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Back to the farm

4 September 2013 By Dominic Elliott

Credit Agricole is starting to resemble the bank it was a decade ago. By exiting its remaining 7.6 percent investment in Spain’s Bankinter, the French bank has almost entirely unwound an ill-advised foray into foreign markets.

Agricole’s Bankinter investment was a terrible idea to begin with. In 2007, former Chief Executive Georges Pauget overpaid for a 15 percent stake in the Spanish lender, the 809 million euro sum valuing it at a heady 17 times Bankinter’s estimated 2008 earnings. Based on that price, Agricole would have crystallised a 190 million euro loss by selling its remaining stake. Instead, Agricole will record a capital gain in its books – but only because the investment had already been written down to next to nothing.

Agricole’s management is right to tidy up its messy links with peripheral European lenders. The bank said at the time of its Bankinter purchase that it was part of its ambition to build a European presence. But it never owned more than a 20 percent minority stake. A similar-sized holding in Portugal’s Banco Espirito Santo, which Agricole still owns, was the result of a deal struck many years earlier. Offloading the Espirito Santo stake is the next imperative: Agricole was forced to write down its investment in the Portuguese bank by 267 million euros – or about 30 percent – in February.

Repositioning Agricole as a retail and commercial bank in France and Italy is a far better, safer bet. French retail banking put in a solid showing in the first six months of the year and Credit Agricole’s large branch network means it is geared to a French economic recovery. True, the Italian Cariparma business had a bad first half – net profit was down almost 20 percent. But it is unlikely to be prone to the sort of blowups that have recurred at Agricole in recent years.

That’s why winding down the investment bank is so important. Yes, equity derivatives has been ditched and the bank has sold off or divested large parts of brokerage and research businesses CLSA, Chevreux and Newedge. But the corporate and investment bank still accounts for 55 percent of the listed bank’s balance sheet, according to Jefferies. That calls for more deleveraging.

A renewed focus on retail and commercial banking in France and Italy may be less exciting. But at least it’s a strategy that the bank’s agricultural stakeholders might welcome – if only because it will sound so familiar.

 

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