Picking up the pieces
The French lender found itself caught in the cross-hairs of the credit crisis and eurozone crisis but, after three years of restructuring, it now looks to be back on its feet, growing revenues at a time when much of the industry is hurting.
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After three long years of restructuring and reform at its corporate and investment bank, Credit Agricole seems to have finally turned a corner. While many of its bigger rivals posted some of the worst numbers for years in the first quarter, the French lender – now pared-back and leaner – had a strong Q1, with most businesses growing.
CIB head Jean-Yves Hocher hopes the next few years will be marked by such relative stability, enabling the bank to put its troubles behind it. Getting there, however has been a bumpy ride. When Hocher took over the business in December 2010, the bank was still reeling from the credit crisis – and becoming more and more embroiled in the simmering eurozone crisis, accentuated by its ownership of Greek bank Emporiki, which was haemorrhaging losses.
At group level, the bank sold off Emporiki for a token €1, recapitalising the bank with €3bn ahead of the deal. In CIB, Hocher took action in exiting more than 20 countries, cutting thousands of staff, trimming billions of risk-weighted assets. He exited the commodities business entirely, ahead of later exits by many of its larger rivals. Revenues fell and in the fourth quarter of 2012 the CIB business recorded a massive €1.1bn loss due to the cost and goodwill charges of exiting various businesses.
Some analysts still believe that Hocher should have gone farther, cutting deeper and removing more business lines. Their argument is that Credit Agricole still tries to be too many things, clinging to a universal model it cannot afford. But Hocher dismisses such criticism, saying that a broad-based CIB business has a lot to offer the Credit Agricole group.
“CA-CIB has no plan to come back to the past, which has been painful for this bank,” Hocher told IFR. “Analysts expect very high returns from CIBs, which we won’t deliver. But for Credit Agricole it’s not an issue because this banking group considers that CIB is a necessary part for a global and universal bank. The group is not asking me for high, but for reasonable levels of profitability. I think that quarter after quarter we will prove that we are doing OK.“
One of Hocher’s most important strategic moves has been the shift to an originate-to-distribute model, in part designed to continue lending to key clients but without the need for a big balance sheet. Under Hocher, the bank entered into talks with pension funds and insurance companies about using their cash to co-originate loans. The strategy has paid off, enabling the bank to continue building revenues at the same time as improving its capital ratios.
But Hocher is not finished with the cuts. He foresees a further €25bn to €30bn in additional RWA cuts from the CIB’s current level of €150bn.
“Our target will be to go down to €120bn to €125bn by the end of 2016,” he said. “I believe this is do-able by reducing some parts of our business and transferring RWAs from one part to another. There will also be natural reductions from discontinued businesses. Also the natural optimisation of the portfolio should reduce our level.”
Moving forward, Hocher does not foresee a radical departure from the model he has spent the last three years putting in place. He says he wants to continue to originate, to distribute about 80% of loans and build out its dollar DCM platform. He was more cautious on the future of forex and fixed income, which he conceded were in very slow markets.
Despite exiting a number of countries since 2011, the lender is now ready to consider opening new branches, though not more than a couple in the next two years. Hocher made a pointed reference to Canada, a country he considers to have a stable and interesting economy.
“We’re now focused on 30 countries, and the heart of the business is in Europe,” he said. “Our main businesses are in the big five of France, Italy, Spain, Germany and the UK. The US is also an important country for us. We should think about opening fully fledged branches in some countries, and first on that list is Canada.
”It’s a very safe country and an interesting economic area. So we are asking for a full licence from the Canadian authorities and that will allow us to grow more. Also possibly in Asia. So I don’t have the intention of exiting any other country, but could open one or two new ones in the coming years. That would be reasonable.”
Analysts’ attention will now be paid to how Credit Agricole fares in the asset quality review, which is expected to be completed in October. Its results will give a clear indication for how far the bank has come or how much farther it needs to go. But analysts were surprised by the 9% Core Tier 1 ratio revealed in the most recent results and are more optimistic about its prospects in the AQR.
“The main surprise in Q1 results came from solvency, with CASA reporting a ratio of 9% versus our 8.4% forecast,” said Flora Benhakous, a banks analyst at Deutsche Bank.
“While due to one-off impacts, this is very positive news considering that capital represents in our view the main uncertainty and risk for CASA shares.”