CRARF - Crédit Agricole: Good Trends But Almost Fully Priced

2023-11-17 01:33:36 ET

Summary

• Crédit Agricole's Q3 results exceeded expectations, with higher revenue growth and lower provisions.
• The bank is on track to achieve its strategic plan objectives and has shown substantial operating leverage.
• On a relative basis, we see less upside vs. other EU banks. It's still a buy with a less attractive dividend yield.

After analyzing Intesa Sanpaolo and BNP Paribas' quarterly performance, today we decided to move forward with Crédit Agricole (CRARF). Post the bank ' Ambitions 2025 ' plan and Q2 results; we increased our target price to €13.1 per share. Italian and French banks are correlated, given the fact that both Crédit Agricole and BNP Paribas have subsidiaries in the Italian peninsula (Italian Optionality parts 1 and 2 ). To support our overweight target, we also suggest our readers check Mare Evidence Lab's previous publication called:

1. Dividend Yield At 10% Means It's A Buy
2. Earnings Growth Momentum With Attractive Acquisitions

Post Q3 results, we lowered BNP Paribas' target price, increased Intesa Sanpaolo 's overweight valuation, and reiterated a value of €13.1 for Crédit Agricole.

Q3 Results

Q3 results were solid, and Crédit Agricole delivered a profit before tax 9% above the company's internal consensus. These performances were mainly supported by higher revenue growth and lower provisions. Here at the Lab, there are no changes in estimates to short-medium term targets, and the bank is in the right direction to achieve its Ambitious strategic plan objectives. The Group revenue diversification and cost control initiatives were coupled with a supportive revenue momentum. In detail, sales were 1% better thanks to the CIB segment, particularly the Capital Markets and Securities Services division (supported by RBC's recent acquisition ). Crédit Agricole's operating costs were broadly in line, with a cost-income ratio of 55.7%. The Q3 total sales were up by 13.4% on a yearly basis, driven by all business lines and operating expenses excluding the SRF (Single Resolution Fund), reached €5.26 billion, and were up +6.7% vs. Q3 2022. This increase resulted from a scope effect with CA Auto Bank consolidation and the activities, including RBC IS Europe in the company's Asset Servicing division. The delta between higher revenue and cost shows Crédit Agricole's operating leverage upside. Noteworthy divisions were CIB profit, 26% better than Wall Street consensus estimates, and the French retail division, 5% stronger than expected. Italy retail was also ahead of consensus, driven by Net Interest Income generation and lower cost of risk. Going down to the P&L analysis, in Q3, Crédit Agricole Group's stated net profit reached €2.38 billion with a +21.0% vs. Q3 2022.

Fig 1

The cost of risk was lower and reached 33 basis points (Fig 2) and was in line with BNP Paribas. In number, Crédit Agricole CoR was at €429 million vs. consensus at €563 million. Looking at the deposits flow, balance sheet clientele deposits slightly increased by 1.0% quarter-on-quarter, supported by the Italian retail bank with deposits up to €64.4 billion from €63.7 billion. The CET1 ratio (fully loaded) stood at 11.7% and was 20 basis points ahead of our internal estimates (Fig 3).

Fig 2

Fig 3

Why are we positive?

1. The company delivered solid operating leverage at the group level with a robust cost/income ratio evolution (well below the 58% 2025 estimated target under IFRS17);
2. Here at the Lab, Wall Street will likely price a low-single-digit EPS upgrade thanks to earnings diversification and lower cost of risk. In addition, post Q3, these positive results should comfort the market on Crédit Agricole's ability to deliver higher returns. In number, the bank reached a RoTE of 13.5% in 9M, which is way above its guidance set at >12% in 2025;
3. Following the quarterly results, we project a clean net income of €5.5/€5.7 billion in 2024 and 2025;
4. 2024 was highlighted as the year of French retail rebound. The CFO previously pointed to H2 2024, but in the call, he indicated that we are close to the bottom;
5. The CET1 ratio is also 20 basis points higher than our estimates set at 11.5%. This might imply a potential special dividend. However, we are not forecasting an additional distribution in our forecasted numbers. In the Q&A call, the CFO reiterated the 50% payout guidance; however, if we assumed a higher dividend, we would project a 9.1% yield with a DPS of €1.1, while our base estimate is set at €0.91 in 2024 (and €0.95 in 2025);
6. Looking at the earnings per share, in Q3, the company reached €0,46 with an increase of +19.5% vs. Q3 2022. Post Q3 results, the bank is trading at a 2024 6.6x P/E and a 0.7x tangible book value (P/TB) supported by a RoTE of 13.5%;
7. A 7.6% cash dividend yield is attractive, but there are other banks, such as Intesa Sanpaolo, that offer better shareholders' remuneration for a similar RoTE profile;
8. Looking at the European bank average valuation, we see bank valuations in 2024 at 0.8x P/TB and a P/E of 6.4x. Therefore, on a relative basis, we almost see a full-price valuation in Crédit Agricole number. On a P/E basis, the company trades higher while is discounted on the tangible book value. For this reason, we decided to confirm our buy rating at €13.1 per share . As a reminder, the French bank offers a lower yield vs. UniCredit and ISP and still has critical Russian exposure for almost €6.7 billion .

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