Crédit Agricole S.A. (ACA) Earnings Call Transcript & Summary

Good morning to every one of you. I'm very grateful that you've been able to be available with such a short notice for this meeting this morning. I want to start by saying that I am here with Philippe Brassac and Xavier Musca and that Giampiero Maioli, the Chief Executive Officer of Crédit Agricole Italia and the Senior Country Officer of the group in Italy, is also on the line and will help me to make this presentation. Let me start by saying that today, we want to present an initiative that we have decided to launch this morning, which is the acquisition of CreVal by Crédit Agricole Italia. In a nutshell, this operation that we have announced will significantly enhance Crédit Agricole Italia's footprint in the retail banking activities in Italy by the adjunction of a very attractive and robust retail network, well located in Italy. This operation, in our analysis, will provide a significant value for all the stakeholders involved. It's going to be the case, definitely, for Credito Valtellinese customers that will benefit from the very wide product offer of Crédit Agricole Group. It's going to be the case for Credito Valtellinese staff that will benefit from enhanced carrier prospect in the whole Crédit Agricole Group in Italy. It's going to be the case for Credito Valtellinese shareholders that will benefit from an attractive price, and it's definitely going to be the case for Crédit Agricole Italia shareholders benefiting from this enhancement of the network, and benefiting from a return on the investment that we consider that will meet our traditional criteria of being above 10% after 3 years. And last point, it's an operation that is in -- again, in our analysis, an operation that will be quite securely integrated in our setup in Italy. Definitely, Crédit Agricole Italia has a proven track record in terms of successful integration of different networks. Again, in 2017, 2018, with the 3 small regional banks that were acquired at the same time and perfectly integrated in the meanwhile. So let me now hand over the floor to CreVal Giampiero Maioli, who will present our activities in Italy and the strategic rationale of the operation that we are announcing today. And I will, after that, present in more detail the operation that we consider launching. Giampiero, if you hear me, it's now up to you.

Thank you, Jerome. I prefer to introduce to you in Italian this presentation the sense of this offer. [Interpreted] So we can, in the long run, strengthen our presence in Italy, which, today, is as part of a group, which is making EUR 76 billion in terms of assets, EUR 50 billion in customer loans, EUR 72 billion in terms of assets under management and assets under custody, EUR 1.9 billion in income, more than 2.1 million clients, more than 9,000 employees and almost 900 branches. So our banking group, Crédit Agricole Italy, has major presence, 70% of Crédit Agricole S.P.A. and also on some of the local banks through [SACAM]. So it has -- we have an important presence of shareholder foundations, Fondazione di Piacenza. So these are foundations that we belonged to the regional banks that we have gradually acquired. And this plurality of these different shareholders, we have almost 20,000 private shareholders. And this just to go -- goes to show how over the years, Crédit Agricole in Italy has become a group which has become a kind of benchmark group. And it's also very much integrated into the culture of our territories and the culture of our country. Now the bank, Credito Valtellinese, is an old cooperative banker with tens of thousands of small shareholders, and they -- if they join Crédit Agricole they will find again -- once again this spirit and the attention to people and the regions, which is what distinguishes us. And I'm sure that this is what the customers feel as well and also the employees of the bank. The bank represents almost EUR 24 billion in total assets, EUR 16 billion in customer loans, EUR 10 billion in assets under management and assets under custody and EUR 0.6 billion in terms of revenue, 700,000 clients, 3,539 employees with market share in terms of branches, 1.5%. But as we'll see in a moment, we will have a regional quota, which is extremely interesting. So it's the seventh (sic) [twelfth] largest commercial bank in Italy. And let me remind you that in terms of Crédit Agricole, we are also a partner of bank insurance -- for bank insurance products for 2 years and very satisfied customers. We have 9.8% of Credito Valtellinese's share capital. And with -- to that, we will add 5.4%, which will come from this agreement that has been stipulated over the last days. Now this operation which will give us another 3 million customers with more than 300 branches, this has many different attractive commercial aspects to it and cost synergies, for example, because our objective for 2022 is to be a single bank and to be a totally integrated bank. We will also gain immediately financial efficiency, and this will be due to the better ratings of Crédit Agricole, and we will also have and, above all, benefits and gains that will come from the already good quality of the CreVal credit risk and also the nonperforming loans ratio, which is very good. So this will improve and enhance our operations. Now we believe that this is an offering, which is an amicable offering because it creating value for all -- for everyone, shareholders, and that has an interesting premium if we reach closing on Friday and also an interesting VWAP. Also, it's a cash operation. It creates value for the employees because they will be part of a group that they already know and which manifests and shows all the values, gives them enhanced career prospects as well, and it also creates value for the customers. They will be able to benefit from the very high quality of the products that are produced by the group. Now this operation will provide value for CAI and its shareholders. We want to have an ROI of 10% over 3 years. And we have the necessary conditions to be able to achieve that now. In terms of the industrial culture we showed over the last couple of years that we were able to integrate, successfully integrate many of the regional banks. We have -- we did this with full agreement of -- with the regulators and also with trade union representatives who, on a national scale -- I called them this morning, in fact and they gave me their consent and also their support for this operation. Now over the years, in Italy, we have created a management team, which is highly qualified, very open minded, multicultural, made up of young, talented managers who are Italian and French. And many of our managers have climbed the ladder of the bank, and so we can be sure that we can count on this talent. Now in the presentation, you have the market shares -- regional market shares. We will have some very major regions in the north of Italy such as Lombardy, [Medio] Romania, Liguria, where we will be between 6% and 16% of market share. We also have FriulI, which is a historical region. And there we will have 12%; Sicily with 6.8%. And of course, it goes without saying that in the other regions, Piedmont, Roma -- Rome, Lazio, we will have between 2.6%, so between 3% and 6%. And so we can confidently say that our group will be -- is a key Italian bank. We've also presented the benchmark information and the balance sheet information in our presentation. So between the CAI and what this operation would bring. That's on Page 10 of the presentation. And there are some interesting information on that. Now Credito Valtellinese represents 25% of annual revenues of CAI, but now in terms of this -- in terms of assets under management and assets under custody, this presents an opportunity. And one of the things which pushed us to speed up this offering is that through Crédit Agricole Assurance and through Amundi, we will easily be able to develop managed savings and deposits from customers with obvious benefits and high service margins. So we've given a presentation of the rankings at national level, and we will have EUR 100 billion in terms of assets. So we will be one of the 6 leading banks in terms of managed savings. and also in terms of the number of customers. I'd also like to remind you that in terms of this combined entity, Crédit Agricole and the new bank, these positions will be reviewed, and they will be reviewed upwards. We have very profitable activity like Amundi and bank and insurance operations so -- within the group. So we will be a key benchmark bank for the Italian market. Now in terms of -- we have a benchmark in terms of the balance sheet and the CET1. Core CET1 is over 16%. Crédit Agricole Italia is at 12.8%, and Credito Valtellinese is at capital -- a very high level of capital, 17.2%. And this is due to an increase in capital a couple of years ago, and this allowed the bank to do de-risking and to have many capital reserves, a very high level of capital reserves. Now in terms of the strategy of the industrial plan, we have set objectives which will not change because we want to achieve excellence in terms of customer relations. And I can tell you that in terms of the latest customer satisfaction surveys, we ranked second best, and this is due to a very long-term work and also to a project of Crédit Agricole S.p.A. that we have been developing, and the effects of that have been very positive. So we will continue these commitments in terms of society. We have been a leader in terms of supporting hospitals and health structures that required help during the peak of this pandemic, and that was last spring. So we were on the front line there. And we have been able to guarantee services in -- even in the red zones where we are present. We've always done this working through our foundations, which are foundations that are nonprofit organizations. And so -- and they make the solidarity initiatives, sponsoring and various other forms of support in the local society. And this is something which we will continue to do even in the new areas where we will be present. Now we have products and management who can offer services of great quality for our customers. Now finally, I would like to remind you of the path that we've taken up to now and the many different integrations that we have managed. We've done more than 14 of those. Now I'm not going to go through all of them, but we've got the CASA [indiscernible], bank [Intesa], banks in Rome and Tuscany. So we have a governance structure and a management team, which is very talented. And we have IT systems, organizational systems, which are very robust. And this means that we can carry out this operation, which is absolutely compatible with everything that we've done in the past, integrating regional banks similar to ours. And so there's been institutional consensus on this territorial consensus as well for this operation. And so that we can create -- we feel to create an extra added value. Now Jerome, I will leave it there, and I will hand back to you.

Thank you very much, Giampiero. I think that what Giampiero has just presented demonstrate very massively both the strategic interest of this operation and also the -- I would say, the very good monitoring of the integration of this new bank within Crédit Agricole Italia when the time will come of the integration. So I will not go back on these elements. I just want to highlight a few elements of the transaction structure. We intend to launch a voluntary public cash tender offer. It will be launched, of course, by Crédit Agricole Italia and all the ordinary shares of Credito Valtellinese. It's going to be an all-cash offer, and the price is EUR 10.5 per share. This corresponds to a total investment of EUR 737 million by Crédit Agricole Italia for all the capital -- all the shares of Credito Valtellinese. This price of EUR 10.5 per share is -- represent a 21.4% premium to the share price of Credito Valtellinese end of last week, spot price on November 20. It's a 42% premium on the 3-month weighted average price -- volume weighted average price of the share as of, again, end of last week. And it's even a premium of more than 50% as compared to the 6 months volume weighted average price. We have already received a commitment letter from one of the important shareholders of Credito Valtellinese, Algebris, who owns a little bit more than 5% of the capital, and that has committed to bring its share capital stake to the offer, subject, of course, to regulatory approval. We have already 9.8% of the share capital through Crédit Agricole Assurance, who, as you know, as you remember, is already the provider of life insurance policies to Credito Valtellinese customers. The offer will be subject to Crédit Agricole Italia reaching at least 2/3 of the voting share capital, but this condition may be waived by Crédit Agricole Italia if it has succeeded to at least gather 15% plus 1 share of the capital of Credito Valtellinese. Of course, we have the other traditional conditions that include, among the other elements, the antitrust and conditional also relations and Credito Valtellinese not adopting any defensive measure even if authorized by its shareholder meeting. If I go on the next page, you will see the main milestones of the time line that we intend to follow. It's going to be a fast time line, of course, respecting all the threshold that we have to respect. So to date, we have deposited the notice pursuant to Article 102 of the Italian law. In December, we are going to file with Consob the tender offer document and all the other filings that we need to do with the competent authorities. We expect all the clearances to be provided by the end or in the course of Q1 '21, and we expect to be granted the authorization by Consob to publish the offer document in March or possibly in April 2021, which will start the tender offer period. And then the tender offer period will end in May '21, where we will have the settlement of the offer. So to summarize what we have said. This operation is perfectly in line with what we have done in the past in Italy in terms of developing our retail banking activities. And let me remind you once again that in Italy, we have a complete and comprehensive set of activities that cover, not only retail banking, but also all of the other specialized business lines in which we operate: asset management, insurance, life and nonlife, consumer credit, car financing, CIB and so on and so forth. And in Italy, as you know, these specialized business lines represent a higher proportion of the net profit that we generate in the country than few retail banking activities. This will strengthen our competitive positioning in Italy. This will create significant value for Crédit Agricole shareholders, the Crédit Agricole Italia shareholders and also Crédit Agricole S.A. shareholders. And this value creation is going to come first from economies of scale and funding synergies, generating an improvement of the earnings per share, which will be positive as soon as 2022 and generating a return on investment that will be above 10% in year 3 as, again, is required by our internal standards related to M&A policies. It will also create long-term value from the progressive cross-selling, additional cross-selling with all Crédit Agricole business lines on the customer base of Credito Valtellinese. And last point, the integration risk will be minimum for an investment that will represent less than 20 bps of CET1 ratio for Crédit Agricole S.A. So here in a nutshell are all the elements and the futures of this operation that we've been announcing this morning, but we are all here to answer your questions if you have some, of course.

[Operator Instructions] And your first question comes from Jacques-Henri from Gaulard (sic) [ Jacques-Henri Gaulard ].

Yes. Congratulations for this deal. Just one question. Just curious about the ROI superior to 10%, which corresponds to at least EUR 73 million, EUR 74 million. The consensus for 2022 expect already EUR 65 million of earnings. I seem to have seen a number that your cost synergies were estimated at EUR 225 million. Wouldn't it be more accurate to say ROI is vastly superior to 10%?

Well, Jacques-Henri, thanks for the appreciation of this operation. I leave you with this comment. But clearly, this return on investment is completely secured and is secured with the most secured synergies, which are the cost synergies and funding synergies. That's for sure.

Your next question comes from Tarik El Mejjad from Bank of America.

Just 2 questions, please. First, on the structure of the deal. I was a bit surprised by the premium, more about the share price than actually the percentage because EUR 0.025, that makes it one of the highest valuation in a while. So just to understand the rationale. Do you just want to basically pay the premium, do the deal quickly without negotiations and then move on and that will be it for you? Or just really, [ as I said ], because the 10% ROI doesn't sound to me enough to justify such a high premium. And secondly, a question on the - after the Creval deal, I mean, you -- clearly, with Creval, you checked all the boxes you mentioned before, something small, adds footprint, clean balance sheet and so on. But what's next? Should we consider this is it for you in Italy and you have now the adequate market share? Or do you think you still have to to add more footprint?

Well, Tarik, thanks for your questions. I think that all the Credito Valtellinese shareholder will be happy to read your note about the price. We think it's a price that is a good equilibrium between the interest of Credito Valtellinese shareholders and Crédit Agricole Italia shareholders. So it's coherent with our return target, and it's also attractive for Credito Valtellinese shareholders. What's next? Well, we are only at the beginning of this operation. And as I've just explained, the -- only the market transaction will already take up to the middle of next year. So please, don't ask us what is going to happen after that. We have to complete this transaction that we are announcing today, then we have to manage the integration of Credito Valtellinese within our setup. So the what's next question is a little bit early if I may say so.

Your next question comes from Guillaume Tiberghien from Exane.

I have 2 questions. The first question relates to whether or not you'll be able to take advantage of the new law in Italy, allowing for the conversion of DTA into tax credit in the event of a merger? And if so, what will be the benefit? And the second question is whether you'll have to pay a penalty should you wish to transfer the asset management and consumer credit flows to your own product factories.

2 good questions, Guillaume. Of course, the first question about the new law. Well, there is no new law as of now because there is a project and I think that this project in itself has triggered a significant increase in all the share prices of Italian banks in the last 10 days. So I think that our offer includes all the elements that were known from the market, and this is clearly an element that was known from the market. So if this new law is passed, of course, it's going to apply to all mergers in Italy, we contemplate a merger between 2 Italian banks. So in my understanding, we will be eligible. But up to now, no law has been passed indeed. As far as the additional cross-selling operation can take place across time. I think that it's too early to tell if the operation goes up to its end as we expect, we will, of course, analyze all of the partnership that exists within Credito Valtellinese. And we'll see depending on the expiry dates if it's best to wait for the expiry dates and then to renew a partnership with our own "product factories", or if it's possible to early terminate them and under which conditions. So we'll see. Of course, the end game is that all product sold to Credito Valtellinese customer are going to be provided by our own specialized business lines.

Sorry, can I ask a follow-up on -- there was a headline on Bloomberg suggesting Crédit Agricole Italy was going to launch a capital increase to fund the deal. But if you get all the excess capital of Creval is about EUR 400 million, and the DTA proposal for the Italian law could save you $200 million or EUR 300 million, so really, you get it for free, the CreVal. So why do you need to do a capital increase in Crédit Agricole Italy?

Well, we haven't mentioned in our presentation this prospect of potential capital increase from Crédit Agricole Italia. So we'll see, going forward, how the transaction is going to be funded by Crédit Agricole Italia. If any capital increase was to be needed to fund the deal in order to maintain a good level of CET1 at Crédit Agricole Italia, which has been the case in the past and which is going to continue to be the case in the future, of course, Crédit Agricole S.A. will fully guarantee this capital increase in order to guarantee the success of it. But it's too early to tell. We are, at Crédit Agricole S.A., of course, fully ready to support this acquisition by Crédit Agricole Italia.

Your next question comes from Azzurra Guelfi from Citigroup.

Congratulation for deal from myself as well. I have a couple of questions. One is on the integration cost. I don't know if you have made any potential analysis on this. The second one, if you had any feedback from CreVal management on your tender offer, and if you can share it with us. The other one is on the deal itself. Probably this is the lowest integration -- execution and integration risk deal that you could have done. So I was just wondering if it's -- that was the main criteria in terms of, like, potential [synergies] realization and easiness of this because the bank is like with a strong balance sheet and maybe with the opportunity for cost and revenue synergies. If you can share with us the rationale for this.

Yes. On your first question, we haven't disclosed neither the amount of synergies nor the cost of realizing those synergies. But clearly, the return on investment above 10% fully integrates and takes into account the fact that to generate the cost synergies, we will have to engage a certain level of investment. So clearly, it's integrated in the global return that we are targeting. Of course, we have had contact with the management of Credito Valtellinese before announcing the offer this morning. I will not comment on these contacts, which have been perfectly professional. Last point, integration risk. Well, I don't know exactly what was your question, but the capacity of managing the integration risks are part of the set of criteria that we have put in place in order to check the relevance of all the M&A transactions that we consider. And in this transaction, clearly, we consider that the integration risks are very remote for the many reasons that Giampiero may have already explained, i.e., the size; i.e., the location; i.e., the DNA of Credito Valtellinese, which is coherent with ours; and i.e., also the fact that we know this bank since a long time, and we have with it a very successful partnership in life insurance.

Your next question comes from Jean-Francois Neuez from Goldman Sachs.

I would like to ask to -- I think, just to -- I think I picked up something in Azzurra's question, which I also wanted to ask, but maybe ask another way, which is in the press recently, you've been linked with Banco BPM quite a few times. And this would have been a tremendously more transformational deal, for example, than this one. Not better or worse. I'm not trying to judge here, but essentially, this was 6x bigger. And the question that I wanted to ask to understand your thought process and also to read better the news flow in the future is what was your thought process if you -- if there was ever a choice between looking for something more transformational at the time when share prices are very low everywhere or to do something more incremental, which was in line with your past strategy. Essentially, what made you make that particular choice at this particular juncture? And the second question that I wanted to ask is when you estimated ROI, synergies, et cetera, how did you go about estimating the synergies and execution risk? Did you discuss this? Was this part of your discussion with the management? Or were your discussion with the management of CreVal purely of an informative nature, and you haven't had essentially a chance to do diligence what you're planning to execute?

Credito Valtellinese is a listed company. So of course, you imagine that it's not possible to do due diligences in such situation. So we've been -- we've established our calculation on the cost synergies and the cost of realizing those synergies on the basis of our past experience, which is wide, which is significant and which is, I think, relevant. So it's our own calculation performed under our own responsibility. But we clearly think that they are relevant, and they are perfectly securing, I would say, the financial parameters of the operation. On your first question, I think, first, we don't want to comment market the most. We never do that, and we are not going to do it in the future. And second, I think it's not either -- it's not also relevant, and we are not going to share with you all the elements of analysis that we take into account before taking a decision. We are presenting today a project. We are presenting today an operation. It's been analyzed. It's been -- we've been taking a lot of time to prepare and to fine-tune this operation. We've taken into account many, many elements. And this is the project that we are presenting to you today, which is, again, we think, coherent with our strategy, which is coherent with our financial, I would say, prudence, and it's coherent with our virtue. So I think that there's nothing more to say.

Your next question comes from Giulia Miotto from Morgan Stanley.

2 questions from me as well. So if we take a step back and I look at the profitability of your Crédit Agricole Italian business, so indeed, you've been successful in integrating different banks through time. That remains below the profitability of the group on average through the years. So I was wondering what sort of ROE do you plan for the Italian business. And do you think one of the reasons that you can't match the group profitability is lack of scale? So that's the first question. And then the second question is on coverage. So what sort of coverage do you plan for the combined entity, Crédit Agricole and Crédit Agricole Italia pro forma?

Let me start with the second aspect of your question. What are you talking about in terms of coverage?

NPL.

NPL. NPL. I see.

Yes, it is. Sorry.

So as Giampiero presented it, you can see that both Credito Valtellinese and Crédit Agricole Italia have indeed quite a low level of nonperforming loans as compared to the average of the Italian market. And they have coverage ratios, which are roughly in the same region, around 50%. So clearly, we intend to pursue significantly the de-risking of the portfolio. And when the operation is going to be completed, we will have room to probably further increase the coverage ratios and/or further decrease the level of NPL. In terms of profitability of our Italian retail banking activities, we have stated in the medium-term plan that we were targeting a return on normalized equity, which is not the return on equity on the level of equity that we have really in Italy, but the return on normalized equity of 13% and a cost-to-income ratio below 50%. So we are not there yet. And clearly, the level of the cost of risk triggered by the pandemic is probably going to delay a little bit our capacity to reach this level of profitability. But clearly, we continue to target that level of profitability in order to fuel the global profitability of Crédit Agricole S.A. It's clear that the addition of Credito Valtellinese to Crédit Agricole Italia, as Giampiero explained it very well, is going to provide scale, is going to provide a booster in order to accelerate the convergence towards the cost-to-income ratio that we are targeting.

Our next question comes from Stefan Stalmann from Autonomous Research.

Just a moment. I'd like to comment. [Interpreted] The reason why right now the profitability level is slightly lower than the bank in France is because of the cost of risk. The average cost of risk in Italy, as you know, is higher than in France. France is where the cost of risk is lowest in Europe. This operation with CreVal will allow us, thanks to the excess capital of CreVal, to further de-risk to reach the levels -- the level of cost-to-income ratio of Crédit Agricole Italia to the European average, and it will automatically increase the profitability. There are no differences in the operational management or in the cost efficiency. And in fact, the productivity of Crédit Agricole Italia is already competitive in terms of cost-to-income ratio. It's at the levels of the best European banks. It's true that we have a problem in Italy because until now, all investments we have made to be competitive in terms of technology and digitization have weighed on an aspect in such a way that it's not enough to absorb costs. So we have suggested this operation to the shareholders because it will allow us to increase synergies of scale and become more profitable.

Yes. I think that we are now going -- thank you, Giampiero. We are now going to take the question from Autonomous.