Credit Agricole Drops as Consumer Unit Slump Erodes Profit

  • Profit at the LCL network drops 32% to 85 million euros
  • Earnings at the large customers division tumble by 51%

Credit Agricole SA dropped the most in three months after first-quarter profit plunged, hurt by a decline at the LCL domestic consumer business where the bank expects margins to remain under pressure.

Net income fell to 227 million euros ($259 million) from 784 million euros a year earlier, Credit Agricole, based near Paris, said in a statement Thursday. That’s in line with the 220 million-euro average estimate of five analysts surveyed by Bloomberg. The bank took a 399 million-euro charge tied to its overhaul.

Europe’s largest banks have been hurt by record-low interest rates squeezing income from lending as turbulent financial markets deterred clients from trading. Credit Agricole, led by Chief Executive Officer Philippe Brassac, announced in February that it would sell stakes in about three-dozen regional banks in an 18 billion-euro transaction to help simplify its structure.

The first quarter showed a “weaker-than-expected set of results,” said Federico Salerno, a London-based analyst at MainFirst Bank AG with an outperform recommendation on the shares. “Given the amount of derisking and deleveraging carried out in the past several years, this may come as a surprise to some.”

Credit Agricole plunged as much as 5.9 percent and traded at 8.73 euros at 1:14 p.m. in Paris, down 4 percent. The shares have dropped about 20 percent this year. BNP Paribas SA has lost 16 percent, while Societe Generale SA has declined 22 percent.

Revenue at LCL, the French retail-banking unit, was “strongly impacted” in the quarter by a decline in net interest margins -- the gap between what it pays for funding and generates from lending. Profit at the business fell 32 percent to 85 million euros and margins are expected to remain “under pressure” in 2016, the bank said.

Brassac, 56, told analysts on a call on Thursday that LCL has “no structural problem that we are not able to solve” and will meet its targets, when quizzed about the management’s strategy for the unit. The bank aims to reach a cost-to-income ratio, a measure of efficiency, of about 63.5 percent at the unit, down 6 basis points.

“The performance at LCL is really weak,” said Marco Bruzzo, a Paris-based fund manager at Mirabaud, which manages about 8.5 billion Swiss francs ($8.8 billion). “That’s disappointing.”

Debt Trading

Global equity markets had their rockiest start of the year since 2009, eroding securities revenue at a time when European lenders are already grappling with tougher regulatory scrutiny.

At Credit Agricole, a slump in debt trading contributed to a 51 percent profit drop at the unit that includes the investment bank. While corporate and investment-banking businesses suffered in the first two months of the year, March and April were of “better quality,” Chief Financial Officer Jerome Grivet told journalists.

Provisions for credit losses at the large customers unit -- which includes the corporate and investment bank -- rose 51 percent to 122 million euros in the first quarter, partly because of money set aside for energy-related financing. Credit Agricole’s exposure to oil-and-gas lending was $25.9 billion at the end of March, down 8 percent from the end of the year, with 82 percent to investment-grade counterparts, according to slides.

‘Big Pressure’

European banks are also squeezed by record low interest rates. Credit Agricole started charging institutional clients for deposits, with the business facing “big pressure,” Grivet said. The lender hasn’t yet decided whether to pass it on to corporate customers, he added.

Profit from savings activities, including asset manager Amundi SA, private banking and insurance, rose 10 percent to 379 million euros in the first quarter. The wealth-management business, which had 148.3 billion euros in assets under management by the end of March, was “penalized by the market environment, resulting in a wait-and-see attitude among customers,” the lender said.

Credit Agricole, which has the largest market share in French consumer banking, is still targeting a return on tangible equity, a measure of profitability, of more than 10 percent by 2019, the CFO said. The lender plans to achieve 900 million euros in annual gross cost savings as it streamlines some businesses and invests in others.

The bank’s common equity Tier 1 ratio -- a measure of financial strength -- increased to 10.8 percent at the end of March from 10.7 percent at the end of 2015.

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