THE NAME OF the game in banking today, as we all know, is about ditching aimless global ambitions and re-discovering virtue in areas where you can add value. It’s a mantra pretty much every bank in the world has adopted – although some more than others, it’s true.
Of all the major banks out there, few have gone through as much pain as or been forced to resize and reshape their business to the extent of Credit Agricole. As has been well documented, the French bank was badly burned in the dual aftermaths of the global financial crisis and the eurozone sovereign crisis. The investment bank in particular just had a lot of assets, positions and businesses in a lot of the wrong places.
A huge amount of change has already taken place, but the reform process continues. Even with all of the deleveraging, offloading and unwinding, Credit Agricole still has a chunky €1trn-plus balance sheet, pushing it into the lower tier of global systemically important banks. It’s been a painful and arduous journey to-date and there’s still a year to go before we’ll know if the targets of the firm’s medium-term plan for 2014–2016 will be hit.
With such a major overhaul, it’s no surprise the senior management team has seen some churn. The AGM this past week saw a raft of executive changes as the bank transforms and morphs to meet the challenges of its new strategy focused around retail banking in the group’s two home markets of France and Italy. That’s a vast change for a group that has a big ugly investment bank embedded in its core structure.
The latest executive to spend more time with his family is chairman Jean-Marie Sander, who announced his departure at the AGM on Wednesday – he will be gone by the end of the year. That was the same day, of course, that Jean-Paul Chifflet stood down as CEO to make way for 33-year veteran of the bank Philippe Brassac. CFO Bernard Delpit has also walked; his successor, Jerome Grivet (another internal appointment) started this past week. To misquote Oscar Wilde, to lose one senior executive may be regarded as a misfortune; to lose two looks like carelessness. I don’t know what losing three could possibly be but tranquil succession it ain’t.
Beyond changes to the nameplates on the doors, the appointment of Brassac into the top job signals very clearly who got the upper hand in the politically-charged and conflict-ridden internal state of affairs that had developed between the powerful Federation Nationale du Credit Agricole (which sets group direction and of which Brassac was secretary general) and Chiffler and Sander, who ran the organisation’s lead bank Credit Agricole SA. It was the FNCA that forced Sander’s hand.
I don’t know what losing three executives could possibly be but tranquil succession it ain’t
THE FORMERLY DERIVATIVES-HEAVY corporate and investment bank has become more of a support player in the grand scheme of things. It’s been radically downsized, had its RWA stack and allocated capital cut back, and has switched to a small number of core products where it can add value. Equity and commodity derivatives were discontinued (remember that sale of €12.5bn of equity derivatives positions to BNP Paribas?), CLSA was flogged to CITIC, Societe Generale took all of Newedge, and a number of other portfolios were offloaded, including credit derivatives.
Warehousing is out the window, the debt business has switched to an originate-to-distribute agency model and the core focus is European. The 2016 financial targets set for the corporate and investment bank are a 3% increase in revenues relative to 2013; a cost-income ratio of 53%, a RoTE of around 12% and a VaR limit of €30m.
Below divisional level, the financing business, which will consume two-thirds of CIB RWAs, has been given a +2% revenue tasking and a target cost-income ratio of 40%. Capital markets and investment banking, which account for the remaining third, have been given a +7% revenue target on a C/I ratio of 64%.
The investment bank will be pushed to “support the intermediate-sized retail bank business customers, particularly abroad” and to “develop disintermediated financing solutions for group customers and for the group’s own needs”. OTD is king. There’s a focus on broadening loan distribution to new investors, building market share in euro bond underwriting (CA-CIB currently ranks a creditable fifth), deepening the cross-sell between the various segments (financing, capital markets and IB) and consolidating its world-class franchises in structured finance.
TO BE FAIR, it all sounds fairly reasonable and do-able. First-quarter results were pretty solid and suggest the bank may be on track to meet its targets. Group net income rose 2.6% year-on-year, including the addition of a €175m charge to the Single Resolution Fund. Excluding that charge and accounting silliness due to IFRIC 21 restatements, net income would have risen 26.3%.
Within CIB, capital markets and investment banking revenues rose 38% while structured finance was up 11% for a combined uplift of 24%. Like other banks, the rates and currencies business line benefited from first-quarter volatility and managed a 35% increase in revenues; the bank also reported solid momentum in bond origination. In structured finance, aircraft and infrastructure financing were highlights.
To misquote another cliche, one quarter doesn’t make a medium-term plan. But in a game of step-by-step progress in a confounding economic and market environment, I imagine shareholders will take that all day long.
