PARIS French banks Societe Generale (SOGN.PA) and Credit Agricole (CAGR.PA) have agreed an asset swap designed to help narrow their business focus, part of efforts to improve their investor appeal in a tough economic and regulatory climate.
Like many lenders across Europe, both banks are under pressure to find new strategies to cut costs and better compete for market share as new curbs on risk taking hike the cost of doing business and as a fragile recovery at home saps revenue.
They are also battling the legal and regulatory fallout from the financial crisis, with Agricole pledging to fight any accusation by the European Commission that it had colluded to rig benchmark interest rates.
"I refused the notion of a deal that would have constituted a recognition of responsibility," Chief Executive Jean-Paul Chifflet said.
Brussels is expected to fine banks billions of euros next month for allegedly operating like a cartel to manipulate benchmark interest rates, Reuters reported this week, with both Agricole and SocGen expected to be hit.
SocGen said it had set aside 700 million euros in provisions for litigation issues without specifying which ones. The bank declined to comment on a possible European fine.
The asset swap, unveiled on Thursday alongside quarterly results, will involve SocGen buying its smaller rival's 50 percent stake in brokerage Newedge for 275 million euros ($372 million), while Agricole will buy 5 percent of their asset-management venture Amundi for 337.5 million.
This would leave SocGen with all of Newedge, which offers greater exposure to foreign-exchange and commodities markets, and Credit Agricole with 80 percent of Amundi.
It would also sharpen differences between investment-banking-focused SocGen and its 119-year-old semi-cooperative rival, which since the 2008 financial crisis has been retreating from trading and brokerage activities to focus on more traditional retail banking and insurance.
"It's positive for Credit Agricole, which derives 40 percent of revenue from insurance and asset management and which has been pulling back from trading and derivatives," said Yannick Naud, a portfolio manager at Glendevon King, who does not hold shares in either bank.
"For SocGen, there will be synergies as well. The French banks are becoming more and more different from one another."
Agricole's strategy may have paid off in the third quarter, when it swung to a profit of 728 million euros from a 2.85 billion year-ago loss on the back of a painful exit from the crisis-hit Greek market.
SocGen shares were up 4 pct and Credit Agricole was up 5.5 pct, extending their gains on back of the European Central Bank's surprise rate cut.
But the bank also said it would push back a planned investor day from later this year to March 2014, signaling potential uncertainty ahead for investors as the European Central Bank begins its health check of the region's lenders.
"While the investor day could bring even bigger changes, expectations are being delayed," Citigroup analysts wrote in a note to clients.
SocGen, which is retreating from areas such as asset-gathering and which according to trade union sources is planning up to 375 job cuts in its custody business, saw quarterly profit jump more than fivefold to 534 million euros.
Analysts had expected profit closer to 674.9 million for SocGen and 483.6 million for Agricole, according to the average of forecasts compiled by Thomson Reuters I/B/E/S.
Smaller rival Natixis (CNAT.PA) reported a 38 percent rise in third-quarter profit on Wednesday as cost savings and robust capital-markets trade offset economic weakness. BNP Paribas (BNPP.PA), France's No. 1 bank, last week also reported a rise in net income after cost cuts.
BNP also said it had made a non-binding offer for Polish bank BGZ without giving a price.
Reuters first reported SocGen's plan to take over Newedge in June. SocGen had previously sought to exit the unit as part of a drive to strengthen its balance sheet, but a lack of buyers pushed it to think up new ways of integrating it.
Agricole has already sold its other brokerage brands CLSA and Cheuvreux as well as assets including its stake in Spain's Bankinter (BKT.MC) in a bid to improve balance-sheet strength.
Agricole, which has lower capital ratios than rivals and its own parent network of regional cooperative banks, is targeting a Basel III core Tier 1 ratio of over 9.5 percent by end-2015. The bank said its ratio would improve as a result of the Newedge deal.
SocGen said it expected its capital ratio to fall by 10 basis points after the Newedge deal. It reached a Basel III ratio of 9.9 percent at end-September and said it expected a dividend payout ratio of around 25 percent of profits. ($1 = 0.7392 euros)
(Editing by Mark John and David Holmes)