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ArchiveJune 1 2000

Foreign banks exploit gap in French defence

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As the race to acquire French banking interests intensifies, consolidation is the only escape route. Samer Iskander reports.

It is generally agreed that HSBC Holdings’ recent approach to acquire Crédit Commercial de France (CCF) for e11bn ($10bn) has set the standard for potential bids for French banks.

The acquisition, currently undergoing regulatory and legal procedures, is a textbook example of how to avoid the pitfalls that threaten cross-border transactions in general and banking takeovers in particular. In the weeks preceding the announcement, Charles de Croisset, chairman of CCF, kept Jean-Claude Trichet, the central bank governor who also heads the main banking regulatory authority, informed regularly of the talks’ progress.

The terms of the deal were also tailored to avoid job cuts and otherwise inevitable trade union unrest. Most significantly, perhaps, was the message – addressed to the government – that “decision centres would remain in France”.

In other words, CCF would maintain its headquarters in Paris and continue to be run by its French management team. The rules have never been written but this would almost certainly fall foul of the European Union’s single market legislation, which makes it illegal to discriminate against companies based in other member states.

EU law states that neither the French government nor financial regulators are allowed to block a bid for a French company on the grounds that the bidder is foreign. However, both warned clearly last year that they would find ways to stop foreign banks from entering the battle between Banque Nationale de Paris, Société Générale and Paribas. French and foreign bankers now acknowledge that Mr Trichet’s condition – that regulatory clearance would only be granted to deals that present a "clear and concerted solution" – effectively means a hostile takeover would be blocked in the name of financial stability.

Since the HSBC/CCF deal was announced at the beginning of April, speculation has intensified that the floodgates are now open for cash-rich foreign banks to pounce on their French rivals, whose market capitalisations are among Europe’s lowest, with the notable exception of BNP-Paribas.

With CCF, the smallest – and most obvious – target out of the way, analysts believe Crédit Lyonnais and SocGen are next in line. SocGen has made no secret of the fact that it is negotiating alliances with a number of foreign institutions, including UK insurance company CGU, and Spain’s largest bank, BSCH. Both helped SocGen to escape BNP‘s hostile bid last year.

Daniel Bouton, chairman of SocGen, has made it clear the company intends to weave a web of European alliances – a halfway strategy offering the potential for cross-selling and cost synergies, with the added benefit of shielding the bank from potential predators. Lyonnais’ case is less clear-cut. The bank, which was privatised just under a year ago, is still recovering from heavy losses of the early 1990s.

Having operated with an exemption from internationally-agreed capital adequacy ratios for the past five years, it only met the eight per cent Basel ratio requirements at the end of last year. In theory, the terms of Lyonnais’ privatisation make it almost immune to a hostile takeover. A group of friendly shareholders controls a third of the capital, with the French state owning another 10 per cent.

In practice, however, a bidder which manages to convince owners of the floating shares – roughly 55 per cent of the capital – could gain an outright majority. Furthermore, the pact binding the so-called “partner shareholders” – Crédit Agricole, Allianz, Axa, Commerzbank, Banco Bilbao Vizcaya Argentaria, Banca Intesa and CCF – will become significantly less stringent in July next year.

Lyonnais’ vulnerability was highlighted recently by chairman Jean Peyrelevade. At the annual shareholder’s meeting in April, Mr Peyrelevade urged core shareholders to protect Lyonnais if it came under attack and pleaded with them not to consider launching a bid of their own. His fears were inspired by two recent incidents that took the market by surprise: SocGen’s acquisition in December of roughly four per cent of Lyonnais shares and the announcement in April that Dresdner Bank of Germany had built a 3.6 per cent stake by buying shares in the market.

The incidents were a stark reminder that affordable banks – those that can be bought for less than e20bn – have become such a rare commodity in the euro-zone that potential buyers are willing to join a queue for them, at the risk of having to fight a bidding war. Agricole is perhaps even more concerned than Lyonnais, given that it has plans to absorb the company in the longer term.

The government inspired such a notion by giving Agricole the leading role among Lyonnais’ core shareholders by selling it the single largest stake: 10 per cent. Although Agricole is France’s biggest bank, with one-fifth of all current accounts, its ability to fight a bidding war is severely constrained by its mutual structure, which means it does not have access to the capital markets.

Seeing its promised partner starting to slip away, Agricole has accelerated a two-year-old plan to adopt a hybrid identity that includes a stock market-listed entity. The mutation, due to be completed by early next year, is proving delicate to set up because of the self-imposed condition of keeping the bank’s mutual culture intact.

Agricole acknowledged its fears implicitly when it asked Lyonnais to strip Dresdner of its voting rights by invoking an obscure clause in the privatised bank’s statutes. Signs of discord between Lyonnais and its biggest shareholder have also muddied the picture. They include Lyonnais dragging its feet before forging commercial agreements with Agricole negotiated before privatisation.

Agricole, which is still struggling to integrate Indosuez, the investment bank it bought from the Suez conglomerate in 1997, is also thought to be hesitating. Although Lyonnais is showing all the symptoms of being “in play”, with at least three potential buyers lined up, analysts believe its fate remains in the hands of Mr Peyrelevade.

The authorities’ aversion to hostile bids in the banking sector effectively means French bank managers can virtually choose their owners. Some of Mr Peyrelevade’s shareholders – including Agricole – suspect him of playing them off against each other.

While analysts are almost unanimous in their belief that France needs to catch up with its neighbours in terms of banking consolidation, several factors explain why the sector seems to be marking time. First, other banks are watching BNP tackle the integration of Paribas, which should shed light on how well synergy forecasts translate into reality.

Second, most bankers have yet to come to grips with HSBC’s surprise purchase of CCF. Because HSBC is based outside the euro-zone, the competitive implications of the deal are proving more difficult to gauge than most observers expected. Other priorities distracting French banks from focusing on their external growth strategy include the realisation that the country is falling behind in the online revolution.

Bankers are gradually waking up to the fact that their Internet strategies are not only less advanced than foreign competitors’ but behind the online projects of their biggest French customers. On the positive side, the banks are expected to continue to benefit from favourable economic conditions both this year and next. France is expected to have the strongest GDP growth rate among the EU’s big countries.

The first quarter of this year was the most profitable period ever for French banks. This resulted from a combination of record activity in all sectors – retail and corporate lending, brokerage and investment and wholesale banking – and a sharp fall in provisions. Barring an international financial crisis like the emerging markets turmoil of 1998, bullish conditions should prevail in the foreseeable future. The property market is rising at a steady, sustainable, rate and unemployment is falling gradually, with the twin benefits of lower defaults and a higher demand for loans.

This should provide banks with the means to fund their online strategies, as well as other development plans. Some analysts say the only drawback is the risk that the favourable backdrop and strong financial performance will lead French bankers to underestimate the pressure for consolidation that will sooner or later migrate from the rest of the euro-zone.

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