Credit Agricole Earnings: Investment Banking Bucking the Trend; Degroof Deal Looks Expensive

No-moat Credit Agricole ACA posted very strong results for the second quarter of 2023, with attributable net income of EUR 2 billion, 25% higher than a year earlier and materially ahead of the EUR 1.4 billion company-compiled consensus. Credit Agricole’s investment banking business performed much better than anticipated and bucked the declining revenue trend of its peers. Credit Agricole is now on track to reach its EUR 6 billion net income target two years ahead of schedule. Credit Agricole’s management did not provide detailed and updated guidance. We understand this. Investment banking revenue is at an all-time high for Credit Agricole and, in a low-volatility environment, could be under pressure in the future. Management indicated that it expects the recovery of French retail net interest margins to only start in the second half of fiscal 2024. We maintain our EUR 14.50 per-share fair value estimate.

Credit Agricole also announced it is buying an 80% stake in Belgian wealth manager Degroof Petercam. At only around 0.3% of Credit Agricole’s common equity Tier 1 capital ratio, this is not a material deal for Credit Agricole. We estimate that the deal values Degroof Petercam at EUR 1.6 billion, equal to 20 times Degroof Petercam’s 2022 net income and around 2.6% of its assets under management. The deal looks fully priced to us, especially considering that Credit Agricole does not have a presence in Belgium, which will limit synergies. Credit Agricole believes it will comfortably exceed its 10% return on investment target for new investments. We estimate that Degroof Petercam will have to double its profits to meet this goal. While the price looks full, we agree with the strategic rationale. Wealth management is a highly profitable, capital-light business with limited credit and interest-rate risks. Degroof Petercam has a solid market share and reputation in the Belgian market with entrenched relationships.