The sleeping giant of French banking is beginning to stir.
Little known outside France, gargantuan Credit Agricole is revamping its U.S. operations and expanding into trading, securities brokerage, and structured finance.
"This is a market where the quality of your counterparty has become increasingly important," says Bernard L. Chauvel, the bank's 41-year-old president and general manager in the United States.
"We have a capital advantage we can exploit."
Credit Agricole's expansion in financial markets in the United States marks a distinct break with past policy of remaining within a narrowly-confined range of banking business.
Moving Out of Chicago
The bank first opened branches in New York and Chicago in 1978, but for many years it focused mainly on corporate finance, especially in the agrotechnology business, and on commodities-related lending.
As part of the U.S. reorganization and expansion, Mr. Chauvel himself has moved to New York from Chicago, where the bulk of the bank's operations were centered until recently.
The revamping comes as part of a broader drive by Credit Agricole to build up its wholesale corporate finance and international capital market activities outside France.
Over the next two years, Mr. Chauvel says, Credit Agricole. plans to turn New York into a platform for its treasury activities by doubling its trading staff to over 50 and pumping $10 million into banking hardware and software.
Brokerage Services
Trading is not the only area Credit Agricole is building. The bank recently obtained Federal Reserve Board approval to develop securities brokerage and advisory services at Credit Agricole Securities Inc. in New York.
It also obtained approval to offer brokerage and advisory services for nonfinancial commodities futures and options through Credit Agricole Futures, Inc., a Chicago-based unit of the bank.
Credit Agricole Securities will focus on distributing French and European securities to U.S. institutional investors, such as pension and mutual funds, that are diversifying internationally.
"We want to profit from the growth in interest in European securities," Mr. Chauvel explained.
He adds that U.S. securities operations are a logical extension of Credit Agricole's own extensive brokerage activities in France.
In contrast, Credit Agricole Futures stems mainly from the French group's need to manage its own extensive investment and trading positions and those of its customers, he says.
Pressure for price management has intensified as the bank's French corporate customers have internationalized their operations and the European Community has eased price controls on agricultural products and a range of other commodities.
"More and more, our clients need to hedge their prices and risks on world markets," Mr. Chauvel says.
"We finance a lot of trading, so it's only natural we should be able to offer hedging products as well."
Financial Engineering
In still another move to develop international corporate finance business and provide customers with state-of-the art financial products, Credit Agricole recently struck an agreement with Lazard Freres to set up a London-based bank.
The bank, Credit Agricole-Lazard Financial Products Ltd. will supply sophisticated financial engineering to large multinational corporations. That covers everything from loans to equity, debt and derivatives, and, eventually, structures intended to minimize tax liabilities.
Credit Agricole is supplying 75% of the the new bank's initital $71 million in capital and Lazard Freres 25%.
The idea behind the joint venture is fairly simple. Credit Agricole supplies part of its extensive capital and strong rating while Lazard brings investment banking expertise.
Mr. Chauvel adds that it's only a matter of time until the new entity applies to extend its operations to the United States.
Separately, Credit Agricole has also taken control of Banque Indosuez's small-ticket U.S. leasing operation, with offices in Louisville, Kentucky, and Los Angeles.
With around $7 billion in assets in the United States, the French banking group has long kept a fairly low profile.
Trend Away from Bank Loans
The current expansion is both strategic and opportunistic, Mr. Chauvel says.
For starters, the shift in borrowing by big corporations away from bank loans in favor of capital market securities such as bonds, notes, and commercial paper has forced Credit Agricole and other banks to look for new sources of revenue.
Among the most attractive are off-balance-sheet activities, like trading, which require limited capital and yield a return on equity higher than what can be obtained from lending.
The French banker acknowledged that the move into new financial sectors - like derivatives - will not be easy. He also cautioned that a shakeout is likely in the years to come.
But he said that Credit Agricole's excess of Tier I capital combined with its strong double-A rating gives it an inherent advantage when competing for business with lower-rated, less well capitalized banks.
Abundant Capital
The bank has nearly $34 billion in capital, of which some 80% is so-called Tier 1 primary equity.
Combined primary and secondary capital, Mr. Chauvel noted, equals 9.8% of the bank's risk weighted assets and the bank could easily boost its capital further if it wants to.
"We have more capital than we need," Mr. Chauvel remarked.
Unlike many other big French banks that suffered a sharp fall in earnings over the last few years on real estate and corporate lending, Credit Agricole came through relatively unscathed.
The group earned $939 million last year, up 2% over 1992. With more than $295 billion in assets, Credit Agricole last year ranked as the world's 1 lth-biggest bank.
Agricultural Roots
Composed of 73 regional banks and 2,900 cooperatives, Credit Agricole started out 100 years ago as a collection of cooperative banks that lent mainly to the agricultural sector.
To this day, the group remains the dominant lender to the agricultural and food sector and retains the single biggest banking presence in France, with 8,400 offices nationwide, or roughly half of all French bank branches.
With around $220 billion in customer and interbank deposits, the group holds about 20% of the French banking market.
Although originally established to finance agricultural production, Credit Agricole has since expanded its operations to a broad range of financial and capital market services and is a major force in France in fund management, insurance, and household finance.
Wholesale and international transactions as well as a portion of the group funding are handled by the Paris-based Caisse Nationale de Credit Agricole, a sort of clearing bank for the group which also runs the U.S. operations.
Born in Brittany, Mr. Chauvel completed undergraduate studies as an agroeconomist and obtained a master's degree in finance and strategic planning from the University of Rennes in 1975.
If Credit Agricole's activities outside France have remained limited, this is partly by choice, Mr. Chauvel observes.
"We're behind in international development in relation to our size and importance," he acknowledges,
But he adds that this has not been all bad since it helped Credit. Agricote avoid large losses suffered by other big international banks in recent years on corporate and real estate lending.
"We're very selective, but for Us, small is beautiful and small is profitable."
