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Not Sexy, But Steady: A French Bank's Playbook

Not Sexy, But Steady: A French Bank's Playbook

(Bloomberg Opinion) -- A large European bank that believes it can grow by doing more of the same is an exception worth reflecting on. Peers should take note: Credit Agricole SA is an example of how diversification helps.

The French lender outlined its three-year plan on Thursday. It expects revenue to grow by 2.5% each year, in part through cross-selling more banking and insurance products. Costs are expected to fall, and net income should grow by 600 million euros ($678 million) to 5 billion euros by 2022. The goal is to make a return on tangible equity of more than 11%.

Credit Agricole revamped itself after the financial crisis, through a series of acquisitions and disposals, to reduce its reliance on trading and bolster capital. It now generates between 25% and 30% of revenue from each of its principal divisions: consumer banking, large customers and asset gathering. Each is expected to grow at a similar rate under the new plan.

To attract new business, the bank plans to invest in IT. Crucially, it is increasing the amount devoted to building new services and platforms. It wants to grow in payments to try and capture market share among small and medium-sized companies. The lender also wants to attract more funds to manage by targeting so-called mass affluent customers.

The tone of senior executives is as bullish as could be given there is no grand redesign or ambitious restructuring. Buoyed, perhaps, by achieving his previous targets ahead of schedule, Chief Executive Officer Philippe Brassac says the group sees “no glass ceiling.”

Its move into asset gathering has been prescient. By building Amundi SA into a $1.6 trillion fund manager, it has created a cushion against declining revenue and shrinking margins in the bread-and-butter business of commercial and consumer lending. In April, Credit Agricole bought Banco Santander SA’s main custody and asset-servicing activities to compete in a business dominated by U.S. firms.

The result is that over the coming three years, net interest income will drop by 2 percentage points to 33% of total revenue while fee and commission income should grow to 43% of sales from 41%.

All the same, investors don’t appear to be overly enthused by the new targets. The shares swung between a 2.7% decline and a 1.6% gain on Thursday. Still, over the past three years they have outperformed their peer group, gaining 18% against a 10% decline in the STOXX Europe 600 Banks Index. Credit Agricole trades at a narrower discount to the book value of its assets than domestic rival Societe Generale SA, but broadly in line with BNP Paribas SA.

Investors may have been disappointed by a revenue target that was more-or-less in line with analyst expectations and the cost-cutting targets could be more ambitious. The cost-income ratio is targeted to drop 2 percentage points to less than 60%. The lender still suffers from a complicated balance sheet, relying on guarantees from regional banks that own it to reduce risk-weighted assets.

The plan also rests on a somewhat optimistic macro outlook, given its basic assumption that interest rates could rise by 100 basis points or more over the coming three years. That looks heroic, given European Central Bank President Mario Draghi’s Thursday announcement that rates will stay at their present levels at least through the first half of 2020.

Credit Agricole has built a universal bank that may not grab headlines, but is at least relatively steady. If you were another French lender with a large trading business to pare back – like Societe Generale – it would be an enviable position to be in.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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