Author Topic: ACA FP / CRARY- Credit Agricole SA  (Read 329 times)

thepupil

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ACA FP / CRARY- Credit Agricole SA
« on: March 15, 2020, 09:39:28 AM »
Let me start by saying that I believe this security to be option like and that it should be sized as such.

I am debating with establishing a position. If I would buy, it would be small as there's enough leverage and punch for the company to contribute material profits at a small size. It is tough to think about probability of extreme dilution and/or failure in these dark times other than to say "it exists".

I'm simultaneously considering a basket of leading deposit share banks from around the world, of which this would be a part. These were "cheap" before corona for obvious reasons. These include the likes of Lloyds, ACA, Wells Fargo/BAC/JPM, etc. So if anyone wants to contribute with a simple "if you like Credit Agricole, then you'll love _______ (insert cheaper, safer, more likely to survive bank here)", feel free.

Credit Agricole is the 3rd largest bank in Europe, 2nd largest bank in France, and 10th largest bank in the world,it is bigger than Citibank. It owns 70% of Amundi, the largest European asset manager, and one of the top 10 in the world. It is big. The Credit Agricole Group has approximately 28% market share in France. It is the largest taxpayer in France, according to one of its investor presentations. To say that Credit Agricole Group is "strategically important" or TBTF is a bit of an understatement. the group has 141,000 employees and claims to have 51mm customers in France (i assume that that number is somehow generously calculated considering France's population).

While that does not mean that the stock of the publicly traded corporate and investment bank, Credit Agricole SA offers good risk/return, I think one should frame the importance of the company/group, particularly for a schmuck like me who has US investment bank snobbery and would naturally look down upon any french bank (with good reason).

The structure is labyrinthine and complex and known to many value investors because of the deeply discounted securities issued by some of the Credit Agricole regional cooperative banks. To simplify it, the regional banks are well capitalized community banks with low return on equity, high-ish cost structures, and very strong local deposit shares. The corporate and investment bank is scary corporate and investment bank that is less well capitalized but still well above regulatory requirements.

Wikipedia, where I go for all of my market beating information, has a nice history of the group, its crisis experience and its slow retrenchment and focus on its core French (and scarily, Italian) retail business.

I have followed the posts of the online blogosphere about the regional bank securities over the years and one of the bear cases / risks to the theses on the regional banks that regularly comes up is that in bad times the regional banks will have to support their problem child that they collectively own 55% of: the corporate and investment bank. From a regulatory perspective, I have to agree with this. The regional's won't let ACA FP die and have a strong interest in the company's health. and that's why I hypothesize that binary downside risk in this particular french investment bank may be lower than one's commons sense and instinct would presume.

The Group earned 7 billion euros last year on 114 billion of equity. ACA FP earned about 4.5 billion euros on 60 billion.

The risks are almost too numerous to list. Let's start with some fun facts in light of COVID-19

1) Credit Agricole SA is the largest aircraft financier worldwide
2) Credit Agricole Assurance is France's 2nd largest life insurer

let those facts flow through you.

3) Credit Agricole has significant exposure to northern Italy
4) have you seen global rates? Are banks "worth" anything?

Credit Agricole SA trades for about 1/3 book and 1/2 of tangible common equity, and 5x last year's earnings. Let's not talk about dividend yield and just assume the group retains all future earnings to fight the impending recession/covid-19 related loss in earnings power.  the regionals trade for 1/3 of book and are arguably safer but have lower ROE. the liquid corporate and investment bank has more punch.

this post doesn't add a lot of analytical value and i intend to do more work, but this type of security kind of falls in the "no matter the amount of work you do, it's still a french bank and is speculative" side of things. I think the hardest thing to do in times like this (if you are a long-term optimist) is to "do you buy high quality down 30%, or do you buy low quality down 60-80%" or do you go all cash, guns/gold. I don't think going all in on either is a good idea, but understand why people come out on different sides.


« Last Edit: March 15, 2020, 09:48:06 AM by thepupil »