French banks BNP Paribas SA (ADR) (OTCMKTS:BNPQY) (EPA:BNP), Societe Generale SA (ADR) (OTCMKTS:SCGLY) (EPA:GLE), and Credit Agricole SA (EPA:ACA) (OTCMKTS:CRARY) are all currently trading at the multiple 1x TNAV, but investors may be undervaluing the CASA’s ability to increase dividend yields this year because of the bank’s unusual structure. When the bank holds its investor day on March 20, Jefferies analyst Omar Fall expects to hear plans on how it will reach 13% RoTE by 2015 (compared to 10% at Societe General and BNP) and bring its capital structure up to standard.
Stock dilution concerns may be answered this year
Credit Agricole SA (EPA:ACA) (OTCMKTS:CRARY) has said that it will target a 35% payout from this year on, which should have investors excited, but the Caisses Regionales which collectively own 56% of Credit Agricole shares have made it a policy to take their dividends in additional shares, diluting the real yield for other shareholders.
“Credit Agricole has targeted that the Caisses Regionales will be continuing with this policy only until CASA reaches a 9% fully loaded core Tier 1 ratio. Given that strong capital generation in Q4 already saw this number reach 8.3% and the further deleveraging we expect, we forecast this will be achieved in 2014,” writes Fall.
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While Credit Agricole SA (EPA:ACA) (OTCMKTS:CRARY)’s capital structure has been weaker than its peers, another reason that some investors are wary of the stock, Fall believes the bank can will pass the 9% CET1 mark this year and that it will catch up with BNP Paribas SA (ADR) (OTCMKTS:BNPQY) (EPA:BNP) and Societe Generale SA (ADR) (OTCMKTS:SCGLY) (EPA:GLE) in 2015.
If this happens then stock dilution will stop being such a problem, and Credit Agricole SA (EPA:ACA) (OTCMKTS:CRARY) could hit a 4.3% yield this year (18% above consensus) making it the highest yielding European bank, let along the highest yielding in France. He has increased his price target to €13.5 from €10.3 (currently €11.8) and maintains his Buy rating, calling CASA his favorite play among French banks. He has been bullish on CASA since initiating coverage in September when the stock was at €7.91.
Credit Agricole is less reliant on investment banking than its peers
In addition to his estimate of sector leading yields, Fall prefers the earnings mix at Credit Agricole SA (EPA:ACA) (OTCMKTS:CRARY) over the other French banks. CASA gets 42% of its pre-tax profits from asset gathering and just 3% from investment banking, compared to 31% at Societe General and 12% at BNP, giving earnings more visibility. Since asset gathering is more stable than investment banking, Credit Agricole’s earnings mix may deserve a valuation premium. Fall gives Societe Generale SA (ADR) (OTCMKTS:SCGLY) (EPA:GLE) and BNP Paribas SA (ADR) (OTCMKTS:BNPQY) (EPA:BNP) a Hold rating.