The expansion of Caffil parent SFIL’s role to include export finance is credit positive, Moody’s said today (Monday), because it will improve SFIL’s profitability and enhance its status and importance in France, although it could lead to increased capital requirements under leverage ratio rules.

Société de Financement Local (SFIL) announced on 6 February that under the mandate of the French government, its 75% owner, it would refinance loans, originated by other banks, that are guaranteed by Coface and have the backing of the French state. Moody’s noted that commercial banks have been “drastically” reducing the volume of export credits because of increasing regulatory constraints under Basel III, notably the liquidity coverage ratio and leverage ratio under the Capital Requirement Regulation (CRR).

The rating agency noted that with SFIL having no experience in export finance, commercial relationships will remain with the commercial banks – which will also continue to evaluate the relevant risks – and that the French government will bear credit risk.

“SFIL’s value is its expertise and capacity to issue large volumes of covered bonds through its financing vehicle Caisse Française de Financement Local (Caffil), whose covered bonds are rated Aaa,” said Moody’s. “Caffil has access to a large pool of investors and resources at a very low cost, which makes SFIL/Caffil an appealing financing solution.”

With the loans benefitting from a French government guarantee, the quality of Caffil’s cover pool – which was Eu63.4bn at September 2014 –  will improve, according to Moody’s, although “only marginally”. It noted that SFIL is targeting an annual production of Eu1.5bn-Eu2.5bn, equivalent to around half of its local government lending.

Moody’s said that although the export credits will be equivalent to French sovereign risk and hence not imply any additional risk-weighted assets or capital charges, it could entail additional capital rules under regulatory rule on leverage.

“The new activity will increase SFIL’s total assets and further diminish its leverage ratio, which is currently less than 2% and under the 3% minimum being contemplated for EU banks,” the rating agency said. “Unless the European Commission allows SFIL and other similar entities to hold a lower leverage level than other banks, it will have to increase its capital base given its low profitability.”

SFIL said that it expects its export finance activity to become operational in the second quarter and Moody’s said it expects the new business to improve SFIL’s profitability – which it described as low – as early as 2016.

“SFIL is hardly making any profit with its current monoline activity, primarily owing to the very low yields on the legacy public sector loan portfolio it inherited from Dexia Crédit Local in 2013,” the rating agency said. “Furthermore, the financing needs coming from the local governments are low because of austerity measures in the French public sector overall, which weigh on SFIL’s revenues and bottom line. This is aggravated by the fact that SFIL’s cost-to-income ratio is more than 70%, higher than that of many banks.”

Moody’s noted that the broadening of SFIL’s remit is contingent upon European Commission approval, but that this is likely because public entities often take care of export finance in other European countries.

Photo: French president François Hollande at a Franco-African forum where he announced the move on Friday; Source: Patrick Védrune, secrétariat général des ministères économiques et financiers