Turkey of the week: the worst of a bad banking bunch
By
Tim Price Aug 27, 2010
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I make no secret of my distaste for banking stocks. And within the banking sector as a whole, Europe lags well behind both America and Britain. The European Central Bank's recent farcical stress tests, designed to shore-up confidence in the continent's ailing banks, aren't fooling anyone.
The prospect of sovereign default has been overshadowing the European markets since the start of the year. According to the Bank for International Settlements, French banks are exposed to Greece to the tune of €78bn – the largest exposure in Europe. The French also boast the second-largest claims against Portugal and Spain (two other core members of the discredited 'PIGS' countries). And according to Jaap Meijer of Evolution Securities, the French bank with the biggest exposure of them all is Crédit Agricole. This rather recalls a line from Liaquat Ahamed's recent book Lords of Finance: a British Treasury official, recalling how much money France had pumped into Russia before the Great War, remarks that, "The French have always had a sure instinct for investing in bankrupt countries."
The history of French banking is as colourful and mixed as that of its military. Hubert Bonin refers to French banking history as "retarded compared to its British counterpart". Ever since the Scottish economist John Law established the Banque Générale in 1716 (which in turn led to the Mississippi Bubble and a disastrous national economic collapse), the French have used the word 'bank' only rarely, and with suspicion. On the basis of recent history, this scepticism is justified.
Crédit Agricole (PA: ACA), rated a SELL by Evolution Securities
Crédit Agricole was born in 1894 on the back of the Third Republic's interest in attracting farmers' votes by supporting small family farms. An Act authorised the creation of Crédit Agricole's local banks, owned by their members. The banking group expanded throughout the early 20th century, and later stepped up efforts to attract savings to help finance the French post-war reconstruction effort. More recently, Crédit Agricole took a stake in Crédit Lyonnais on its privatisation in 1999, and acquired consumer finance business Sofinco in 2003. Between 2006 and 2008, the enlarged group made retail banking acquisitions in areas including Egypt, Ukraine, Greece and Italy. But this exposure to the eurozone periphery is now its Achilles' heel.
As Meijer points out, "The main French banks have direct exposures on Greek sovereign debt and Crédit Agricole has the biggest exposure all in all, when including possible losses on its domestic loan book". The problem facing Meijer and other bank analysts is that a lack of precise data from the banks makes it hard to pinpoint exactly who holds what. In any event, Crédit Agricole has the highest total debt to tangible book value of any of the major French banks, at 29 times versus 24 times for BNP Paribas and 15 times for Société Générale. The price/book-value is a miserly 0.54, so the market doesn't trust the banks to deliver.
Risks include deflationary pressures, ongoing deleveraging, soft economic fundamentals, default risk and the prospect of further dilution by way of capital raising. Crédit Agricole is covered by 36 City firms. Of these, 14 rate it a 'Buy'; 16 a 'Hold'. But the six I agree with express an outright 'Sell' opinion.
Recommendation: AVOID at €9.88
Tim Price is director of investment at PFP Wealth Management. He also edits The Price Report investment newsletter. Visit
www.moneyweek.com/tpr.aspx
, or call 020-7633 3637.
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