Over the last five years Crédit Agricole has appeared well suited to a time when synergies between European banks were sorely needed but almost impossible to realize through mergers – especially cross border.
It has used the economies of scale it enjoys from owning France’s biggest retail network as the basis for buying the smaller product factories of weaker rivals, while retaining their distribution.
“We are a universal bank, and each of the business lines that we have decided to keep are open to cooperation,” Philippe Brassac, chief executive of Crédit Agricole SA (Casa), told Euromoney in June. “Partnerships are an attractive alternative to bank mergers. They’re easier, less risky and you protect your brand.”
After the pandemic, this partnership model appears particularly relevant, as many European banks – especially mid-tier lenders in southern Europe – are in even greater need of the capital trapped in their increasingly uncompetitive product factories.
Just weeks before Covid struck, Banco Sabadell sold its asset management arm to Crédit Agricole’s Amundi; the deal included a 10-year distribution agreement. That followed other similar agreements in asset management, insurance, consumer finance and custody, especially in Italy and Spain.
However, the last year has also shown the limits of the model. Mid-tier banks have become so aware of their vulnerabilities that they are giving up being standalone institutions entirely. A new openness to M&A on the part of the single supervisor means outright mergers are no longer the last-resort option they were before.
Volatile partnerships
For Crédit Agricole, this is both a challenge and an opportunity. M&A and other events in 2020 have showed that partnerships between independent firms are more volatile than the link between proprietary banks and in-house product factories.
That’s a relevant point for the things Crédit Agricole has itself outsourced, such as cash equities, which it now offers through Kepler Cheuvreux, and elements of its payments offering, previously through Wirecard.
Crédit Agricole deepened a product development partnership with Wirecard in 2019, months before the German e-commerce fintech collapsed into insolvency, amid a multi-billion euro accounting fraud.
The debacle has been more than an embarrassment. It has meant wasted time in the digital race, as the bank now has to develop functionalities in-house that would otherwise have come from Wirecard.
M&A between other institutions can cause us to lose some distribution agreements, but it can also lead us to gain distribution in other situations
Jérôme Grivet, Crédit Agricole SA
There is now also a more widespread risk to distribution partnerships from takeovers, such as 2020’s merger between CaixaBank and Bankia.
This is likely to result in the end of Bankia’s recently established joint venture in Spain with Crédit Agricole Consumer Finance, while Sabadell is more open to a merger than before, although talks with BBVA collapsed in late November over price.
“M&A between other institutions can cause us to lose some distribution agreements, but it can also lead us to gain distribution in other situations,” says Jérôme Grivet, Casa’s deputy general manager and chief financial officer.
He points to Banco BPM. In 2019, Crédit Agricole added the former consumer finance arm of Banca Popolare di Milano to its existing joint venture with Banco Popolare, following the two Italian banks’ 2017 merger to create Banco BPM, Italy’s third-biggest bank.
Grivet says the recent uptick in M&A consequently “doesn’t change the strategy of helping our business lines to grow by concluding these sorts of partnerships”.
But the increase in M&A in Europe in 2020 has raised questions over the extent to which Crédit Agricole itself could buy banks, especially ones with which it already has partnerships.
Best positioned
The French group is among the banks in Europe best positioned to do M&A, as it restructured earlier and did not creep back into businesses such as equity derivatives, which have cost some rivals dearly in 2020.
After Covid struck, Crédit Agricole saw its biggest credit provisions in the corporate and investment bank, reflecting its earlier over-enthusiasm in aviation and commodity trade finance.
However, Casa’s cost of risk was only 67 basis points for the first nine months of 2020, versus a European average of about 100bp. At group level, which includes its French mutual banks, it was only 38bp.
More problematically however, the other way in which Crédit Agricole restructured in the early 2010s was by rolling back efforts from the early 2000s to build an international retail bank, especially in the eurozone periphery.
Italy was saved from that cull. Its bank there, which is based in the wealthier parts of the country’s north and centre, remains relatively profitable – with a return on equity of 9% in 2019 – but small, with €65 billion in assets.
Today, Italy is the only country except France that Crédit Agricole considers a domestic market. As such, it would not officially consider buying an Italian bank as a cross-border deal.
Nevertheless, buying a big Italian bank that is much less profitable and with much worse asset quality than its own might hint at a rerun of the mistakes that Brassac and his team have spent so long fixing.
In that context, it’s hardly surprising that Crédit Agricole entered the post-Covid M&A arena in November not with a bid for Banco BPM, as widely expected, but instead with a bid for a smaller and healthier bank, Credito Valtellinese (Creval).
With just €24 billion in assets, Creval will not propel Crédit Agricole into the top tier in Italy.
However, the chance to solidify and widen an existing insurance distribution partnership is a vital part of the rationale. De-risking will also be easier, given the target has a markedly higher common equity tier-1 ratio (17.2%) and a lower non-performing exposure ratio (6.4%) than Banco BPM.
