Credit Agricole Rises as Banco Espirito Santo Risk Cut

Credit Agricole SA jumped in Paris trading after the bank wrote off its holding of bailed-out lender Banco Espirito Santo SA while boosting profit excluding the charge.

Net income fell 98 percent to 17 million euros ($23 million) from 696 million euros a year earlier, France’s third-biggest bank said in a statement. Ignoring the 708 million euros in costs related to its 14.6 percent Banco Espirito Santo stake and some one-time charges, profit rose to 1 billion euros.

Banco Espirito Santo’s 4.9 billion-euro bailout unveiled by the Bank of Portugal on Aug. 3 will leave shareholders and junior bondholders with losses, while sparing senior creditors and unsecured depositors. Lower bad-loan provisions helped Credit Agricole increase profit in consumer finance and corporate and investment banking and the bank boosted capital. The lender also said it’s starting talks with U.S. regulators on settling a probe into alleged sanctions violations.

The bank’s results show “strong underlying, strong capital, despite Banco Espirito Santo being written down to zero,” said Omar Fall, a London-based analyst at Jefferies International. One of the last equity holdings the bank had was Banco Espirito Santo and “it has not ended well,” said Fall, who has a “buy” rating on Credit Agricole.

’Conservative’ Provisioning

Credit Agricole shares rose as much as 6.6 percent and were 3.6 percent higher at 10.65 euros as of 3:00 p.m. Shares of the bank are up 15 percent this year, valuing the company at about 27.5 billion euros. By contrast, BNP Paribas SA, France’s largest bank, and Societe Generale SA, the country’s No. 2 bank, both dropped 12 percent.

Credit Agricole is entering talks with U.S. authorities after submitting the findings of its internal review into transactions with countries subject to American sanctions, Chief Executive Officer Jean-Paul Chifflet told journalists on a conference call. He declined to disclose how much money it has set aside for the U.S. probe, after the bank said in March it may face financial penalties.

Credit Agricole, which has a “conservative” provisioning policy, has set aside about 1.1 billion euros in total provisions for unspecified litigation, the CEO said.

Asked in a France Inter’s radio interview today whether Credit Agricole sees risk of record penalties similar to that imposed to BNP Paribas SA, Deputy CEO Michel Mathieu said “no.”

BNP Paribas posted a 4.32 billion-euro second-quarter loss last week after a record $8.9 billion penalty for doing business with Sudan and other countries blacklisted by the U.S.

Agricole ‘Deceived’

In its second-quarter earnings Credit Agricole recorded a 502 million-euro charge to reflect its share of Banco Espirito Santo’s losses in the quarter, and a 206 million-euro writedown to cut the value of the holding to zero in its accounts.

Banco Espirito Santo, once Portugal’s largest lender, will be split in two, with depositors and healthy assets joining the newly formed Novo Bank while bad loans and junior creditors stay with the old bank until it can be shut down. Credit Agricole, based near Paris, was Banco Espirito Santo’s second-largest shareholder.

Portugal’s finance ministry said shareholders and subordinated debt holders, as well as board members and former board members directly involved in the events, will have to shoulder the losses, rather than taxpayers.

Credit Agricole, which had five people on Banco Espirito Santo’s board, was “deceived” by the Espirito Santo family and blames “bad practices that were unknown to us and outside of any governance procedure” of the Portuguese bank, Chifflet said.

Credit Agricole is considering legal options “to defend” its interests concerning Banco Espirito Santo, he said.

Banco Espirito Santo plunged 73 percent in Lisbon trading last week before trading was suspended on Aug. 1. The bank had a market value of just 675 million euros.

“The situation is confined to Banco Espirito Santo and it’s not to be excluded that they manage to recoup some money with the legal pursuits,” said Francois Chaulet, who helps manage more than 300 million euros at Montsegur Finance in Paris.

Following Plan

Credit Agricole, which returned to an annual profit in 2013 following two consecutive years of losses, is betting on an economic recovery in its key markets of France and Italy, where growth remains sluggish. The lender said in March it’s targeting at least 4 billion euros of annual net income by 2016, compared with 2.51 billion euros last year.

Credit Agricole’s fully-loaded common equity Tier 1 ratio, a key solvency measure under Basel III rules, rose to 9.9 percent at the end of June from 9 percent three months earlier, it said. That’s ahead of the company’s self-imposed goal of 9.8 percent for the end of 2015.

“Despite the BES situation and its effect on our quarterly accounts, the group is progressing in line with the trajectory set during the announcement of our medium-term plan last March,” Chifflet, 64, said in the statement.

Scaling Back

Credit Agricole’s corporate- and investment-banking profit rose to 261 million euros in the second quarter from 251 million euros a year earlier, helped by higher revenues in its corporate financing business, the bank said.

Societe Generale reported higher profit in the three months through June as earnings jumped at its investment bank and provisions for doubtful loans declined.

Profit from Credit Agricole’s French regional banks fell 8 percent to 235 million euros, while net income at the LCL branch network declined 9.7 percent to 145 million euros.

Credit Agricole cut its balance sheet last year by reducing market risks and selling units such as unprofitable Athens-based Emporiki Bank. It disposed of brokers Cheuvreux and CLSA last year and in May completed the sale of its 50 percent stake in derivatives brokerage Newedge Group.

Credit Agricole’s stake in Banco Espirito Santo was at 23.8 percent at the end of 2010, according to its website.

Founded 120 years ago as a lender to French farmers, Credit Agricole helped the Espirito Santo family regain control of their old bank and insurer after Portugal’s government in 1989 started selling the companies it seized in the 1970s.

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