Credit Lyonnais: This Time, The Bailout May Work

A state rescue will force the bank to sell off assets

Here they go again. France wants to throw billions more into the black hole that is Credit Lyonnais. Bailouts of the state-owned bank are a recurrent nightmare for European Union competition officials. Three times in the past five years, French governments have upped the ante for rescuing Credit Lyonnais from mismanagement and incompetence. After months of haggling and missed deadlines, the EU and the French government hope to announce on May 20 a final rescue plan of about $16.6 billion to replenish the bank's capital and clean up losses on bad loans.

The latest bailout is twice as big as the previous one, in 1995. But this time, the cure is likely to take. Face-saving compromises will probably allow Credit Lyonnais--the world's 22nd-largest bank, with $250 billion in assets--to remain French and independent. It will stay that way at least until it is privatized in October, 1999. But the deal is humbling and may pave the way for an eventual buyout by a foreign rival. "It will be difficult to keep the bank in French hands," says Yves Burger, banking analyst at Standard & Poor's Corp. in Paris.

OPEN FLOODGATES. Financial markets seem to agree. Credit Lyonnais' nonvoting shares have doubled in price since January--outpacing the Paris CAC-40 index, which has risen 32%--in anticipation that a foreign buyer might pay a hefty premium to get a toehold in the French market. Selling Credit Lyonnais all in one piece to a foreign lender could fetch double the about $5 billion that an initial public offering would likely raise, according to J.P. Morgan & Co. A takeover of this French icon could even be the event that finally triggers a wave of cross-border banking mergers in Europe.

But to keep its head up and appease nationalist sentiment, the French government would prefer to sell the bank through an IPO on the Paris Bourse. Even so, such an offering might not preserve the bank's French status. European Union officials have forbidden the French government to put in place a noyau dur, or hard core, of shareholders, who could keep the bank under French control. One solution could be for Germany's Allianz and Japan's Nippon Life Insurance Co. to take small stakes prior to a flotation.

Either way, shorn of about $105 billion worth of assets, the bailed-out Credit Lyonnais will be a much shrunken outfit. EU Competition Commissioner Karel van Miert tried to force Credit Lyonnais to shed all its European operations outside France as a condition for the bailout (table). But, after a lot of haggling, it will be allowed to keep capital-market operations in London and private banking in Switzerland and Luxembourg. As the price of this compromise, the bank must sell about $12 billion worth of assets in Asia and North America. In addition, it will have to sell 22% of its retail branches in France. "It will be a French national bank with major operations in New York and London," says Robin Monro-Davies, group CEO of Fitch IBCA Ltd., a credit-rating agency in London.

Finding buyers for all the assets Credit Lyonnais is slated to sell might be a struggle. J.P. Morgan analyst Catherine Woods says the asset disposals could rack up losses of $80 million in 1998 alone. Just how big they'll be eventually depends on the still undecided sell-off candidates in the U.S. and Asia. But of activities known to be on the block, French officials were really eager to keep only the bank's retail unit in Belgium. It generates a 10% return on equity and so should sell for a profit. But Credit Lyonnais paid too much for a half share in Germany's Bank fur Gemeinwirtschaft in 1991 and could take a hit on a sale. Likewise, two Spanish banks, acquired from Banco Santander in 1988 for $1 billion, have lost money consistently and will prove hard to sell.

The prize that remains is Credit Lyonnais' domestic banking operation. A 6.9% market share of loans and 6.4% in deposits make it France's fourth-largest bank. Since 1994, CEO Jean Peyrelevade has trimmed costs, reduced his headcount by 15%, to 32,500, and turned around results. Last year, French operations earned $648 million before tax. Analysts say that, buoyed by strong economic growth, profits could jump 53% this year.

But Credit Lyonnais is not out of the woods yet--even if Brussels approves the final bailout. Its $6 billion in loans to Asia give it the biggest exposure in that region of any French bank. Peyrelevade may also have to pull the plug on the bank's wholesale capital markets operations as a condition of the bailout. It may also be squeezed down to a niche player in project finance and a small-time investment bank.

As a result of its cutbacks, Credit Lyonnais certainly won't become the global powerhouse it aspired to be in the 1980s. It may even lose its independence. But at least Credit Lyonnais seems poised to escape from the troubles that have dogged it for years.

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