* Self-help story with material re-rating potential CASA is one of the most compelling self-help stories in the European banking sector, in our view. At 6.5x 2015E P/E, CASA trades at a 30% earnings discount to European peers, despite 70% of net income being driven by the low-volatility, highly profitable French retail and Savings businesses. Depressed valuation reflects continued market concerns about low capital and high leverage at the listed-entity level, in our view. We think these concerns are overplayed. Though CASA has a low starting point on Basel 3 Capital – 6.9%, we think the combination of strong retained earnings (+170bps), derisking in the CIB (+80bps) and the already-announced 'SWITCH' mechanism (+80bps), will drive Core tier I above 10% by FY 2015E. We expect strong capital generation to drive +8% TNAV CAGR - leaving the stock at 0.8x TNAV 2015E for a 13% RoTE: we think the re-rating potential from this capital catch-up is material
*Market appears to be discounting worst-case scenario Some regulatory tail-risks exist, but we currently think the market discounts a worstcase scenario – an outcome we view as unlikely. We expect the ECB's Asset Quality and balance-sheet review to be conducted at the level of the Credit Agricole Group (not listed entity) – leaving CASA management in a strong position to deliver a shareholderfriendly deleveraging agenda in 2014E.
* Upside risk from CIB de-risking We see some upside risks to company targets in coming years – particularly if management pursue a more meaningful CIB de-risking agenda. As it stands, we forecast CASA CIB to consume ~40% of Basel 3 capital in 2014, while contributing ~25% of group earnings at a 7% divisional RoE. We would therefore expect the division to be high on management's list of priorities at the forthcoming Strategic Review in March 2014.
*Valuation: We have a Buy rating and increase our Price Target to €10.80 (from €10.50), driven by a probability-weighted Gordon Growth Model.