Crédit Agricole Takes $950 Million Charge on Portuguese Bank

Photo
A branch of the French bank Crédit Agricole in Paris.Credit Jacky Naegelen/Reuters

The French bank Crédit Agricole said on Tuesday that nearly all of its second-quarter profit was wiped away as it took a $950 million charge to write off its entire investment in the troubled Portuguese lender Banco Espírito Santo.

Crédit Agricole, based in Paris, said earnings fell to 17 million euros, or about $22.8 million, from 696 million euros in the period a year earlier.

The French bank was one of the largest shareholders of Banco Espírito Santo, which will be split up as part of a €4.9 billion rescue plan announced by Portugal this week. Under the plan, the heaviest losses will be absorbed by Banco Espírito Santo’s shareholders and some creditors.

Crédit Agricole took a charge of €708 million in the quarter as a result of the Portuguese bank’s demise.

Excluding the Banco Espírito Santo write-down and other items, Crédit Agricole posted second-quarter net income of about €1 billion. Its shares rose about 2 percent in afternoon trading in Paris on Tuesday.

Markets in Europe have not been phased by the collapse of Banco Espírito Santo, as investors appear comfortable with its rescue plan. The main index that tracks Portuguese stocks rose Monday and was down slightly on Tuesday.

Still, additional write downs could be in the works as investors assess their remaining stakes in the Banco Espírito Santo.

None is expected to be as high as Crédit Agricole. With its 14.6 percent stake, the French bank was the bank’s largest shareholder behind Espírito Santo Financial Group, a unit in the Espírito Santo empire that has itself sought creditor protection.

On Monday, the Brazilian lender Banco Bradesco said it planned to take a charge of 356 million Brazilian real, or about $157 million, related to its 3.9 percent stake in Banco Espírito Santo.

Other large shareholders include the privately-owned British investment manager Silchester International Investors, with a 4.7 percent stake; the American asset manager Blackrock, which has a 4.65 percent stake; the United States investment manager Capital Group, with a 4.3 percent stake; and Portugal Telecom, which has a 2.1 percent stake, according to Banco Espírito Santo.

Crédit Agricole in the 1990s first took a stake in Banco Espírito Santo, which has been run by the Espírito Santo family for decades.

Photo
Jean-Paul Chifflet, chief executive of the French bank Crédit Agricole.Credit Jacky Naegelen/Reuters

“We can only regret having been misled by the family with which Crédit Agricole was trying to create a true partnership to build the biggest private bank in Portugal,” Jean-Paul Chifflet, the Crédit Agricole chief executive, said on a call with journalists on Tuesday, Reuters reported.

In July, Ricardo Espírito Santo Silva Salgado, the family patriarch and former head of Banco Espírito Santo, was arrested and ordered to post bail of €3 million as part of a money-laundering and tax evasion investigation. His arrest came only days after he stepped down from the bank.

As a result of the rescue plan, Crédit Agricole’s stake in Banco Espírito Santo remains in the bad bank, but Crédit Agricole, with its write-down, has essentially determined that those shares are worthless.

On a conference call with analysts, Bernard Delpit, the chief financial officer of Crédit Agricole, said the bank had been planning to write off its Banco Espírito Santo stake before the events that gripped the Portuguese bank in recent weeks.

Crédit Agricole did not participate in a €1 billion rights offering by Banco Espírito Santo this summer, which resulted in it holding a smaller stake in the Portuguese bank.

Soon after, Portuguese regulators found irregularities in the books of Banco Espírito Santo’s corporate parent, Espírito Santo International, and determined that the parent was in “serious financial condition.”

Last week, the bank shocked financial markets with a €3.58 billion loss. The bank’s earnings report showed how exposed it was to other companies that it had funneled loans to in the Espírito Santo family business empire, whose interests include real estate, health care, energy and agriculture. Since one of its companies failed to repay a loan on schedule in July, three Espírito Santo holding companies have filed for bankruptcy protection.

Over the weekend, the government of Portugal and European officials put together a rescue package for the family bank in which the government will loan the country’s bank resolution fund €4.4 billion of the €4.9 billion cost of the bailout.

The government’s intent is to recover the taxpayer loan with the future sale of the entity created in the rescue, called Novo Banco, which will take over Banco Espírito Santo’s sound assets, including deposits and loans that are likely to be repaid.

The bank’s problem assets will remain with the existing bank, which will be shut down over time.

On the call with journalists on Tuesday, Mr. Chifflet did not rule out the possibility that Crédit Agricole might take legal actions related to its stake in Banco Espírito Santo.

The write-down of its stake is Crédit Agricole’s latest step back from parts of southern Europe. The bank has also gotten out of investments in Spain and in Greece in recent years.

Crédit Agricole’s operations in Italy, which are primarily focused on Northern Italy, remain an important business for the bank. Revenue in Italy was up 5.8 percent, to €416 million, in the second quarter.

Over all, Crédit Agricole reported that second-quarter revenue declined 6 percent, to €3.93 billion, while operating expenses rose slightly, to €2.77 billion.

During the first six months of the year, Crédit Agricole said it had reduced its annual costs by €64 million, reflecting a reduction of its recurring costs by €415 million since the cost-cutting program began in 2012. The bank is aiming for annual cost reductions of €650 million by the end of 2016.

The bank’s common equity Tier 1 capital ratio, a measure of its ability to weather financial disturbances, rose to 12.3 percent at the end of June from 11.7 percent at the end of March.

“Despite the situation at BES and its impacts on our quarterly results, the group is on track with the path set when we unveiled our medium-term plan last March, leveraging its strengths and financial robustness while continuing its efforts to cut costs,” Mr. Chifflet said.