The corporate and investment banking arm of France’s Crédit Agricole has been through several rounds of strategic repositioning and its chief executive says its final shape is now in sight.

After a strategic review in mid-2008, Calyon, the investment banking arm of France’s largest bank by capital, Crédit Agricole, produced a restructuring plan. The plan envisaged scaling back the bank’s key areas of focus, namely structured finance, credit and equity derivatives. A week later, Lehman Brothers collapsed.

The wind-down of the non-core portfolios proceeded slowly amid rock-bottom valuations for structured credit. In December 2010, Patrick Valroff, chief executive of what had been renamed Crédit Agricole Corporate and Investment Bank (CIB), resigned. He was replaced by Jean-Yves Hocher, a veteran of the network of regional banks on which Crédit Agricole is built, and later head of its insurance operations. Within months of Mr Hocher stepping into his new role, the eurozone liquidity squeeze hit, and the supply of dollar funding to French banks threatened to dry up. The bank responded by squeezing treasury portfolios and selling loan portfolios worth $10bn at about 80 cents on the dollar, to shrink dollar funding consumption as quickly as possible.

Mr Hocher also intensified efforts to reduce the bank’s risk-weighted assets to meet growing regulatory capital demands. The EU’s Capital Requirements Directives (CRD III and CRD IV) added about €80bn to Crédit Agricole’s risk-weighted assets, especially in the markets business. The bank has sold market portfolios equivalent to €50bn in risk weighted assets, and the aim is to bring the balance sheet back to its pre-CRD III size of €120bn by 2016.

Paying the price

Structured credit and derivative portfolios incur particularly high capital charges in the new regime. In March 2012, Crédit Agricole sold much of its credit default swap book to US hedge fund Blue Mountain and subsequently offloaded the collateralised debt obligations on its trading books. “This came at a price, but it was much less costly than raising new capital to comply with the required regulatory ratios,” says Mr Hocher.

In 2013, Crédit Agricole transferred its legacy structured products and equity derivatives business to BNP Paribas. The result is a much leaner corporate and investment bank at what is now France’s second largest bank by capital (behind BNP Paribas), although Crédit Agricole still has the largest gross total asset base. Mr Hocher says Crédit Agricole CIB now has a clear strategy centred on its role as a debt house, with the intention to distribute about 80% of loans originated to maintain leaner capital and funding usage. On the markets side, daily value at risk is typically no more than €10m.

“Going forward, recurring profitability will be much less volatile than in the past. The remaining reduction in risk-weighted assets will be mostly by technical means and optimisation, rather than selling further loans or portfolios,” says Mr Hocher.

Identifying key clients

The aim now is to achieve return on equity of 12%, which will require an unwavering focus on what the optimum client base for the corporate and investment bank should look like. Mr Hocher identifies this as about 800 corporates and 400 to 500 financial institutions worldwide, of which perhaps two-thirds are based in Crédit Agricole’s home region. Elsewhere, the bank looks at whether countries have the required number of large corporates with investment banking needs or a significant number of financial institutions, or ideally a combination of the two. If neither characteristic is present, then Crédit Agricole CIB has pulled back, departing from about one-quarter of its markets worldwide to leave a target group of 30 countries.

“In Japan, most corporates are very liquid, so their bond or loan needs are limited. But financial institutions are cash-rich and looking for somewhere to invest, which makes them good clients for loan or private bond placements from Europe,” says Mr Hocher.

While concentrating on financing as the centrepiece of the business, Mr Hocher says the return on equity target will require changing the “biology” of the corporate and investment bank to gather all its capabilities around the client. This means loan originators coordinating with distribution teams to ensure that part of the financing commitments can be sold into the market, as well as offering ancillary services such as hedging, merger and acquisition advice, and equity capital markets (ECM).

“We have always been strong in offering financing to key clients for their development, and we are flexible and innovative in our approach to help meet clients’ needs. We offer our balance sheet against clients’ commitment to buy other CIB products and that is how we build long-term relationships,” says Mr Hocher.

Central strengths

Of course, the corporate and investment bank arm’s first client is the Crédit Agricole group itself, which includes 39 regional banks and foreign subsidiaries, as well as insurance, private banking and asset management divisions. The regional banks’ small-and-medium-enterprise (SME) customers are not necessarily natural investment banking target clients. But Mr Hocher says the more internationally focused SMEs have complex needs and Crédit Agricole CIB helps the regional banks provide them with a full service.

For the large-cap client base, Crédit Agricole is focusing on a number of key segments and capabilities. Mr Hocher wants staff to have the expertise to compare clients knowledgeably, and he has organised sectoral teams around the bank’s traditional strength in asset-based lending. These include teams in infrastructure finance, natural resources and transport financing. The bank has a market-leading aircraft leasing team with a particularly strong track record on minimising balance sheet use and distributing deals, while the reserve-based lending team includes several engineers with an expertise in analysing the risks around size estimates for natural resource deposits.

“Our next step is to reorganise the work of all lending lines in the coming months in a similar way, including our services to other banks and financial institutions,” says Mr Hocher.

Streamlined business

The most substantial reorganisation has been in the bank’s equities businesses, with the sale of Credit Lyonnais Securities Asia (CLSA) minus its Taiwan unit to China’s Citic completed in July 2013. In May 2013, Crédit Agricole CIB completed the sale of its European equities brokerage Cheuvreux to standalone broker Kepler, which had already entered a joint venture to take on equities trading from Italy’s UniCredit. Crédit Agricole retains a 15% stake in the combined Kepler Cheuvreux.

“Our intentions for these two brokers were very different. There was never much synergy between the beautiful Asian brokerage at CLSA and Crédit Agricole CIB, because the rest of the bank was relatively small in Asia. Of course we will take opportunities to go on working with CLSA and Citic. We may one day be interested in the Chinese market, especially as the renminbi offshore market develops and we are looking at a few other targeted markets in Asia,” says Mr Hocher.

By contrast, Cheuvreux operated in Crédit Agricole’s core western European market. But the Kepler deal stemmed from an assumption that margins would continue to ratchet ever tighter in the equities business. That led Mr Hocher and his colleagues to the conclusion that it would be better to form fewer, larger independent regional brokers capable of competing in their chosen markets with the top-tier global investment banks.

The difficult part of the integration process is complete, with 300 job losses at Cheuvreux. Under French law, Crédit Agricole CIB was obliged to offer them new roles within the group, but in practice only about 10% took up this possibility. So far, Mr Hocher is pleased with the combined entity, which demonstrated its potential in April 2013 by acting as bookrunner on the €2.28bn accelerated bookbuild for the sale of French media company Lagardere’s 7.4% stake in aerospace giant Eads.

“Kepler Cheuvreux is more than the sum of its parts and we can offer a more comprehensive service now with a greater reach. Flows are picking up again, and this will allow us to demonstrate a strong ECM track record to our clients,” says Mr Hocher.

He adds that there are flows of clients in both directions between Kepler Cheuvreux and Crédit Agricole. And if a third bank were to reach the same conclusions as Crédit Agricole and UniCredit about the future of the European equities business and join the partnership, that could only strengthen Kepler Cheuvreux’s market position in the region.


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