>>> Credit Agricole / Danish Compromise : Potential Big impact, €1.5/share

Danish Compromise to be maintained or only be partially but not fully removed? Good for Credit Agricole

In a consultation document on the harmonising the exercise of options and discretions in Union Law the ECB indicated regarding the so-called Danish Compromise that
 
The general rule is to deduct from banks' own funds their significant holdings in insurance undertakings. As an exception to this rule, in the case of bank-led financial conglomerates, Article 49(1) CRR gives competent authorities the option, on a case-by-case basis, to allow such holdings not to be deducted and for them to be risk- weighted instead (100% to 370%), provided that a number of conditions are met. Since this O&D requires an ex ante case-by-case assessment, the ECB policy approach is laid out in the Guide.
A full deduction of insurance holdings would have had a significant impact on major bank-led conglomerates in the SSM. Indeed, when deducting the insurance holdings, the fully loaded CET1 ratios of relevant significant institutions (as indicated in Table 1) drop by 100 bp on average, from 11.41% to 10.41%. Therefore, the decision taken was to allow non-deduction while enhancing disclosure requirements. In addition, an intermediate approach is being explored, according to which only the Solvency II requirements of the insurance component would be deducted from the capital of the bank.

 
Read across for Credit Agricole:  Credit Agricole only trades at 0.8x TE for 10% ROTE because of capital deficit. In our current forecasts we have assumed a scrip dividend in order to build capital faster so as to be able to face the removal of the Danish Compromise. The article above suggests that full removal is no longer likely and that instead no deduction or partial deduction would be the most likely scenario. We currently remove EUR5bn from our SOTP valuation or around EUR2 per share. The table above suggests that on average (CA may be worse impacted than average) the 'intermediate scenario' is of only 24bp, ie 75% less than a full deduction. In the instance of CA this would be equivalent to a 50bp deduction instead of 200bp and would add c. EUR1.5 per share to our SOTP
 
Following a sharp share price correction post a poor Q3 performance we believe the shares offer an excellent entry point. We reiterate our Outperform rating.