Crédit Agricole Announces High Net Losses in Midst of Bank Reforms

Crédit Agricole.Photo: Wikimedia Commons/Michiel1972

Crédit Agricole.
Photo: Wikimedia Commons/Michiel1972

Last Wednesday, February 20, French bank Crédit Agricole, announced a net loss of 6.47 billion euros for the year 2012. This statement sets the bank’s balance sheet “in the red” at a net negative of 3.8 billion euros. Great losses for the first three quarters of 2012 had already been declared, and this most recent announcement only confirms the extent of the losses.

Crédit Agricole S.A. is the largest retail bank in France and the third largest French bank by market value. Known as the “green bank,” it has its origins in the agricultural credit of the 19th century. 39 French retail banks – including Crédit Lyonnais (LCL) – own the majority of the group. Its key services lie in French and international retail banking, specialized financial service, asset management, insurance and private banking, as well as corporate and investment banking.

In October 2012, the Credit Agricole S.A. sold their Greek branch, Emporiki, to the rival Greek bank Alpha Bank for the symbolic amount of one euro, indicating the bank’s minimal worth. This transaction was precipitated by a series of events. In 2006, Credit Agricole acquired Emporiki as a part of a European expansion plan. However, the financial crisis continued to degenerate, and the Greek economy plummeted. As a result of Greece’s financial crisis – the cause of extensive losses in loans and government bond holdings – the Greek lender, Emporiki, left the French bank with billions of euros in bad loans. Today, this acquisition is said to have cost Crédit Agricole S.A. a total of 3.9 billion euros, contributing to a total loss of 8.4 billion euros in 2012. The 8.4 billion euros accounted for exceptional losses, goodwill write-downs and provisions. Additionally, there was the loss of an Italian retail bank and a 20% stake in Portugal’s largest publicly traded bank.

Nonetheless, the solvency (a measure of the ability of a company to meet its long term financial obligations) of Crédit Agricole has remained constant. The bank has maintained an optimistic Tier 1 capital ratio of 9.3%, when subjected to the Basel III regulations. The bank expects to reach an ambitious ratio of 10% by the end of December 2013.

While Crédit Agricole was counting its debt, the long awaited French bank reforms, promised by President Hollande during his campaign, were announced in December 2012. These reforms directly affect chief French banks that conduct both retail and investment banking activities, such as Crédit Agricole, Société Générale, and BNP Paribas. Although more lenient than expected, the reform requires French banks to ring-fence proprietary trading activities in separate, self funded entities by 2015. Banks must separate rather risky proprietary activities that ensure profit for the bank itself using its own monetary reserves from retail banking activities.

The National Assembly voted in favor of the law on February 19, with 315 supporting votes and 116 opposing votes. Apart from the main separation between speculative banking activities and the banks’ retail role, the law also obligates that banks disclose activities regarding foreign transactions and fiscal hubs. The new legislation also set limits on the amount of fees imposed on clients.

Most, if not all, financial regulations and laws imposed seek to reduce and eliminate the risks brought to the fore by the financial crisis of 2008. The argument behind Hollande’s reform is to reduce the fragility of universal banks – banks with retail and investment functions – and the harm they inflict to retail customers. Universal banks, as opposed to non-universal banks, have the advantage of greater market liquidity. They can fall back on customer finances rather than defaulting. Yet, these particular banks are especially vulnerable to liquidity shortages, which would result in a situation similar to 2008. By imposing a “ring-fence” between risky transactions and deposit functions in the legislation, the French government seeks to protect Banks from irreparable mistakes.

In the same spirit, on February 7, Germany put forward a legal proposition for universal banks. Germany would like to separate retail banking functions and proprietary trading activities when the latter exceeds 20% of the balance sheet, or 100 billion Euros. This law would affect the two prominent German banks, Deutsche Bank and Commerzbank, as well as the first regional state bank LLBW. Imposed in January 2014, the banks will be given until July 2015 to complete the effective separation.

Looking to punish the actions leading to the 2008 financial crisis, the EU desires a strict cap on bank executives’ bonuses. Such a limit will reduce the incentive for risky behavior conducted in 2008 and curb corporate and banking excess. Both the European Parliament and the 27 European finance ministers must sign off on the proposition. Banks complain that, given the already strict Basel III regulations, they were not expecting pay regulations. Some claim that compensation limits will harm the ability to recruit high caliber candidates for bank jobs. This resulting shift in the applicant pool represents an intrusive regulation of employee compensation and livelihood, in the eyes of many banks.

In the face of these changes and challenges to come, the chief executive of Crédit Agricole, Jean Paul Chiffet, optimistically stated, “2012 was a year of transformation and refocusing. We are turning a page and will develop a new medium-term plan this year. It will show that we are moving forward on solid foundations.” Hopefully, Chiffet’s words will come to fruition given the fact that Crédit Agricole S.A. has over 21 million clients in over 60 countries.

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