Credit Agricole Seeks an End to Its Greek Imbroglio

In 2006, Georges Pauget, then Credit Agricole SA Chief Executive Officer, bought Greece’s Emporiki Bank, calling it a “perfect fit.” Six years on, the purchase has put the French lender in the eye of a perfect storm.

A possible euro exit for Greece has made Credit Agricole the foreign bank with the most to lose. France’s third-biggest bank has 23 billion euros ($29 billion) of Greek loans on its books, the largest such holdings for a foreign bank. Although Greek loans represent about 3 percent of parent Credit Agricole Group’s lending commitments, they amount to at least 40 percent of the country’s private cross-border debt claims.

Gains made in the polls by Greece’s anti-austerity parties before the June 17 election have raised the specter of the country having to abandon the euro, driving Credit Agricole to reassess support for its unit. Costs from Greece’s euro exit may reach 6 billion euros for the bank, Citigroup Inc. analysts Kinner Lakhani and Florent Nitu estimated.

“The Greek vote’s outcome will influence Credit Agricole’s decision on whether to stay or to quit the country,” said Jerome Forneris, a Marseille-based fund manager at Banque Martin Maurel, which manages $8.5 billion euros, including Credit Agricole shares. “If Greece exits the euro, what’s the interest of keeping a unit there?”

Growth Quest

The bank is considering all options for Emporiki should Greece leave the euro, including combining it with a local rival or walking away, according to a person with knowledge of the bank’s plans. The situation is in flux and nothing will be decided until after the elections, said the person, who declined to be identified because the deliberations are private.

Credit Agricole spokeswoman Anne-Sophie Gentil declined to comment on the bank's plans.

Before today, shares of the bank, based near Paris, tumbled more than 78 percent since early October 2009, when Greece signaled its borrowings were higher than estimated, triggering Europe’s debt crisis. The Bloomberg Europe Banks and Financial Services Index fell 43 percent in the period. Credit Agricole shares today rose 3.5 percent to 3.05 euros.

A quest for growth drove Credit Agricole and its French rivals BNP Paribas SA (BNP) and Societe Generale SA (GLE) to markets outside their home turf in the last decade. French banks held $541 billion in private and public debt in Greece, Ireland, Italy, Portugal and Spain at the end of December, the most by foreign lenders, Bank for International Settlements figures show.

Argentina Exit

For Credit Agricole, founded in 1894 as a French farmers’ bank, the Greek imbroglio shows the pitfalls of its foreign forays. A decade ago, after Argentina defaulted on its debt and ended its peso peg to the dollar, Credit Agricole abandoned its units there, Banco Bisel SA, Banco de Entre Rios SA and Banco Suquia SA, taking a 106 million-euro hit, its website said.

The Greek situation may be stickier.

“Leaving by shutting the doors and handing the keys to local authorities isn’t possible as in Argentina,” said Benoit Petrarque, an Amsterdam-based analyst at Kepler Capital Markets who has a “reduce” rating on the stock. “Reputation risk and legal risks inside of the euro zone are much stronger.”

Jean-Paul Chifflet, 62, Credit Agricole (ACA)’s CEO since 2010, told shareholders last month that the bank will continue operations in Greece so long as it remains in the euro, depositors trust banks and the French lender’s local unit has access to the nation’s central bank’s emergency liquidity.

Emporiki Options

Credit Agricole got a break last week when it reached an accord with Greek authorities that will let Emporiki access emergency funds from the central bank should the need arise.

“It’s like an insurance policy, if there were deposits outflows, they would be covered,” Citigroup’s Lakhani said.

Chifflet shrank funding, including capital, to the Greek unit to 5.2 billion euros at the end of March compared with 11.4 billion euros a year earlier. He said he’s “personally involved every day” in the unit.

Emporiki’s loans -- close to 10 percent of Greece’s gross domestic product -- exceed deposits, requiring Credit Agricole to provide funding to help close the gap. Credit Agricole’s accumulated losses from Emporiki represent on average more than 15 million euros for every one of the unit’s 337 branches. The loss since 2008 is about 4,000 euros per client.

Credit Agricole may try to merge its Greek assets with a local firm and exit the country, although finding a buyer won’t be easy, said Julian Chillingworth, who helps manage 16 billion pounds ($24.9 billion) at Rathbone Brothers Plc in London.

Sufficient Reserves

“Possibly, Credit Agricole may like to sell the Greek unit, if they find someone to get rid of it to,” he said. “But do you see anyone interested?”

Parent Credit Agricole Group’s reserves are large enough to withstand “extreme” Greek losses, Chifflet said.

And although the bank expects that Greece will remain in the euro, the risk of “further adverse developments” may lead it to reconsider its support to Emporiki and “its overall strategy,” the Greek unit said in a statement last month.

Credit Agricole’s expansion in southern Europe also makes it vulnerable to contagion worries. In Spain, its exposure totals 11.3 billion euros, with “modest” real-estate risks.

The bank also holds a 20.6 percent stake in Spanish lender Bankinter SA and about 20.5 percent of Portugal’s largest bank by market value, Banco Espirito Santo SA. (BES)

Its Parma-based Italian unit, although one of the country’s most profitable retail banks, has its headquarters and a leading market share in the region struck recently by earthquakes.

‘Stratospheric’ Prices

Credit Agricole’s insurance unit holds 11.6 billion euros of public debt from Greece, Spain, Portugal, Ireland and Italy.

“The ship is solid, but it’s starting to take on water,” said Jacques-Pascal Porta, who helps manage 500 million euros at Ofi Gestion Privee in Paris.

Mostly under state tutelage until the late 1980s, Credit Agricole’s expansion picked up after its 2001 initial public offering. Its biggest purchase remains the 16 billion-euro takeover of Credit Lyonnais SA in 2003.

Credit Agricole, under the leadership of former CEO Pauget and former Chairman Rene Carron, invested 2.2 billion euros in 2006 to buy a majority stake in Emporiki, the least profitable of Greece’s top banks at the time. Since then, Emporiki has been unprofitable every year except 2007, with cumulated net losses for Credit Agricole of 5.3 billion euros.

“The prices paid in Greece and in Spain were stratospheric,” said Francois Chaulet, who helps manage about 200 million euros at Montsegur Finance, including Credit Agricole shares. “Still, you can’t blame them for everything. There was also a political will to create European champions.”

Complex Structure

The French bank’s complex structure partly explains some of its expansions woes. Credit Agricole Group’s 39 French regional banks own a 56 percent stake in the listed Credit Agricole SA. About 2,500 small, local lenders closely held by their 6.7 million customers form the bulk of the regional banks. The heads of the regional banks gather monthly to discuss strategy.

“You need to be reactive and to take rapid decisions,” Porta said. “Their governance isn’t the most adapted to face new challenges coming from bad choices abroad.”

Credit Agricole Group, the entity regulators and rating agencies monitor to check compliance with international capital and liquidity standards, had 54.2 billion euros of core Tier 1 capital, or 10.9 percent under Basel 2.5 standards, at the end of March, it said May 11. It expects to reach a 10 percent core Tier 1 ratio under stricter Basel III rules at the end of 2013.

First Loss

While Credit Agricole Group’s core Tier 1 ratio would remain above 9 percent under Basel III in the event of a Greek euro exit, the losses would widen the capital gap between the listed bank and the group’s total reserves, Citigroup analysts Lakhani and Nitu wrote. The group could support the listed bank through a capital increase or through guarantees, they wrote.

Credit Agricole last year had its first annual loss, scrapped its dividend and gave up its 2014 financial targets. The parent group remained profitable.

The bank is closing most of its derivatives business. Chifflet told investors it has cut all proprietary trading. At the end of April, Credit Agricole achieved 91 percent of its target to cut risk-weighted assets by 35 billion euros, part of the effort to comply with stricter capital rules.

Chifflet has put forward the name of Xavier Musca, former French President Nicolas Sarkozy’s chief of staff, to join the bank as deputy CEO overseeing international consumer-banking, asset-management and insurance, Credit Agricole said today.

‘Soldier On’

The bank’s board votes on the nomination next month. Musca will bring “an essential managerial asset,” Ofi’s Porta said.

“He comes with the greatest degree of expertise,” Porta said. “He knows the Greek dossier since he was at the heart of French decision-making.”

Any euro-friendly outcome of the Greek ballot may also provide an upside for Credit Agricole after Chifflet’s steps to “clean” Emporiki, analysts and investors said.

In the first quarter, Emporiki’s deposits rose by 570 million euros as loans fell. Compared with 2006, Emporiki Bank’s staff has shrunk 33 percent to 4,200. Strub, dispatched in early 2009 as Emporiki’s CEO, has cut quarterly labor costs to 66 million euros in the first quarter, a 31 percent drop from three years earlier. In January, he got unions’ approval for a 10 percent wage cut with immediate effect.

“Credit Agricole can try to soldier on,” Chillingworth said. “There isn’t much else they can do, right?”

To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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