In most banking mergers, the predicted savings take several years to come through. Sometimes they are never fully realised and profits are usually dented as the merger process unfolds.
Crédit Agricole, however, which merged with Crédit Lyonnais in mid-2003, has already achieved E211m of its 2004 targeted synergies of E275m. The bank’s first-half results, announced in September, were also sharply up, with a 46.5% increase in net income after goodwill and integration-related costs.
In The Banker’s Top 1000 listing, Crédit Agricole is now the world’s second largest bank, with $55,435m of Tier One Capital; in 2003, the bank placed fifth with $35,661m.
“The results are very satisfactory since we achieved them during the integration process,” says Crédit Agricole’s chief executive Jean Laurent. “We have already realised the main steps of the integration, and it will be fully completed by the end of the year.”
Focus on strategy
Now attention is turning to the future strategy of the merged businesses. All areas will be required to have a detailed development plan in place early next year.
“We need to do an exercise where we evaluate our position across the board in all businesses. We are working on this matter today and we will produce detailed development plans by next spring,” says Mr Laurent. “We have to realise the full potential of what is effectively a new group. It’s a dramatic change that we have been through. Every business has been reorganised, and for most businesses the size has doubled.”
The bank’s assets, for example, have grown from $609.1bn in 2003 to $1,034.2bn. But pulling this together into a single entity has not proved the insurmountable task that some observers might have envisaged.
This is illustrated by the first-half 2004 results, in which net income after goodwill hit E1,075m, up 46.5% on the first half 2003. The second quarter showed a 31.4% increase to E569m.
How was the merger achieved so effectively? Unusually for a banking merger, the focus was on business lines rather than technology platforms and back offices. Many potential pitfalls have been avoided in retail by maintaining the separation between Crédit Agricole’s 40 regional banks and Crédit Lyonnais’ centrally organised network.
“Merging the two networks with so many different IT systems and back offices would have been extremely difficult. It would not have been the most efficient or the best solution. Instead, we focused on the business and how we can sell core products across the networks,” Mr Laurent says. “The first step in the merger [for all the businesses] was to decide on the post-merger structure of the new company, its organisation and its legal form. Then we named a manager for each business line. We have a very decentralised organisation, and these are the real bosses who have the means to organise and deal with all the staffing issues and the trade unions. This way, all the businesses went through the merger process at the same time.”
The trickiest part was corporate and investment banking, says Mr Laurent, because while this was a separate function in Crédit Agricole, in Crédit Lyonnais it was part of the general bank. Calyon was created out of the two operations. This involved the transfer of E140bn of assets out of Crédit Lyonnais, together with 2,000 staff. When putting together Calyon, the role of the IT specialists was crucial in bringing the operations together.
The merger was also made difficult by the departure of some key bankers. In corporate and investment banking, net banking income totalled E1,956bn, down 20.4% year on year. Operating expenses dropped as headcount was trimmed, and risk-related costs also fell dramatically. The segment generated net income before goodwill amortisation of E502m, up 19.8% year on year.
“We had to merge the IT platforms, reorganise the back office, and strengthen the teams. The strategy of Calyon is to have leadership in France, and we want to develop our activities in Europe and, for some businesses, the world. We have a relationship with all the leading corporates in France and many European companies, but we don’t want to be a global player,” maintains Mr Laurent. “Our priority is to finish the integration, and most of it will be finished by the end of the year. Then, in 2005, we will review the strategies of all our businesses.”
While Crédit Agricole has operations overseas and many thousands of people working outside France, the group’s fortunes are very much tied up with the French economy.
“The outlook for the French economy is a little better [than before], although not much,” said Mr Laurent. “The growth rate is 2.5%, which is better than last year. The surprise is that consumption is really good.”
Absorbing change
Asked about the constraints of France’s restricted working hours, he replies: “I expect evolution not revolution. It has been difficult operating bank branches with the restrictions. We have had to reorganise to take account of it.” And on the question of financial regulation in general, Mr Laurent says: “I don’t think there will be a change in the general trend for more regulation. We just have to absorb it.”
Crédit Agricole is, of course, focusing hard on costs. The cost income ratio has fallen by 2.2 percentage points to 68.9%, compared with 71.1% in the first half of 2003. Crédit Lyonnais plans to lower its ratio to 65% by 2007/8. “The aim is to improve the efficiency of Credit Lyonnais, with lower cost and better revenues.” Judging by the progress made in gaining merger synergies so far, this aim seems achievable.
