What progress has the group made over the past few years?
Georges Pauget: We have achieved our financial targets in terms of cost synergies and we have achieved our targets in terms of return on equity, both globally and in each activity. That is why we consider that the period of integration of Crédit Lyonnais is now over. In terms of the group structure, we are often the number one in a particular activity in France, and in the top 10 in Europe. From time to time we are in the top 10 worldwide, but that is only in very specialised areas.
We have structured all the organisations of the group along business lines. For each business line we have one or more subsidiaries, with the business line identifying strongly with the subsidiary. We have merged the Crédit Agricole corporate and investment banking (CIB) activity with the CIB of Crédit Lyonnais Indosuez.
We have separated the CIB activity and the retail banking activity within Crédit Lyonnais. Now we have rebranded Crédit Lyonnais as LCL and we have created a new company inside Crédit Lyonnais dedicated to retail banking. This is completely different to the regional banks of Crédit Agricole. The overlap between the two is less than 2% of clients.
We have a new CIB, which is called Calyon. We also have two main networks, the regional banks of Crédit Agricole and LCL. We have shown that they are completely different and we are working to reinforce the differentiation of the two. We are developing a common policy between the two networks in terms of IT systems and processes to obtain economies of scale that the group’s new size allows.
We had to improve the organisation of the two networks and ensure that the people inside them did not compete directly. Now we have demonstrated that we are beginning to win market share. We are investing in advertising and marketing, especially with the re-branding of LCL.
To what extent have you cut costs?
GP: The cost synergies were mainly in CIB. In retail banking, we realised the cost-cutting more progressively. It takes longer to realise the benefits of cost-cutting in retail banking and in our 2004 business plan for retail banking, we set targets for cost/income ratio. Our retail bank has the best cost/income ratio of any bank in France, of around 55.
The situation for LCL is not so good, with a cost/income ratio of around 73, but we are forecasting this will fall to 65 by 2008. That would take it to around the same level as our other competitors.
In asset management, we have merged the two companies. Our next step, taken at the end of last year, was to buy a 65% stake in Nextra, the asset management company of Banca Intesa. In terms of life assurance, we have merged the IT systems and integrated systems. In each branch of Crédit Agricole and Crédit Lyonnais, there is the same IT system.
At the global level, we have merged 80 direct subsidiaries. In terms of the caisses regionales [regional banks], we announced in 2000 that our target was to reduce the number from 48, the level at which it stood then, to between 35 and 40. We are now at 40.
Mergers between the regional banks is not part of our plan as that might damage client relationships. But we do intend to change the back-office processes and to merge the IT systems. The management of our regional banks is very close to the commercial networks and the client. This enhances our competitiveness in the sector.
The strategic development plan talks about overseas expansion and it says you have the money to finance an acquisition programme abroad. Could you tell us about your plans? The view from outside France is that Crédit Agricole is a giant institution in France but quite a small player internationally.
GP: You will know that 65% of our net bank income comes from France and 35% derives from business outside France. Our target is to balance the two by 2008. In CIB our business is much more substantial abroad; in consumer credit, the level is 40% abroad and the international business is growing more rapidly than the domestic side.
While we are very international in some business lines, the retail banking position accounts for the overall imbalance. Some 90% of our retail banking business is in France, where we have more than 24% market share. We have almost twice the weight of any of our competitors in terms of retail banking.
What type of bank would be a suitable fit for Crédit Agricole?
GP: How do we define our target? How do we plan to use the €5bn we have allocated to acquisitions?
First, we explored each business line to define the capacity for internal growth and the need for an acquisition. We then crossed this view with a regional view, to integrate the economic outlook or potential of the region. We know that we can expect to do acquisitions in countries where we know people. But in other countries, where we don’t know people, we don’t expect to make acquisitions. We have no projects in the US because we don’t know the market and in retail banking we have no competence there.
We have made an investment plan which appears to be very diversified in terms of activity and in geography.
Gilles de Margerie, CFO Crédit Agricole
Gilles de Margerie: There will not necessarily be just one acquisition. There can be a string of medium-sized acquisitions. We have recently bought the Egyptian American Bank [at the beginning of January, Crédit Agricole announced it had bought a 40.83% stake in EAB from Amex, and a 33.81% stake from Bank of Alexandria. The bank has bid for the remainder of the stock. The price for 100% of EAB stock has been put at €431m]. That can be repeated. We can acquire medium-sized targets.
What are your plans for your stake in Banca Intesa?
GP: There is a shareholder agreement until April 2008. Until then, all that we can do is well defined. We can do things inside the shareholder agreement but we can increase our position only marginally. Unless there is deep change inside the Italian banking system, our position in Intesa is stable.
With the departure of Antonio Fazio, the governor of the Bank of Italy [following a scandal involving a controversial bank takeover in December 2005], the climate has changed in Italy. Whereas in the past, it might not have been politically so easy to buy a bank in Italy, now it might be regarded differently. What is your response?
GP: The political and economic environment in Italy suggests that Italy needs the same major banks as other countries. I think it may be a policy that may evolve. Italy will be more open to foreign banks. But not just foreign banks. It will also be open to internal mergers.
We need a global view. We are open to an evolution, but according to the opportunities. We can be very flexible.
Could your stake with Nextra be a model for how you proceed internationally?
GP: We have two targets in that deal. The first is to reinforce our partnership with Intesa and reinforce the profitability of our stake in Intesa. The second is to build, at the group level, an asset management company which is stronger. It is now number four or five in Europe.
Some banks in Europe have decided to leave asset management. But we are of a size where we can stay as a European asset manager. So we can supply our network to other banks. Intesa was very interested in us supplying big networks. We have a special know-how in integrating all our products.
You said that the €5bn could be used to make many small acquisitions rather than one large one. Is that more likely?
GP: Can we imagine new mergers between major western European banks? That is the main question today. We are looking at the evolution of this market, but its outcome is impossible to forecast. It is a matter of opportunity. We have integrated this evolution inside our plan, because our plan is a contract with the market. Outside the plan we are very careful about any opportunities that can appear.
Are you putting a limit of €5bn on a future merger?
GM: €5bn is only our free cash flow. It is not all the capability of the group to finance a merger. The €5bn figure is a reference scenario. It is the typical amount we can do over the next few years. We have a variety of targets, small and medium size, that can result in a €5bn acquisition. That is what the free cash flow enables us to do easily. If it were a larger acquisition, we would have to use leverage or issue new shares.
What are the key issues regarding an acquisition programme such as you have outlined?
GM: Today the biggest risk is overpaying for other banks, as asset prices get very high. I am not unhappy being in a group where you can pick your moment to do your investment. We will not be paying any silly prices.
Where do you want to go in investment banking?
GP: We are number 10 in Europe. Our strategic target is to be sufficiently strong to be competitive. CIB has its own development but it is also a supplier for the other big-line businesses of the group. We have done a joint venture between Calyon and Crédit Agricole Asset Management. This ensures we add synergies to manage our structured funds and to create new products. CIB is our research and development in corporate banking. If we don’t want to lose the value added that appears in this activity, we have to have a strong CIB.
CIB supplies all the organisations of the group, for example, in managing all the treasury operations. From time to time, it can help in M&A. Our two networks are both suppliers of M&A operations for CIB.
It’s a little different to the CIB structure, which is free standing. Our CIB organises all the synergies with all the business lines. We will create value added, in line with our efficiencies.
You have stated that you wanted Calyon to be a specialist in equity derivatives?
GM: No. We have a very small business in equity derivatives. We are looking at targets that are a fraction of what the bigger players have. We are growing this area because we have good people to conceive the products and we think we have an approach to distributing the product that will enable us to have a profitable equity derivatives business, which will enable us to get a few hundred million euros in income. We are not looking at billions like some of our competitors.
So you are not in the business of being an independent competitor to the other major French investment banks in terms of CIB?
GM: A few years ago, the motto was to be a bulge bracket firm or disappear. That has been proved wrong. BNP and Société Générale have proved there is another successful model and that is not being a bulge bracket firm. We are not that different to them in terms of size.
They are more profitable in return on equity but we have done remarkably well in increasing the profits of our CIB over the last year. We think that CIB can be a good asset allocation for our capital. We have gone from 40% of our capital allocated to CIB three years ago to around 33% today. CIB is making the same return as the group’s average return. That is fine with us. We think we can be lastingly successful with that type of capital allocation and that level of profitability.
We have recruited a significant number of people to CIB over the past year. The senior management set-up is there, but we will be recruiting some junior staff.
Are the returns in investment banking equivalent to that in other parts of the business?
GM: We did 16.5% returns in the CIB area and, on average, the group does 16% and the business lines do closer to 20%. We have reached the target we set, which was 15% return for CIB, and we are happy with that. It is very straightforward; it is a business that is profitable. People thought you needed to be among the top five globally or die, and that hasn’t happened. When you look at the various lines, most of them are viable at their present scale.
We have had a great year in privatisations in 2005 but that year was particularly good. We had a great score in 2005, and there will be less in 2006.
You give value-at-risk figures but not in relation to the returns, so people cannot see where the risk is in relation to the profits.
GM: We publish roughly the same figures as our competitors. We are not a very large trading house. We have more customer-driven business than trading business. We have had a normal return on value. Because we are somewhat smaller, the cost/income ratio in capital markets or the return on equity is not as strong as it would be in the bigger competitors. There is an element of scale there.
Returns are satisfactory, but we want to beef them up and have higher returns in the capital markets than we have at present. But we have made enormous progress in the past two years.
Is there one part of Calyon that you would like to develop?
GM: Equity derivatives is one part where we have been growing rapidly and we have been doing very well. But it is a fraction of the size of some of our biggest competitors. Over three years, net banking income at Calyon should go up a billion, of which 60% will be in capital markets. There will be €400m additional net banking income in equity derivatives. These are very moderate figures.
The joint venture between the asset management guys and the structured products guys can do a substantial fraction of that. It is not an irrational allocation of capital to have roughly one third of group capital in CIB.
In the Strategic Development Plan, you talked about acquisitions in Europe and the Mediterranean basin. How would that work?
GP: The issue at the moment is the price of the asset. That is why we prefer small targets. If we can buy small targets, we can grow up with them and help them to grow.
Is there any scope for expansion in the North African countries?
GP: We have a good position in Morocco and if we can, we will invest in Tunisia and Algeria. We have indicated that we were looking around the Mediterranean Sea.
There is a perception that the bank is a great national institution, but it hasn’t absorbed the lessons of US banking, of a more global outlook. How much would you want to adopt the US style?
GP: We are very open. We are fighting with the Postal Bank and the French government, because we consider the government helps postal banks and that this is unfair competition. We are very open to change, we are open to information coming from Brussels about how the market could be more open. It is not a problem for us to be in a competitive market. France’s CIB market is very competitive. There is little difference between France and Spain in that respect.
GM: Four years ago, the company was not listed. A decade before that, the company was not even private. It was state-owned. We went to the market, we understood the constraints of being a listed company.
When we bought Crédit Lyonnais we knew domestic growth was limited because we were too big. So growing the company implied being more international. We knew this implied investing, financially, but also in people, because we are not very international.
We have managed over the past few years rapid internationalisation of specialised financial services, of asset management, and we have started forming a pool of human resources to buy and manage retail banks abroad.
Gradually, we are becoming a more international and diversified group from a basis that was very domestic and much more specific.
GP: In 2000 we defined our strategic project and, we bought Crédit Lyonnais to be the leader in France. We wanted to be sure that we were number one in retail banking. We then said that we would be one of the main actors in Europe. Hence, as we integrate Lyonnais, we have made acquisitions in business units. In consumer credit it was possible. In asset management, we did Nextra, just after the merger of Crédit Agricole and Crédit Lyonnais.
