EUR 850.00 For Business Accounts Only

Morningstar | Credit Agricole Posts Strong 3Q, but Credit Losses Below Midcycle Levels Reduce Earnings Quality

Credit Agricole SA reported net income of EUR 1.1 billion for the third quarter, virtually the same as it did in the corresponding period last year. However, the corresponding quarter was inflated by nonrecurring income of around EUR 100 million, so underlying growth was therefore stronger at around 17%. We maintain our fair value estimate of EUR 11 as well as our no-moat rating.

Credit Agricole recorded decent revenue growth of 6% year on year, somewhat inflated by the first-time inclusion of the acquired Italian banks. Revenue from insurance activities was especially strong. Corporate and investment banking was resilient under tough market conditions where substantial pressure on trading revenue was more than offset by good growth in structured finance. The strong growth in lending activity in France took us by surprise and might be a trend that warrants further investigation. Cost growth of only 4% translated into strong preprovision profit growth of 10% as the high operating leverage resulting from Credit Agricole’s relatively high cost/income ratio kicks in. Credit costs are now at a level just slightly above half of where Credit Agricole sees its midcycle credit loss ratio to sit--or 28 basis points currently versus midcycle guidance of 28 basis points. To our mind, this diminishes earnings quality; however, most banks in Europe are now entering this stage. But unlike Credit Agricole, most banks do not provide such explicit guidance on their respective midcycle credit loss ratios, which makes it difficult to evaluate the relative quality of earnings.

We continue to believe that one cannot completely disregard the capital adequacy of the listed entity, Credit Agricole SA, in favour of the much stronger capital adequacy of its unlisted parent, the Credit Agricole group. We were therefore quite bemused by the speculation in the market regarding a possible share buyback due to Credit Agricole SA being overcapitalised. A 11.5% core equity Tier 1 ratio for Credit Agricole SA does not suggest overcapitalisation by any stretch of the imagination. Investors in the credit instruments issued by Credit Agricole SA do not disregard Credit Agricole SA’s capital adequacy, and therefore it has consequences for Credit Agricole SA’s cost of funding. In the unlikely event that Credit Agricole SA needs a capital injection, this will be done on terms favourable to the parent, not to the minority investors in Credit Agricole SA. We therefore urge investors not to ignore the capital adequacy of Credit Agricole SA in favour of the capital adequacy of the Credit Agricole group.