Under new chief executive Philippe Brassac, Crédit Agricole has simplified its oft-criticised group structure and devised a new plan, aimed at strengthening core business lines, improving operational efficiency and transforming its digital offering. Brian Caplen reports on how these changes will affect the bank. 

Credit Agricole

In his first year as chief executive of France’s largest bank, Crédit Agricole, Philippe Brassac has definitely made his mark. After years of analysts complaining about the complexity of the group’s structure, Mr Brassac has taken bold moves to simplify it.

He has put in place a medium-term plan that combines a big digital push with the cost cutting considered prudent against a backdrop of economic uncertainty and tighter regulation.

Also, he has been extremely vocal on some aspects of regulation – particularly the so-called 'Basel IV' – as well as the economic storm clouds he sees on the way in Europe.

Eureka moment

Mr Brassac's big move is the decision to restructure the group – dubbed the ‘eureka’ project. At present, a network of 39 regional French mutuals own a 56% stake in the listed entity Crédit Agricole SA (CASA), which then holds a 25% stake in the mutuals.

Under the new plan, to be enacted in the third quarter of 2016, the regional banks will buy back the 25% stake for €18bn. This will increase CASA’s fully loaded core equity Tier 1 to 11%, while a guarantee by the regionals to CASA, called ‘switch 1’, which analysts were never fully happy about, will be unwound. Dividends will be paid in cash instead of scrip.

A report by Germany-based ratings agency Scope Ratings, published before the announcement, said: “All these factors [in the regional-CASA relationship] inherently create a raft of different prerogatives and responsibilities, which can create difficulties in communication. More importantly, they add a strong layer of complexity to a business model that is essentially simple.”

Mr Brassac says: “The metrics of Crédit Agricole were not so easy to understand and the market kept telling us we were too complex. The new structure clarifies everything and improves the ability of the market to assess our main metrics. It normalises the prudential backdrop of CASA since with this operation our solvency is immediately at 11%.

“One of the positive impacts of the plan is that all the capital issues are off the table and it paves the way for a new medium-term business plan absolutely focused on customer ambitions and on the synergies we can achieve in both revenues and costs.

"We have an opportunity to increase revenues and reduce costs independently of all the economic uncertainties.”

Multi-channel approach

Under the medium-term plan, called ‘Strategic Ambition 2020’, as well as the simplification of the capital structure, the bank lists three other priorities – reinforcing the model of universal customer-focused banking through digital transformation; the strengthening of the core business lines such as retail, savings, insurance and specialised financial services; and improvements in operational efficiency.

Mr Brassac acknowledges that the restructuring will have an impact upon CASA’s balance sheet because it will no longer receive revenues from the regional banks. “There is a dilution of income for CASA of almost 9% and this is why we needed to present a medium-term business plan with a target return on equity of more than 10% in 2019.”

He lays great emphasis on the links between CASA’s business lines and the regional banks. “The model is designed to link all the businesses so that each customer can get all the services of an international bank. The aim is to be a multi-channel distributor taking advantage of this [local] relationship with the customer, which is really our trademark," says Mr Brassac.

“We are often asked: ‘What are our aims in digital and how many branches will we close as a result?’ So we have to explain that for our customers this is not the problem we have to solve. Our decision is to be fully multi-channel so that customers can contact us by any channel they want to use.”

Onwards and upwards

Mr Brassac has been with the group since 1982 and became chief executive of Crédit Agricole Provence Côte d’Azur in 2001. He took on the role of chief executive of Crédit Agricole in May 2015.

The past few years have been tough ones for Crédit Agricole as for many other European banks. It built up its international and investment banking operations prior to the crisis only to have to resize them in the post-Lehman environment. The bank took a hit of €2bn after offloading Emporiki in Greece to Alpha Bank in 2012. It sold a final 7.6% stake in Spain’s Bankinter in 2013 and the write-down of its stake in Portugal’s Banco Espírito Santo (BES) more or less wiped out second-quarter earnings in 2014. In 2015, it paid a $787m penalty to the US authorities over sanctions violations related to Iran, Sudan, Cuba and Myanmar.

But the latest set of annual results do suggest that the bank is putting past troubles to rest. CASA recorded a 43.9% increase in net income from 2014 to 2015, to €3.87bn. The group figure was an increase of 21.7% to €6.43bn. The bank’s results statement says: “Despite the context of moderate growth and ongoing low interest rates, which is not helpful for the retail banking business, CASA’s earnings grew strongly in 2015, supported by the upturn in business lines that made major refocusing efforts between 2011 and 2013.” International retail, for example, produced net income of €328m in 2015 compared with a net income group share loss of €500m in 2014, due to the BES write-down. In Italy, CASA subsidiary Cariparma’s net income group share rose by 19.2%. First-quarter 2016 results were hit by the restructuring costs, with CASA suffering a fall in net income group share of 71%, from €784m to €227m. 

Crédit Agricole

Steering the right path

Savings management and insurance accounts for the largest slice of CASA’s earnings.

The initial public offering of Amundi, one of Europe’s largest asset managers, took place in November 2015 and was designed to give Sociéte Générale, which it jointly owned with CASA, an exit. While the asset manager saw strong net inflows in the first quarter of 2016 of €13.8bn, this was offset by a negative market effect leaving assets under management stable at €987bn. Inflows from Asia were particularly strong.

CASA's corporate and investment banking (CIB) experienced a drop of 11.7% in net income group share to €739m in 2015, with volatile markets hitting credit operations. The bank states that its exposure to oil and gas – long a source of discussion among analysts – represents just 2% of CASA’s exposure at default and is both diversified and of high quality.

Mr Brassac says: “The mix of activities is important for CASA. In a universal banking model, activities may change in profitability over the years but it’s necessary to keep them all to serve our customers.

“When I am asked about the weight of CIB activities I always respond that they are at the size that we need for our customers and for the economy. The reduction of the balance sheet at CIB [operation] has already been done. We really have a CIB that is useful for us but we do need to optimise the use of risk-weighted assets [RWAs] under the new regulations.”

Mr Brassac says that CASA's return on equity from CIB is 9% to 10% and the value at risk is less than €50m, which is less than that at most of the bank's competitors. But it is regulation and the economic outlook that make Mr Brassac cautious about the future.

“This situation [of low and negative interest rates] cannot last. It doesn’t produce growth. There is also a contradiction in current policy between flooding the banks with liquidity so we can distribute loans and kick-start economic growth but, at the same time, the regulators are asking us to deleverage our balance sheets. Things may get worse under ‘Basel IV’ with a tougher approach to RWAs. Our bank’s medium-term plan is based on stable RWAs. It would have been possible to raise them but we didn’t do that because we don’t yet know the future rules. There is great concern that there may be new, even higher equity requirements.”

Mr Brassac is concerned that when quantitative easing does end, there may be problems with sovereign indebtedness and, for this reason, it is important to be prudent in setting the direction of the bank from here on. 


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