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BPCE in danger of missing cost targets

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BPCE in danger of missing cost targets

posted a healthyincrease in net income for 2015, but analysts are worried the Paris-based bankis not doing enough to meet its stated spending targets.

BPCE,which comprises the Banque Populaire and Caisses d'Epargne bank networks,registered an 11.5% year-over-year increase in net income attributable to theparent, buoyed by a strong derivative performance at investment bank unitNatixis.

ButBrigitte Martineau-Trauner, a senior investment analyst at LandesbankBaden-Württemberg in Stuttgart, said in an interview that BPCE has been alaggard in cutting costs. For 2015, operating expenses totaled €16.25 billion;the bank has a network of almost 9,000 branches.

Someinternalconsolidation is underway, with a merger reportedly planned betweenthree members of the Banque Populaire franchise, which Martineau-Trauner saidis probably aimed at tackling the cost issue. But BPCE has a long way to gobefore it catches up with peers, she said. In a March 8 note to investors, shepointed out that only 50% of the 2014/2017 strategic cost targets have been metto date. The final 2017 goal is to achieve a cost-to-income ratio of 65%.

Thisseeming lack of urgency has raised eyebrows. Although it is not quoted,Martineau-Trauner said the group is still heavily reliant on debt capitalmarkets and thus must keep investors happy. Having a loan-to-deposit ratio of124%, the bank is reliant on functioning wholesale markets and is expected toraise about €24 billion in new debt in 2016.

"BPCEdepends on investor confidence," she said.

Theanalyst said that, in France, only LaBanque Postale has a higher cost-to-income ratio — and pointed outthat this bank has a very different business model anyway. La Banque Postale isa state-owned bank offering low-cost services, and is operated through theFrench post office. Its cost-to-income ratio at the end of 2015 was 78.6%,according to data from SNL Financial, a part of S&P Global MarketIntelligence.

BPCEhad a cost-to-income ratio of 66.8% at the end of 2015, while the same ratio atother French mutual banks was significantly lower: 's was 63.8% andCrédit AgricoleGroup's was 62.2% for the period, SNL data shows.

Martineau-Traunersaid she expected BPCE to cut both its workforce and its branch network in thecoming months. SNL data shows that BPCE currently has 8,894 branches in France,while Crédit Mutuel and Crédit Agricole have 5,459 and 7,972, respectively.

Meanwhile,the analyst said 2015 revenues were mainly driven by , the Paris-listed investmentbank and asset manager of which BPCE owns about 70%.

Thiswas thanks largely to its unorthodox strategies including short-selling andderivative trading, Guillaume Tiberghien, a bank analyst at Exane BNP Paribasin London, said in an interview.

Assetmanagement income at Natixis grew by 53% in 2015. At the end of the year thebank had €801 billion in assetsunder management, up 9% on the previous year.

Natixis"attracted a lot of inflow, €12 billion of the €33 billion [of which] areon alternative strategies [with] higher margins," Tiberghien said.The bank's income fromthe equity business grew by 26% for the year, registering "strongderivative performance."

However,Natixis' U.S. evolution was "lackluster," with outflows of €3 billionin 2015, Tiberghien added. Recently, Natixis acquired a controlling stake inNew York-based boutique investment bank Peter J. Solomon Co.

"Somehave been overly bearish on Natixis' ability to deliver," Tiberghien said,adding that its stock was oversold due to concerns around asset management andoil and gas. Natixis had an exposure to oil and gas of €12.1 billion at the endof 2015, which has led to worries that further declines in oil price might hitits capital position.

The€12.1 billion is the entirety of BPCE's oil and gas exposure, making up 5% ofits total book and 23.8% of its common equity Tier 1 capital at end-2015, datafrom research house Credit Sights shows. By comparison, had €23.5 billionin exposure to the sector, amounting to 3% of its total exposure and 58% of itsCET1 capital. Crédit AgricoleSA, the listed part of Credit Agricole Group, had a sector exposureof €25.1 billion, or 75.9% of its CET1.

Credit quality remains good atBPCE, with an NPL ratio of only 3.7% in December 2015 in spite of majorheadwinds from low interest rates and a slowing French economy,Martineau-Trauner said. It had a CET1 ratio of 13.0% and a leverage ratio of5%, according to SNL data.