Credit Agricole's plan to simplify its complex structure, with a promise of stable investor returns and stronger capital base, lifted its share price by 14 percent on Wednesday to eclipse Societe Generale as France's second-biggest bank by market capitalisation.
Chief Executive Philippe Brassac, providing detail on plan that was first announced last month, said it would end criticism from analysts, shareholders and regulators that the cross-shareholding between Credit Agricole's listed entity and its co-operative parent banks was a drain on capital.
"We want to put an end to this unbearable paradox that we are a big, well-capitalised bank while doubts linger over the fragility of the listed structure's capital," Brassac said. The reform would focus Credit Agricole mainly on asset management, insurance and investment banking activities, while reducing the share of retail banking operations in its underlying net income to 20 percent from 36 percent, based on 2015 results.
The loss of the parent banks' contribution to the listed entity's earnings would, however, carve 470 million euros ($523 million) out of this year's net income of 3.52 billion euros. The bank, which flagged an increase in cross-selling within the group, said its listed entity would sell back its 25 percent stake in the parent banks for 18 billion euros. The listed entity would repay 5 billion euros to the parent banks to unwind an intragroup guarantee mechanism, while also lending them 11 billion euros over 10 years to fund the move.
"At the end of the day we will have a much more understandable and simpler group, because what used to be entangled will be disentangled," Brassac told a news conference. Brassac said the move would allow the bank to generate a return on tangible equity (ROTE) of at least 10 percent between 2016 and 2019. The bank had previously flagged expectations for 2016 ROTE of 12 percent.
Rivals BNP Paribas and SocGen signalled this month that they might miss their targets for 10 percent return on equity in 2016. SocGen's share price fell 13 percent on February 11, when it reported lower than expected quarterly profit. Credit Agricole's plan will also allow it to pay its 2016 dividend in cash rather than in shares, effectively increasing its capital base, while sticking to a payout ratio of 50 percent of earnings.