Credit Agricole S.A.: Resuming Coverage; Interesting for Dovish Investors

We resume coverage of Credit Agricole S.A ACA with a no-moat rating and a fair value estimate of EUR 14.50 per share; its current share price implies a 25% discount to our fair value estimate. It trades at 0.8 times 2022 tangible book value, in line with its average market rating over the past decade, but at 7 times its 2023 earnings, its forward PE ratio is meaningfully below its 9 times long-term average. Credit Agricole S.A.’s valuation is in line with the average European bank that we cover. Given its lower interest rate sensitivity, Credit Agricole S.A. could be an interesting option for investors with a more doveish view on interest rates and investors with a broader allocation to European banks could consider including Credit Agricole S.A. as a naturual hedge in their portfolio to offset the rate sensitivity of other European banks.

Credit Agricole S.A. is, in many ways, unique among European banks. It has a more diverse mix of operations. Its lower reliance on traditional banking activities reduces its exposure to credit and interest rate risk, which could support greater earnings stability. But, it also means Credit Agricole S.A. stands to gain less from the return to positive interest rates. The relationship with its parent, the Credit Agricole Group, is a double-edge sword. It creates cross-selling opportunities but makes Credit Agricole S.A. a complex bank to understand.

We forecast that Credit Agricole S.A.’s net attributable income will grow by 4.5% per year on average over the next three years, with robust revenue growth and operational leverage offsetting higher loan loss provisions. We believe Credit Agricole S.A. can earn a midcycle return on tangible equity of around 11%, slightly ahead of our 10% cost of equity assumption for Credit Agricole S.A. and slightly below Credit Agricole S.A.’s 12% 2025 target.