Retail Banking Momentum And European Initiatives Will Improve Future Profitability

Key Takeaways

• Strong retail banking and consumer finance performance, with French home loan rebound and stable consumer credit driving revenue potential.
  
• Record insurance premiums and asset management growth at Amundi boost revenue, with net inflows enhancing assets under management.
  
• Increased regulatory constraints and political uncertainties may hamper profitability, with rising provisions and legal risks potentially limiting earnings and net margins across sectors.

Catalysts

Provides retail, corporate, insurance, and investment banking products and services in France and internationally.

• Crédit Agricole is meeting its profitability targets a year ahead of schedule, with net profit 20% above the target and return on tangible equity 2 percentage points above the target, which suggests the company is well-positioned to continue driving revenue growth and improve net margins.
  
• The company is seeing strong activity in retail banking and consumer finance, with a notable rebound in home loan activity in France and stable, high levels of consumer credit, indicating potential for increased revenue and net interest margin improvement.
  
• Crédit Agricole’s insurance activities and asset management, exemplified by record levels of premiums and assets under management at Amundi, are integral to enhanced revenue growth, particularly with strong net inflows and increased assets under management.
  
• Efforts in securitization within the Capital Markets Union and leveraging European ties could potentially optimize capital efficiency and enhance profitability through better capital consumption and cost management.
  
• The stabilization of deposit mix in France and anticipated improvement in net interest margin from loan repricing could positively impact revenue and net margins moving forward.

Crédit Agricole Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Crédit Agricole's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.1% today to 24.6% in 3 years time.
• Analysts expect earnings to reach €7.2 billion (and earnings per share of €2.32) by about May 2028, up from €6.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €8.3 billion in earnings, and the most bearish expecting €5.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from 7.8x today. This future PE is greater than the current PE for the GB Banks industry at 6.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.71%, as per the Simply Wall St company report.

Crédit Agricole Future Earnings Per Share Growth

Risks

• Increased IFRS 9 provisions, primarily from Stage 1 and Stage 2, could signal potential risk exposure adjustments, adversely affecting net margins and earnings.
  
• The decrease in net interest income due to macro hedging could impact future profit margins for LCL and the retail banking sector.
  
• Political uncertainties in France might unpredictably influence the market, potentially affecting revenue from retail banking, especially in lending activities.
  
• Capital constraints due to Basel IV and other regulatory impacts may elevate risk-weighted assets (RWAs), which could suppress the growth in earnings and limit net profit margins.
  
• Legal risks and provisions in the UK motor finance sector suggest regulatory challenges that may lead to unexpected costs, impacting revenue and profitability.

Valuation

• The analysts have a consensus price target of €17.694 for Crédit Agricole based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €21.5, and the most bearish reporting a price target of just €14.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €29.3 billion, earnings will come to €7.2 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 6.7%.
• Given the current share price of €16.49, the analyst price target of €17.69 is 6.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.