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Cariparma's 3-bank deal depends on Italian authorities, Crédit Agricole CFO says

Crédit Agricole SA's acquisition of three troubled Italian savings banks will depend on the Italian authorities' ability to meet the French banking group's conditions for closing the deal, the lender's CFO said Aug. 3.

Italian subsidiary Crédit Agricole Cariparma SpA has been in talks with local regulators to buy Cassa di Risparmio di Cesena SpA, Cassa di Risparmio di Rimini SpA and Cassa di Risparmio di San Miniato SpA. Crédit Agricole said Aug. 1 that it had extended its deadline for closing the deal, with the conditions of the sale to be confirmed by Sept. 15.

The deal under discussion includes hiving off the bad loans of the three lenders prior to their acquisition by the French bank, while also guaranteeing that they "clearly" benefit from sufficient client deposits to make them attractive M&A targets.

"There is no discussion about our financial framework," CFO Jérôme Grivet told an analyst call following publication of Crédit Agricole's second-quarter results. "The only discussion is about the capacity of the Italian government to put in place all the elements which will allow it to meet our global framework."

He added: "It's more the fact that the Italian government in principal agrees on what we have put on the table ... it has to put together the different elements which ... render this transaction feasible."

Grivet said the acquisition would extend Crédit Agricole's "footprint" by 20% in the Italian market.

"It's significant and will represent a significant add-up for the distribution capacity of the business lines which are present in Italy," he told analysts.

During the second quarter, revenue from Crédit Agricole's Italian operations rose 5.6% to €436 million, while net income was up 15.1% to €50 million, helped by solid lending and deposit growth. Overall, Crédit Agricole reported a 16.6% rise in second-quarter net income to €1.35 billion, boosted in part from a €107 million capital gain on the sale of its stake in French investment firm Eurazeo. Second-quarter revenue totaled €4.71 billion, down from €4.74 billion a year ago.

Margin pressure to 'vanish'

Revenue from the lender's French retail operations was €857 million, up 1%, and net income rose 40.7% to €152 million amid a 10.7% growth in loans and a 5.1% rise in customer savings. However, Grivet said the net interest margin in the LCL division had come under pressure from mortgage renegotiations as French borrowers take advantage of low interest rates. The vast majority of French mortgages are set at fixed rates.

However, he said the bank was trying to offset this impact through fees and commissions generated by selling other products to customers renegotiating loans, and through an improvement in the credit market.

"On a significant proportion of our loan book we are going to have in the coming quarters — and we already had in the second quarter as compared to the first quarter — a hit on the net interest margin," he told the call. "It's going to be progressively compensated and it's already been partially compensated by the increases in volumes and the increase in fees."

Grivet said the pace of renegotiations was starting to slow, with just €1.6 billion in the second quarter compared to €4.7 billion in the first quarter. Around €400 million was renegotiated in June, in line with levels before the wave of renegotiations started, he added.

"We are now getting to a moment when the additional pressure on margins is going to progressively vanish," he said. "I don't know exactly when we are going to reach the bottom in terms of net interest margin but ... if you compare by the end of the year the [net banking income] in 2017 to 2016 we will be more or less stable."

Grivet also said Crédit Agricole would be on track to meet European rules known as MREL, or the minimum requirement for own funds and eligible liabilities. Set to take effect in 2019, MREL is Europe's version of the global standard for big banks known as TLAC, or total loss-absorbing capacity, and means that a bank must have funds available both to keep itself operating and to absorb losses in the event that it is placed into resolution.

He said he was not expecting any "divergence" between the MREL and TLAC levels, noting that Crédit Agricole was already "significantly above" its TLAC buffers at 20.8% and was on target to be at 22% by 2019.