Daniel Lebègue & Charles Milhaud

Daniel Lebègue doesn’t like the way that Americans pronounce the name of his bank’s new joint venture. Eulia is not supposed to have a long vowel sound at the beginning, he says. Fortunately, the partial merger between Caisse des Dépôts et Consignations (CDC), where Lebègue is president, and Caisse Nationale des Caisses d’Epargne (CNCE), is unlikely to be much of a talking point in the US. It has hardly caused a stir in Europe so far. Most analysts admit to having been more focused on Crédit Agricole’s IPO in recent months than anything its rivals are up to.

That doesn’t deter Lebègue though. He is convinced the venture to create the third-largest bank in France, due to be completed last month, makes sense. “I don’t see any other European partnerships where the complementarities are so evident,” he says. His plan, along with his counterpart at CNCE, Charles Milhaud, is to combine parts of their businesses in a holding company owned 51% by CDC and 49% by CNCE. The weighting reflects the fact that CDC will have more influence on the day-to-day running of Eulia.

CDC’s main contribution is its investment and wholesale banking business in the shape of CDC Ixis and its insurance activities. These will be united with CNCE’s network of retail banks – the Caisses d’Epargne (savings banks) – along with the two banks’ real-estate activities and other subsidiaries such as consumer lending and private equity.

Lebègue, who is 58 and trained as a lawyer, has spent much of his working life in the French treasury, progressing from bottom to the top in 18 years to become director in 1984. He then joined Banque Nationale de Paris in 1987 and spent 10 years there before returning to a government role as president and CEO of CDC.

Milhaud began his career at the bank in his home town of Sète in southern France. He is also 58 and has degrees in maths, physics and chemistry. Now in his 37th year at CNCE, he became the bank’s president in 1999.

There has been a long-standing close relationship between the two institutions but there have also been disagreements. Relations between the two men at their helms, in Milhaud’s words, have been a little strained. “Our discussions have always been slightly tense because there were various aspects of the insurance business over which we disagreed,” says Milhaud. “From this we started to talk about how we could work out solutions together.”

A merger was never on the cards since CNCE is a mutual institution and CDC a publicly owned bank. So the next best option was to form a jointly owned holding company. According to Lebègue, this will enable the two banks to hold their own in the next phase of consolidation. “We also consider that mutual and public banks have a role to play in Europe and think that we would be in a stronger position to develop at the European level if we merge our expertise, our equities and our teams to develop as a full financial services company,” he says

But analysts have serious doubts about the success of the venture. Merging some parts of the two institutions into a new entity which will have total assets of e18 billion ($16 billion) and involve 50,000 employees, but keeping the rest separate will result in an extraordinarily complicated governance structure. Lebègue and Milhaud also have ambitious ROE targets. The current combined ROE of the two groups is 10% and they’re aiming at 15% within a fairly vague four- or five-year time period. Crédit Agricole, the institution that most closely resembles Eulia, currently has a ROE of 14% and is widely considered to be streets ahead.

They also point out that CNCE has consistently underperformed. It has a huge franchise – 60% of bank branches in France are owned by a mutual institution and CNCE has 17% of them. But despite their huge franchise, historically the savings banks have underperformed and CNCE is no exception. “If they can’t make money in retail banking, what hope is there for them?” says one French banking analyst.

“We want joint stock companies that are able to flexibly restructure,” says another. “I’m not sure what value they’re adding with this.” Analysts are also sceptical about Eulia’s stated intention to forge partnerships with other institutions in France and across Europe. They’ve already done a share swap with Italian bank San Paolo IMI – the Italian bank took 3.5% in CDC Ixis in return for 2% of its own equity.

“There are a great number of institutions, cooperative banks, savings banks and public institutions which would probably be interested by an original scheme for pursuing growth at a European level,” says Lebègue. But observers feel they should concentrate on improving performance in the domestic market first.

At least Eulia – a combination of Europe and Alliance – is an improvement on the previous proposed name – Alliance. Lebègue feels this sounded just a little too like a German insurance company that, given its current dominant financial services role in Europe, may one day swallow them both.