPCE's VR in a case of a material reduction in capital requirements, which would lead us to believe that the instrument could be written down before GBPCE becomes non-viable, which is not our central scenario.
An upgrade of the GSR would be contingent on a positive change in the sovereign's propensity to support the bank. In Fitch's view, this is highly unlikely, although not impossible.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
NATIXIS STRUCTURED PRODUCTS LIMITED
The senior debt issued by Natixis Structured Products Limited and guaranteed by Natixis is rated 'A+', in line with the guarantor's senior preferred debt. We expect the guaranteed notes to benefit from the protection provided by GBPCE's buffer of subordinated and senior non-preferred debt. This reflects our view that Natixis is highly likely to honour its commitment as guarantor if required, as the guarantees are unconditional, irrevocable and timely.
LEASING SUBSIDIARIES
The ratings of the negotiable European commercial paper (NEU CP) programmes of BPCE Factor S.A., BPCE Lease S.A., BPCE Lease Immo S.A., BPCE Bail S.A. and Cicobail S.A., guaranteed by BPCE S.A. are rated 'F1' and aligned with the guarantor's short-term senior preferred debt. This reflects Fitch's view that BPCE S.A. is highly likely to honour its commitment as guarantor if required, as the guarantees are unconditional, irrevocable and timely. The issuing entities are part of GBPCE's leasing and factoring activities.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
The rating of the senior debt issued by Natixis Structured Products Limited, and guaranteed by Natixis, is primarily sensitive to a change in Natixis' IDRs or to changes in the terms of the guarantee.
The programme ratings of BPCE Factor S.A., BPCE Lease S.A., BPCE Lease Immo S.A., BPCE Bail S.A. and Cicobail S.A., guaranteed by BPCE S.A., are primarily sensitive to a change in BPCE S.A.'s Short-Term IDR or to changes in the terms of the guarantees.
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
The ratings of the NEU CP programmes of BPCE Factor S.A., BPCE Lease S.A., BPCE Lease Immo S.A., BPCE Bail S.A. and Cicobail S.A. are linked to the ratings of their guarantor, BPCE S.A.
Natixis Structured Products Limited's senior preferred debt rating is linked to Natixis' Long-Term IDR, as Natixis guarantees the notes.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
NATIXIS 
