Credit Agricole Net Falls 98% On Banco Espirito Santo

Big 5

Credit Agricole SA (ACA), France’s third-largest bank by market value, said profit was almost wiped out in the second quarter on charges tied to its stake in Portugal’s bailed-out Banco Espirito Santo SA.

Net income dropped 98 percent to 17 million euros ($23 million) from 696 million euros a year earlier, the bank, based near Paris, said in a statement today. That compares with the 387.4 million-euro average estimate of five analysts surveyed by Bloomberg. Credit Agricole booked 708 million euros in costs related to its 14.6 percent holding in Banco Espirito Santo.

The Bank of Portugal on Aug. 3 unveiled a 4.9 billion-euro bailout that will leave Banco Espirito Santo’s shareholders and junior bondholders with losses, while sparing senior creditors and unsecured depositors. Excluding the Espirito Santo losses and some one-time financial costs, second-quarter profit at the French lender rose to 1 billion euros as bad-loan provisions fell.

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,” Fall said.

Shouldering Losses

Credit Agricole shares rose as much as 5.5 percent to 10.85 euros as of 9:10 a.m. in Paris trading, extending its gain this year to 16 percent and valuing the company at about 27.7 billion euros. By contrast, BNP Paribas SA (BNP), France’s largest bank, has fallen 11 percent this year, while Societe Generale SA (GLE), the country’s No. 2 bank, has fallen 12 percent.

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 was Banco Espirito Santo’s second-largest shareholder.

The French bank 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.

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, Chief Executive Officer Jean-Paul Chifflet told journalists on a conference call.

U.S. Probe

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.

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, Chifflet said. 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.

BNP Paribas posted a 4.32 billion-euro second-quarter loss last week after a record penalty for doing business with Sudan and other countries blacklisted by the U.S. Societe Generale reported higher profit in the three months through June as earnings jumped at its investment bank and provisions for doubtful loans declined.

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.

“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.

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.

“There is a very good performance of the corporate finance business and the international retail side functions well,” said Francois Chaulet, who helps manage more than 300 million euros at Montsegur Finance in Paris.

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.

Scaling Back

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.