Börsen-Zeitung : Mr. Grivet, Italy has the markets on tenterhooks. Crédit Agricole is quite heavily invested there. How do you see the latest developments ?
Jérôme Grivet : Italy is clearly our second home market. We have been in Italy pursuing all our activities for more than 30 years now. Italy accounts for 15% of the net income of Crédit Agricole SA, the listed entity, but less than 10% of the Group's total net income. The political situation in Italy looks challenging, but the economic situation looks quite stable.
How is that ?
Last year's growth came to more than 1.5%; this year should be similar. Italy's budgetary situation is better than France's. It has a primary surplus, which France has yet to achieve. The balance of trade is positive. Overall, the economic situation is improving, especially in the regions where we do business. Although we are aware of the political turbulence, we are nonetheless optimistic about Italy's long-term prospects.
So, you are not dreading a scenario like the one you experienced in Greece with your former subsidiary Emporiki ?
The situation of both countries is very difficult and the situation of our business in Italy is not the same as it was in Greece or at Emporiki. We may have expanded too quickly in Greece and may not have made the right choice of bank. We were only there for a relatively short period and were unable to establish the same activities that we have in Italy, so the situation is not comparable.
What are you doing to protect yourself against risks in Italy ?
We constantly monitor all exposures and make sure the quality of our credit risk with respect to players on the Italian market is good. This is the case. In our retail banking business in Italy, the level of non-performing loans is far below that of the entire Italian market.
How high is it ?
It currently stands at 11%. This is high for German and French standards, but low for Italian standards. We monitor our credit risks in Italy and ensure that we have balanced activities; that is, that all customer deposits cover the financing of the loan book. This is the case.
You see no reason to change anything ?
We have an eye on the situation. Take, for example, the Italian government bonds that we hold. We monitor the sensitivity of our solvency to bond pricing. Our vulnerability is very low here. If there is a change between the spread of Italian government bonds and the swap rates of 100 BPS, this will result in a reduction of just three basis points in the Tier 1 capital ratio of Crédit Agricole SA. So, it really is not an issue.
Of late, there has been renewed speculation about a merger of Unicredit and Société Générale. Is a consolidation of European banks imminent ?
I think not. For one, I have doubts about the prospects of any such consolidation. A big merger is justifiable only if it achieves major savings. If you merge a Spanish bank and a German bank, there are hardly any opportunities to cut costs. They do not have the same products in retail and commercial banking, and
customers in the two countries behave differently. From a cost standpoint, it is hard to justify a cross-border merger of banks with a strong regional presence. Besides, there are many regulatory hurdles in place.
Even so, the ECB would like to see a European banking champion.
It has pointed out that the market in the United States, a country slightly smaller than the European Union, is in the hands of six to seven banks. That is not the case in Europe. But the USA has a domestic market, whereas Europe does not.
So you think the speculation about Unicredit/Société Générale is unfounded ?
I do not comment on rumors concerning banks that are not part of our Group. But I can tell you this: We are not considering this type of cross-border merger.
Does that mean for as long as there are regulatory hurdles in place? What if they were removed ?
Let me remind you of the first point I made. This sort of merger is untenable if there are no cost synergies. I believe that a transaction like this can only be initiated if cost synergies provide legitimate financial reasons to do so. I fail to see how that is possible.
But you do not rule out smaller acquisitions.
We have made minor acquisitions. We are not looking into this type of acquisition at this time. There is the possibility that we may do so in the future. However, several conditions have to be met. First, we have to have the financial resources to finance any acquisition. Second, it would have to be an incremental rather than a transformational acquisition. Third, we have to be certain that we will achieve at least a 10% return on investment after three years through cost synergies.
In what area would you be interested in acquisitions like this?
We specified the preferred activities for this in our strategic plan: asset management, private banking, minor acquisitions in private banking in Asia, Monaco and Italy, but also in retail banking in Italy.
It would appear that French companies operating in Italy are facing growing resistance. They have acquired many businesses in Italy in the last five years.
Unlike these companies, people in Italy see us as being Italian and not as a French bank on the hunt for Italian banks. Italian authorities know that we have been in Italy for more than 30 years. This is why our recent acquisitions were not seen as aggressive foreign acquisitions.
What about Germany, the second most important foreign market after Italy ?
We have no tradition of retail banking in Germany, but we do pursue nearly the entire range of our other activities there, such as corporate and investment banking and asset management. I do not see us building a retail banking business from the ground up or by way of a takeover.
Why not ?
You do not build a retail bank from the bottom up in a mature market such as Germany. There are plenty of banks here already; perhaps too many. If you buy up a cost-intensive business such as retail banking in a country where you do not already have a footprint, there is no basis for cost synergies. The price to be paid for this business cannot be justified. This is why our idea is to expand our other activities in Germany and to try to achieve as much synergy as possible between them.
How much do you want to grow in Germany ?
We will prepare a new strategic plan next year. Then we will set even more specific targets for countries such as Germany. We have stepped up our presence in Germany in terms of both size and profitability over the past two years. We will continue doing that.
What business activities do you want to expand in Germany ?
In corporate and investment banking, we initially focused on the biggest companies. Now we are also addressing large medium-sized enterprises with an international outlook. Other activities that we intend to develop further include asset management. With Amundi's acquisition of Pioneer, we now have a network to market our products. We can develop all activities further and do not have to make any acquisitions to do this. Germany accounts for 2% to 3% of our net income.
Are you also prepared to provide more capital for Germany ?
We are prepared to provide more risk-adequate capital for financing activities in corporate and investment banking, where our business model is based on the famous "distribute to originate" model. Over the past two or three years, we have redoubled our presence in financing while simultaneously reducing our risk level.
And how is the retail banking business coming along in France ?
In Europe, France, alongside Germany, is probably the most competitive market. Six banking groups share 90% of the market. All these groups need to gain new shares or at least to defend what they have now. That is good from the customer's standpoint.
Bank fees are still higher than in Germany, though.
Germany is perhaps even more competitive in terms of pricing. But the fees in France are very low compared to Italy or the United Kingdom. Real estate loans are very cheap. These days, you have to pay a fixed interest rate of just 1.45% on a 20-year loan. There really are very aggressive offers. Therefore, the only way for banks to continue making money in France is to cross-sell as much as possible. But we also sell more and more consumer and car loans and asset management products.
How much does Crédit Agricole S.A. depend on retail banking in France ?
It took some time after the restructuring, but we are now seen as being more like BNP Paribas rather than Société Générale. In other words, as a listed bank where the French retail banking business contributes just a small share of revenues and results. We have by far the largest market share in retail banking in France. The Group has more than 25 million private customers. However, CASA only has to compensate the pressure from LCL's retail banking business with just over five million private customers because the regional subsidiaries are not accounted for there.
LCL's revenues declined again in the last quarter.
Yes. This is because real estate loan renegotiation came to a halt. We had €45 million in fees in the first quarter of 2017 and none now. That is the main reason.
What do you expect LCL to do over the full year ?
Revenues should at least remain at the same level and then gradually increase. We closely monitor the cost base. We do not expect risk provisions to increase, so net income could rise. We are aiming for the Group's net income to increase. The first quarter results are in line with our targets for 2019/2020. We aim to achieve net income of €4.2 billion in 2019.
New competitors such as Orange Bank are on now the mass market in France. What is Crédit Agricole doing to prepare for this ?
The first online banks were launched 20 years ago, and we are constantly adapting to this situation. But now more and more providers like N26 are entering market. Just because these providers open accounts does not mean they are winning customers or generating revenue. You are not going to earn money by merely collecting deposits, issuing free credit cards and paying the ECB 40 basis points to park deposits there. Of course, we cannot ignore these new competitors. We have to respond and do what we have been doing for 20 years—adapting our entire offering to new technological possibilities.
How are you going to do that ?
We need to better understand how customers' behavior is changing to better respond to their needs—with greater agility, flexibility and service to customers. However, we do not believe that these new competitors will challenge us at the core of our profitable activities. Crédit Agricole has now launched an offer called Eko, the price and terms of which are similar to what newcomers are offering: a €2 monthly fee for a bank account, a payment card, no overdraft protection, and an app, of course. This offer wins a lot of new customers for us—around 70,000 since it was launched. However, that amounts to just 11% of all new customers. This means that 90% of our new customers opt for the more comprehensive offering; that is, better service at a higher price.
You don't believe in a sea change in French retail banking ?
We believe in constant changes, and of course it is up to us to master this challenge.
What about the branch network ?
LCL and the regional banks of Crédit Agricole are taking different approaches. LCL has only 5 to 6% market share in France and needs to reduce its costs. To this end, we are merging branches that are often just a few hundred meters apart in big cities. That is why we are talking about branch mergers rather than branch closures.
What about the regional banks of Crédit Agricole ?
They have a market share of 25 to 30% and in some areas even more than 50%. They often have the advantage of being the last supplier standing. For these banks, it is not a question of reducing the number of branches, as they are often the only ones left in their region within a radius of 15 to 30 kilometers. What's more, these institutions have a historically low cost-to-income ratio.
How far will Crédit Agricole go in reducing the number of branches ?
We started with 1,900 branches at LCL. We have reduced this number by 250. This may not be the end of this development.
How much do you invest in digitalization ?
That is hard to say because a part of every investment goes to digitalization. Considering purely the IT development costs for creating new digital services, then CASA will be spending around €200 million and the regional banks €500 million this year. This figure would be a lot higher if we added investments, some of which flowed into digitalizing internal and customer processes.
Crédit Agricole restructured. Why ?
The regional banks now own 57% of the listed entity and we have 43% free float. Insurance, asset management and all other business lines are in the listed entity. This structure offers two advantages: We can manage the listed entity with a Tier 1 capital ratio of 11% because it is not systemically relevant; only the entire Group is that. This enables us to manage the listed entity with a capital base slightly below that of some of our competitors. That favors our earning power. At the same time the Group has a Tier 1 capital ratio of 14.5% and will continue to strengthen it.
How does the new structure affect the results ?
Crédit Agricole S.A. distributes half of its profits to shareholders, but the payout ratio at the Group level is below 20%. Every time CASA distributes 50%, 57% of this amount goes to the regional banks, which in turn only distribute 15 to 20% of their earnings. We will therefore retain around 80% of the revenue in the Group. This is a very efficient model in terms of solvency and resilience with a good return on equity at CASA, and very robust profit retention at the Group level.
Can you use the entire Group's deposits at Crédit Agricole S.A. ?
Yes, and we can even use it offer customers the entire range of our services. Deposits do not even play such a big role here. Nowadays, French banks have a loan-to-deposit ratio of over 100% anyway so that even
regional banks have to refinance part of their loan book externally. This is due to the volume of life insurance policies in France, which account for a big share of customers' savings.
Why didn't you set up the Group like this before the restructuring in 2016 ?
Before this transaction, we had another idea in mind that was a little more complicated. We wanted to transfer the central body that is now part of CASA to the regional banks. Instead of these complicated transactions, we chose the much simpler option that has solved the Group's capital issue. This is as far as we want to go.
What is your relationship with your supervisory authorities ? An outsider might think that the climate could be better.
Everyone had to adapt to the new situation when the ECB took over the supervision of major French banks. As a cooperative group, we were in a special position because the ECB was not entirely familiar with this type of structure. Now that it has been in charge for almost four years, I can say that the dialog is good. The ECB's requirements and wishes are always extensive, but this is nothing unusual for a supervisor. I find our relationship to be normal.
However, you had intended to reward long-standing shareholders' loyalty with higher dividends, but had to scrub that at the supervisors' insistence.
Frankly, that was a bureaucratic approach. French law allows loyal shareholders who hold their stakes as registered shares for at least two years to be rewarded. We had the right to reward them with a 10% higher dividend. Last year's dividends for 2016 came to less than €10 million, with total dividends amounting €1.7 billion. The ECB and the European Banking Authority somehow came to the conclusion that this model failed to meet European capital requirements. This mechanism has since been eliminated.
Jérôme Grivet began his career with the French civil service. He then became advisor on European affairs to Prime Minister Alain Juppé before joining Crédit Lyonnais in 1998 as Head of Finance and Management Control for retail banking in France. In 2001, he was appointed Head ...