UPDATE 3-Credit Agricole profit plunges on Espirito Santo hit

Tue Aug 5, 2014 6:42am EDT

Related Topics

* Agricole Q2 net income plunges 97.5 pct to 17 mln euros

* Bank takes 708 mln hit from Banco Espirito Santo exposure

* Shares rise 5 percent at the market open

* Underlying earnings beat expectations (Adds market opening price, analyst comments)

By Maya Nikolaeva and Matthias Blamont

PARIS, Aug 5 (Reuters) - France's Credit Agricole took a 708 million euro ($950 million) hit from its stake in troubled Portuguese lender Banco Espirito Santo (BES), nearly wiping out its second-quarter net profit.

Better-than-expected underlying earnings and stronger capital ratios helped lift Credit Agricole shares, however, as the bank moved closer to turning the page on an era of ill-timed cross-border deals.

Credit Agricole posted net income gains in 2013 after two straight years of losses, marked by a painful exit from Greece, provisions related to Italy and a withdrawal from riskier investment banking activities.

"Today, the group (BES) must deal with the issues specific to the Espirito Santo family and which took place outside the sphere of the bank's corporate governance, and which were unknown to us," Credit Agricole Chief Executive Jean-Paul Chifflet told reporters.

"We can only regret having been misled by the family with which Credit Agricole was trying to create a true partnership to build the biggest private bank in Portugal," he said.

Portugal was forced to bail out BES over the weekend in a 4.9 billion euros rescue package that will see shareholders such as Credit Agricole, and junior bondholders hit with losses, while shielding senior creditors and depositors.

Once Portugal's largest listed bank, BES, in which Credit Agricole has been a shareholder since 1991, has been brought to its knees by the implosion of the Espirito Santo business empire following revelations of financial irregularities.

The bank had issued loans to family-owned companies and sold on the dynasty's debt to its customers leaving it horribly exposed after they filed for creditor protection.

Credit Agricole, which is majority owned by a network of cooperative regional lenders and owns 14.6 percent of BES, said on Tuesday that second-quarter net income plummeted 97.5 percent to 17 million euros.

Adjusted net income rose to 1.003 billion euros from 682 million a year earlier.

Credit Agricole took a 502 million euro hit reflecting BES's losses and recorded a 206 million impairment charge on the value of the stake, which it wrote down to zero.

Shares in Credit Agricole rose 5.1 percent to their highest since June 25, as underlying earnings beat expectations.

"Taking the BES link away is a positive. The issue will not drag on for Credit Agricole," analysts at Societe Generale said in a note to clients.

Credit Agricole had five representatives on the board of BES at the end of last year, including two of its four deputy chief executive officers: Xavier Musca, head of international retail, asset management and insurance, and Bruno de Laage, in charge of retail banking in France. It now has two BES board members.

LEGAL ACTION?

Chief Executive Chifflet said France's third-largest listed bank was closely following the investigations and audits underway at BES and that it supports the new management.

"The new management has indicated that it would consider taking legal action, and we will take part," Chifflet said.

Credit Agricole sealed it first deals in Portugal with Espirito Santo family in the mid 1980s. At the time, the French cooperative lender had a monopoly in France to give out loans in the agricultural sector.

The bank lost its monopoly on granting low-interest loans to farmers in 1990 and it soon became a key BES shareholder when the Espirito Santo Group recovered control of the bank through a privatisation auction.

Credit Agricole has undergone a series of reorganisations since the late 1980s, including an IPO in 2001.

In competition with other French banks, Credit Agricole increased its acquisitions before the financial crisis. It invested in corporate and investment bank Indosuez in 1996, French lender Credit Lyonnais 2003, and assets in Greece and Italy in 2006.

Credit Agricole said it remained on track to hit its goal of increasing net profit by more than 60 percent in two years by cutting costs and selling a wider range of existing products to customers to combat slow growth in France.

Quarterly revenue fell 6.1 percent to 3.934 billion euros. That was above a mean analyst estimate of 3.91 billion, according to figures compiled by Thomson Reuters I/B/E/S.

Net income from French regional banks fell 8 percent in a "sluggish market with the gloomy economic environment coupled with an unfavourable regulatory climate".

Operating expenses were stable, while loan-loss provisions were down 19.6 percent, mainly due to an improvement at Italian consumer-loan unit Agos Ducato.

Agricole's corporate and investment bank, restructured since the crisis, posted a 8.8 percent rise in underlying revenue. (1 US dollar = 0.7452 euro) (Writing by Maya Nikolaeva; editing by James Regan and David Clarke)

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