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February 5, 2012 5:43 pm
Crédit Agricole is launching a new financing model in its corporate and investment bank which will allow France’s third-largest lender by market value to continue project and trade finance, despite upcoming unfavourable capital rules, according to the unit’s chief executive.
In his first interview with an international newspaper since becoming chief executive of Crédit Agricole Corporate and Investment bank (CACIB) 14 months ago, Jean-Yves Hocher, told the Financial Times: “We aim to remain a significant player in corporate and investment banking but to do that we will have to change our business model.”
Mr Hocher, a 56-year-old veteran of the mutual bank, said the new model is an “originate-to-distribute” system of originating loans for corporate clients, with the new element for CACIB being its intention to sell on most of the loans, instead of retaining them as in the past.
Last month, the investment bank completed the first of these new deals – worth €500m. Mr Hocher says insurance companies and pension funds are ready investors as they seek alternatives to sovereign bonds.
He says his model – which should be in place by the end of the year – will be different from the heavily criticised US version, since he is creating a new organisation within the investment bank in charge of both originating and distributing. The bank will also remain an interested party in the loans by keeping 20 per cent of them.
“The people who originate loans will have to know if their loans are sellable to investors or not, which was not the way we used to work. Previously we would only syndicate loans with other banks,” he said. “A good result, even if it is ambitious, would be to sell roughly 80 per cent of the loans and to keep something like 20 per cent. So this model is more like ‘distribute-to-originate’.”
Under the impending Basel III regulations, banks have to hold more capital against their loan books, prompting many, including domestic rivals, BNP Paribas and Société Générale, to shrink their project finance business – typically the financing of ships, aircraft and boats – which ties up long-term capital.
But for Mr Hocher this business is core. “Crédit Agricole CIB is number three in project financing worldwide; we are a big player and this is a very safe business with very good margins . . . we will defend our leadership position.”
Over the past decade, Crédit Agricole has expanded and contracted its corporate and investment bank like an accordion, reflecting an ambivalence towards capital markets, rooted in the retail outlook of the former farmers’ bank.
Since having its fingers badly burnt in the 2007 subprime crisis, the investment bank’s refinancing needs have been shrunk by €60bn. CACIB made a net loss in 2010 and analysts expect another loss in 2011.
The investment bank is now looking to lose €18bn of financing needs, equivalent to 10 per cent of the total, and this time Mr Hocher – the unit’s third chief executive in four years – wants to prevent it bloating again.
“We will be slimmer, operating in a smaller network of countries and a business model focused on the financing business. And we are very much focused on debt capital markets because our customers need more and more to issue bonds,” says Mr Hocher. “What is important is to prevent the balance sheet of the bank from growing again because the aim is to remain smaller.”
All three big French banks have been deleveraging since the autumn to retain cash in the face of the new capital rules, and more expensive dollar financing after the withdrawal last summer of US money market funds from European banks.
Mr Hocher has “no regrets” about discontinuing equity derivatives and commodities hedging, since the bank does not have critical mass in these areas, in which BNP and SocGen are strong.
It is closing operations in 21 countries, leaving it with a presence in 30 countries that generate 85 per cent of output. The departure accounts for the lion’s share of the 1,750 job losses in CACIB.
It is also selling existing loan portfolios to help reduce its current liquidity consumption of €180bn – made up of €80bn in loans, €40bn in the markets business and €60bn in treasury.
Nearly €10bn of loans have been sold off, piecemeal. “We have decided to sell loans in small quantities, from €50m to €300m; not more,” said Mr Hocher, explaining it is less costly to do it this way. “To sell €10bn or €20bn portfolios, you would probably have to accept a haircut of between 20 to, probably, 30 per cent. It’s very expensive. But it is quicker”.
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