Crédit Agricole cedes to pressure on structure

By:
Dominic O’Neill
Published on:

French bank joins mutual banking reform; investors hope for capital boost, fear earnings dilution.

Crédit Agricole is the latest European mutual group to be pushed into a radical reorganisation, as regulators and investors look ever less favourably on complex cooperative structures. After a press leak in mid-January, the French group confirmed it has started to evaluate the sale of the central listed entity’s 25% stake in the 35 caisses regionales, potentially transferring it into a new vehicle to be 100%-owned by the regional banks. 

It’s a response to concerns over a bewildering structure in which, since its IPO in 2001, Crédit Agricole SA owns 25% of its majority shareholder, the regional banks. Regulators are thought to be increasingly uncomfortable with that. The loop has also contributed to keeping CASA’s shares (in contrast to rival Natixis) way below book value despite recent efficiency drives and a post-crisis refocus on core businesses, including corporate and investment banking.

Crédit Agricole says the move would have no impact on the group’s solvency or tax burden, but would "reinforce financial flexibility" at CASA – improving the latter’s quality of capital, and helping it reach its regulatory capital target (150 basis points above the ECB minimum, or 11% tier-1, compared with a reported 10.4% in September 2015). The change will allow a return to pure cash dividends next year, after three years of a choice between cash or scrip.

"All in all, it’s good news," says Alex Koagne, banks analyst at Natixis. 

Guillaume Lucien-Baugas at Moody’s adds that from a ratings perspective, and under French law, CASA continues to benefit from the strength and solidarity of the group – as it did after the 2008 crisis, when the regional banks offered capital support. 

The new structure will be more in the spirit of Basel III rules on minority equity stakes, according to Lucien-Baugas. 

Credit_Agricole_structure-600


Messy

The sale will entail the end of the switch mechanism in which CASA benefits from the group’s equity via a guarantee covering €54 billion of risk-weighted assets. The switch’s expiry in 2017 makes it a doubtful, as well as messy, element of the capital make-up.

The sale of the regional bank stake could boost CASA’s capital ratio by eliminating almost €10 billion of risk-weighted assets that are not covered by the switch, because of the regional banks’ growth since the switch was put in place just over four years ago, says John Raymond, senior analyst at CreditSights. 

This could mean an improvement in CASA’s tier-1 ratio by around 30bp, notes Koagne – assuming the sale is at book value. 

The announcement said independent judges would determine a fair price for the stake, which was valued at almost €17 billion in CASA’s 2014 balance sheet. At around 16.9 times earnings, that was way above the 10.6 times average for European banks, according to Berenberg research in September.

At a time when worries about commodities have also weighed on French banks, bearish investors have focused on a potential dilution of earnings as a result of the sale. The end of the switch mechanism will eliminate a large fee – a 9.5% coupon on a €5 billion deposit. Yet the sale removes the strong earnings of the regional banks, a contribution to CASA’s income statement of around €1 billion a year, according to KBW.

Recommendation

Berenberg’s James Chappell previously called the convoluted group structure "the root of CASA’s problems" – but he tells Euromoney he will maintain a sell recommendation in January. In his view the sale will have no capital benefit, but a 30% dilution of earnings (KBW puts the earnings dilution at €550 million, or 13% of 2017 estimated earnings).

Though subject to discussions within the group and with regulators, the market expects more details on the deal on March 9, when chief executive Philippe Brassac unveils a new four-year plan. But some say Crédit Agricole is just joining other European cooperative groups forced to do away with complexity and opacity. Natixis, the listed subsidiary of BPCE, France’s other big mutual group, got rid of its 20% share in its parent in 2013.

Unlike Natixis, CASA maintains the central liquidity and treasury management function for the regional lenders – despite a plan under Brassac, shortly after arriving as CEO last May, to shift this to a different vehicle. CASA will further continue to own a large retail banking operation in Italy under Cariparma and in France under LCL (formerly Crédit Lyonnais).

But the direction is the same elsewhere in the eurozone. On January 1 this year, Dutch mutual group Rabobank merged its 106 local banks with its central institution and now operates under one licence, publishing one set of financial results. Pohjola Bank, in Finland, has been through a similar change. DZ Bank, a central cooperative institution in Frankfurt is merging with Germany’s last regional mutual group, while reform to cooperative banks in Italy could spark mergers there too.

"Cooperative banks across Europe are under pressure to simplify their organisational structure and make their capital and liquidity situation clearer," says Lucien-Baugas at Moody’s.