Credit Agricole SA (ACA:US), France’s third- largest bank by market value, will book 2.68 billion euros ($3.64 billion) of goodwill writedowns in the fourth quarter to reflect stricter rules and a worsening economy.
“These measures do not involve any cash outflows and do not affect the strength of the group,” the Montrouge-based bank said in a statement today. While the goodwill charges come “primarily” from complying with tighter rules, “they also reflect the present macro-economic and financial environment in the relevant countries and business lines,” it said.
Credit Agricole’s total one-time charges, which include costs related to a revaluation of its own debt and a writedown on its stake in Portugal’s biggest publicly traded bank, will reduce the bank’s net earnings by about 3.8 billion euros. Credit Agricole, which had 16.9 billion euros in goodwill on its balance sheet at the end of September, is taking the writedowns following recent recommendations from the European Union’s markets authority.
The European Securities and Markets Authority called on Jan. 21 for improvements in disclosures after reviewing 800 billion euros of goodwill assets at 235 companies in 23 countries across Europe. Goodwill is an accounting convention that represents the amount paid for an acquisition over and above the fair value of its net assets.
While writing down goodwill doesn’t deplete capital, it reduces profit and signals a company overpaid for acquisitions. Deutsche Bank AG, Germany’s largest bank, yesterday took 1.9 billion euros of writedowns on goodwill and other intangible assets. ArcelorMittal, the world’s largest steelmaker, said in December it will write down the goodwill in its European businesses by about $4.3 billion as the region’s weakening economy erodes demand.
“The cleaning operation is still ongoing” at European banks, Jacques-Pascal Porta, who helps manage 800 million euros at Ofi Gestion Privee in Paris and doesn’t own Credit Agricole shares, said in an interview before the announcement. “But even heavy losses are easier to swallow as confidence has returned in the markets since last summer.”
Credit Agricole rose as much as 3.6 percent in Paris trading, after initially slumping, and was up 2 percent to 7.43 euros at 9:55 a.m. The stock has gained 16 percent in Paris trading since the bank agreed on Oct. 16 to sell its unprofitable Greek unit, Emporiki Bank, to Alpha Bank SA for a token price of 1 euro.
Credit Agricole, controlled by 39 French regional banks, has a market value of 18.2 billion euros. It is scheduled to report earnings in full on Feb. 20.
French banks are facing a proposed bill to split off their riskiest market activities into separately capitalized units. BNP Paribas SA Chief Executive Officer Jean-Laurent Bonnafe urged lawmakers this week to also tackle goodwill risks stemming from past acquisitions.
“Goodwill is particularly harmful in the banking industry,” Bonnafe said at a Jan. 30 parliamentary hearing. Bonnafe wasn’t referring to Credit Agricole.
Credit Agricole invested 2.2 billion euros in 2006 to buy Athens-based Emporiki, and has written down the Greek unit’s goodwill in recent years. Credit Agricole expanded in southern Europe after its 2003 purchase of Credit Lyonnais SA, which strengthened its lead in French consumer banking.
Credit Agricole’s goodwill writedowns include 466 million euros on its corporate- and investment-banking unit, 366 million euros on Newedge Group SA, a brokerage joint-venture with Societe Generale SA, and 852 million euros on Credit Agricole’s Italian branch networks, the bank said.
Societe Generale, France’s second-largest bank, said Jan. 16 that it expects a goodwill charge on its stake in Newedge, without giving the amount. Newedge is cutting costs and jobs as the derivatives brokerage seeks to offset declining volumes and adapt to new European rules.
Only Banco Santander SA’s goodwill assets surpassed those of Credit Agricole among European banks at the end of September, according to analysis from Bloomberg Industries. BNP Paribas had 11.1 billion euros of goodwill on its balance sheet at the end of September, while Societe Generale had 6.6 billion euros at the end of June, according to the banks’ websites.
Credit Agricole is also taking 850 million euros in pretax charges from the revaluation of its own debt. Banks book accounting charges or gains tied to the theoretical cost of buying back their own debt as market prices fluctuate.
Credit Agricole also wrote down by 267 million euros its 20.2 percent stake in Portugal’s Banco Espirito Santo SA (BES) and booked a tax expense of 130 million euros on its insurance businesses. Credit Agricole SA (ACA) reiterated it will book about 160 million of fourth-quarter losses as its French regional lenders depreciate the value of their shares in the publicly traded bank.
To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at email@example.com
To contact the editors responsible for this story: Frank Connelly at firstname.lastname@example.org; Edward Evans at email@example.com