Credit Agricole And Its Italian Optionality: Part 2 (OTCMKTS:CRARF)

Following our previous analysis called Crédit Agricole And Its Italian Optionality, today we are back focusing our attention on Banco BPM’s latest development and Crédit Agricole’s Italian subsidiary (OTCPK:CRARF). As a reminder in April, the French leading bank decided to enter with a 9.2% equity investment into Banco BPM share capital and since then, BPM is up by more than 23% whereas Crédit Agricole stock price is up by 20%.

Aside from the financials consideration, here at the Lab, we commented about Crédit Agricole M&A optionality, the Banco BPM deal, and our preferred metrics on how to value a retail bank.

Insurance Deal

So today, we were not surprised to see that Banco BPM signed a binding agreement with Crédit Agricole Assurances (CAA) for the establishment of a long-term strategic partnership in the banc assurance division in the Non-Life/Protection sector (this was one of Mare Evidence Lab’s supporting points). The term sheet envisages the acquisition by CAA of the 65% stake in Banco BPM Assicurazioni and the start of a 20-year commercial partnership in the sector. Financially speaking, this operation values the insurance business at €400 million, and consequently, for the 65% sale, Crédit Agricole will pay Banco BPM €260 million. The price is subject to adjustment following the due diligence and will be paid in cash on the closing date expected in 2023.

In addition, earn-out and claw-back hypotheses are envisaged depending on the achievement of the objectives set by the parties with put and call options for CAA and Banco BPM respectively. In number, the transaction will have a positive impact on Banco BPM’s fully loaded adjusted CET1 ratio which the Milanese group estimates at 13 basis points. This consequently will support Crédit Agricole’s 9.2% investments. In our previous follow-up note, we mentioned that BPM’s insurance policies were “about to unleash an all-French derby between Credit Agricole and the insurance giant AXA, which has been aiming for years to strengthen its presence in Italy.”

Today, we can conclude that entering into BPM share capital was a defensive move, a tactic to protect existing business partnerships with Banco BPM. And although Crédit Agricole already performed the same approach with CREVAL, the potential merger with BPM could have significant financial upside given the extremely low valuation of the Italian bank. Banco BPM is still trading at a P/E of 5.8x. Here is a recap of the Italian bank’s latest development: Intesa and UniCredit.

Crédit Agricole Italia

We already commented on the company’s Q3 results; however, today we are going deep into the Italian subsidiary accounts (Crédit Agricole’s second largest market with 5.3 million customers). Indeed, our buy case recap was based on: the company’s ‘Ambitions 2025 Plan’, M&A capital optionality with a focus on Italy, and low exposure to Russia (compared to peers such as Société Générale S.A.). Given point two, in the nine months aggregate, Crédit Agricole Italy closed with a consolidated profit, net of the charges related to CREVAL’s integration of €387 million, up +26% on a yearly basis. By including charges from CREVAL, this results amounts to €365 million.

Looking at the important numbers in the period, loans to customers were stable with an increasing trend in Q3 and a market share that reaches 6.8%, compared to 6.1% at last year’s end. The new mortgage market share also increased to 6.2% compared to 5.7% in the third quarter of 2021 in a slowing market context. Asset management was negatively affected by financial market performance; however, net of effect, the bank shows an increase of +3%. This was supported by the positive dynamics of net flows which amounted to €1.5 billion since the beginning of the year. In detail, commissions were positive on an annual basis, signaling +2% on a year-to-year comparison and +4% on a quarter-to-quarter level. Moreover, commissions reached 50% of total core revenues. More importantly and given the rising interest rate environment, the net interest margin significantly improved and operating costs were down. Admin expenses were down by 5.2% on an annual basis and fully benefitted from IT systems efficiency.

On the balance sheet side, loans impaired fell below 2% and reached 1.97%, while gross impaired loans reached 3.4% (a good result compared to June 2022). In September end, the Common Equity Tier I ratio was at 13.2% with a solid number on the Liquidity Coverage Ratio that reached 248%. This ratio expresses the ability of a financial institution to cover short-term needs with the highly liquid assets held in the portfolio.

Conclusion and Valuation

Last time, we concluded that the company performed a mixed quarter; however, we were supportive of the NII evolution in the rising interest rate context. In detail, we emphasize that the French back sensitivity is much higher than Wall Street expectations, “and with the 1-month Euribor at 2%, the additional benefit expected on the CASA’s interest margin is expected to be around €2.5 billion”. Given the latest positive development on point two in Mare Evidence Lab’s buy case recap, we decided to maintain our target price at €13 per share. Regarding the valuation, Crédit Agricole is still trading at a discount versus its historical average on its Tangible Book Value (0.425x versus 0.6x) and already accrued for more than 5% dividend yield for 2023 (not considering the last 2022 quarter).

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.