Ross Levin on Cooperative Investment Certificates (CCIs) issued by Credit Agricole Group (podcast #186)

Ross Levin, Director of Research at Arbiter Partners, joins the pod to discuss his thesis on Credit Agricole S.A. CCIs (Cooperative Investment Certificates).

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Transcript begins below

Andrew Walker: All right. Hello and welcome to yet another Value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot. If you could follow rate, subscribe, review it wherever you're watching or listening to. With me today, I'm happy to have my friend Ross Levin. Ross is the Director of Research at Arbor Partners. Ross, how's it going?

Ross Levin: It's going well. Can't complain.

Andrew Walker: [crosstalk] I am so excited to have you on. You're the one who turned me onto this. We've been talking about these ideas for a while. They're very different, but I'm really excited to present them. But before we get there, I know you're probably going to have to add onto this, but just a quick disclaimer to remind everyone. Nothing on this podcast is investing advice that's always true, but it's particularly true today we're going to be talking about I say a little but actually a lot smaller, more, I liquid off the run international security. So everybody should just remember every word I just said said, carries an extra degree of risk that everyone should remember when they're, you know, doing their research. This is an investment advice. Please, consults financial advisor. Ross, all that out the way. I know you'll probably have to add something, but the things we wanted to talk about today were kind of French. How do you call them? It's French, not convertible prefers, but certificate-

Ross Levin: [crosstalk] Cooperative Investment Certificates.

Andrew Walker: There you go. People who are familiar with kind of trust preferred securities in the US might know about them, but I'll let you give the overview and your disclaimer. So I'll just toss it over to you.

Ross Levin: Sure, sure, sure. Let me just pronounce the the blessing provided by my compliance officer. This discussion is of course not investment advice, and investors should consult their own advisors prior to making any investment decision. Arbiter and its clients currently own the securities we'll be discussing and may buy or sell them at any time, and we undertake no obligation to correct update or supplement any statements made in this discussion. With all that out of the way, yes, I'm happy to discuss with you today the certificate Corporative to invest this more, which are issued by the regional banking affiliates of the Credit Agricole Group. I think most viewers of your podcast would be more familiar with Credit Agricole SA. That's the corporate and investment bank that's got the most liquid listing and it's got the symbol, ACAFP. It houses the corporate and investment banking operations of the Credit Agricole Group.

It houses all of the international and insurance operations of the group. And that's the entity that has the big headquarters over on six that avenue here in New York. That's indirectly an investment via the Certificate, corporate Chief Investors Mall, or CCIS, as I'll refer to them. But it's not really the the main course. What a lot of people don't necessarily know about the Credit Agricole group outside of France, although those within France would be quite familiar, is that the main and historical business of the Credit Coal Group is a retail, predominant retail banking franchise within France. That's a business that goes back into the 19th century, and it is a business conducted by 39 regional banks, which are predominantly mutual in their ownership. The corporate and investment bank is often discussed as the holding company or the mothership but it is in fact not.

In point of fact, the 39 regional banks collectively own 60%, the majority of that corporate and investment bank that it is essentially a minority stub that is the the main listing, if you will, of the group. And in fact, the regional banks have recently disclosed plans to increase their stake by about a billion euros and take it up possibly as, as high as 65%. So the regional banks that we're involved in are predominantly mutual. Most of them have no public listing at all. However, a subset of them which now number 13 issued for the most part several decades ago, a form of non-voting participating equity. These are the CCIS. They issued this paper at a time when the situation facing the group was quite different and when the macroeconomic environment was quite different.

They issued this paper at a time when interest rates were quite high I mean by historical standards, not by the standards of the last decade. They issued this paper at a time when the the group and the regional banks were fairly thinly capitalized. They had been somewhat de recapitalized by a prolonged period of inverted yield curve, much as the US savings and loan sector had been up till that time. And they issued this paper partly to finance the buyout from the government of what would become the Credit Agricole corporate and investment bank that we know today. They sold this paper out of the bank branches to their retail clientele, you know, literal sort of mom and pop investors. It never had a sell side coverage of any note.

It never had a buy-side, you know, institutional constituency of any kind. and it was sold in fairly small lots to many, many, many, many, many thousands upon thousands upon thousands of shareholders. But over the ensuing decades of a few things have changed. Number one, the compounding of the equity or book value of these instruments and of the banks in general has outpaced the growth in their balance sheets or indeed in the French economy, such that they have become quite overcapitalized. And by that I mean almost preposterously overcapitalized, the regional banks at this point run CET one ratios of around 25% on average with some north of 30%. Those are the sorts of numbers that we would associate with maybe a second step demutualization in the state rather than-

Andrew Walker: [crosstalk] I was thinking this. It's, yeah, for people who aren't super familiar with banks, I mean, like a JP Morgan would have from the top of my mind, they'd have like 14 or 15% set one. And as JP Morgan's considered well over capitalized the government because they're so big, says, ''Hey, we take a well over capitalized bank and we add 2% to you, and all this sort of stuff.'' So most of the banks people are familiar with are probably in the like 10% range, right? Which is about one to 10 leverage, and that's kind of normal for banks. So 25% is like, you're basically all equity, you're approaching all equity. It is wildly overcapitalized.

Ross Levin: That's correct. and, you know, you are also in an environment where even with interest rates, you know, materially higher than they were a few years ago participating equity capital is still relatively expensive compared to other, you know, means of funding a bank in a way that it was not several decades ago when this paper was issued. The third thing that's kind of changed is that these instruments, which traded at around book value throughout the 1990s and the early two thousands came after the GFC in 2008, 2009, and then sort of the European Sovereign Echo in 2011, 2012 they came to trade at extremely large discounts to their book value or net assets. The discounts are now running approximately 80%, so they're trading at at 20% of a book value, and that's a book value that's grown seven or 8% per annum over the last 10 years, over the last 20 years, and over the last 30 years. So these are kind of compounders that are trading at a huge discount. They also happen to feature what is at current market prices, a fairly considerable dividend yield of about 5%. So the combined compounding rate is, is well into the double digits at current pricing.

Andrew Walker: Perfect. So let me pause there. So basically how people can think of it, you have these small e-liquid pretty much off the run securities that were sold to retail investors in the early nineties. You know, I think a lot of people are familiar with people made fortunes going and buying going and buying when all the communist countries were demoralizing and giving their citizens literal stocks. And people would go like, ''Hey, I'll take those 500 shares of the local oil company you've got for this bottle of vodka.'' Like this isn't quite that, but these were very much sold to retail citizens and they kept them in their bank accounts for 30 years or so, you've got these off the run e-liquid securities and massively overcapitalized banks. So I guess there's two opportunities here, right? Oh, and I should just say, I'm really excited for this idea, but it is difficult to provide tons of pushback because so many of the documents are in French, and people can read this, but there's two opportunities, right? This could go one of two ways. Way number one, what happens if you and I, and again, we're not providing investing by, but if we buy today, what sort of dividend yield are we looking at? And kind of how would that trend if these were never called and we just kind of had a perpetual preferred that we bought right now?

Ross Levin: So if you buy them today you get about a 5% dividend yield. Over the long term that dividend yield has tended to grow along with the earnings of the banks over the recent past. The growth in earnings has been very limited because they've been sort of wrestling with compression and NIMS. For some technical reasons the French banking sector is a little slower to recover in terms of its NIM than some of the other Eurozone economies. So it's not Ireland, it's not Italy where the politicians have recently announced that they're going to take a bite out of what are seen as excess NIMS from banks. [crosstalk]

Rather, there's a bit of a lag in the recovery of NIMS. But nonetheless, I would expect over time those dividends to grow along with earnings. The Credit Agricole regional banks have undertaken fairly explicitly. But at the time of the corporate investment bank, IPO and more recently, as part of an arrangement with the AMF, which is the French securities regulator, when they bought out the corporate and investments banks' stake in the regional banks, they've undertaken to pay out 30% of their nominal earnings in dividends. And while they have stuck to that commitment it is worth noting that the nominal earnings are understated by about half, such that the effective payout ratio is 15% or so. My general sense is that when you buy, you know, a yield instrument at a mid single digit dividend yield but at a 15% payout ratio, you tend to do pretty well.

Andrew Walker: But, so, but just so to be clear, like one of the things I even said mistakenly at the front is perpetual preps, right? And I, I can point you to a lot of US banks that have perpetual preps that are trading for 60% of face value, because, you know, they were issued when interest rates were zero. So they've got a 5% fixed coupon, interest rates have gone up and they've got a fixed coupon. So that's great for the bank. In this case, the dividend is based on a percentage of earnings. So assuming earnings are going up, which, you know, it should happen one way or the other because the bank's retaining a lot of capital. So earnings should go up the dividend's based on that earnings, you should have a growing income stream over time.

Ross Levin: That's correct. And the compounding rate of the capital exceeds the stated ROE of the banks because the majority of the capital in these banks is mutual capital that, like in a partially demutualized thrift holding company in the United States is taking no, or in this case, a di minimis dividend such that the external kind of non-mutual capital realizes a growth in capital higher than you might infer from the ROE less dividends. There's also a couple other sources of incremental compounding. One, is that the regional bank's ownership in the corporate and investment bank which in aggregate is 60%, is individually not a controlling stake. So they don't fully consolidate or proportionately consolidate the earnings from the corporate and investment bank. They only record the dividends from the corporate and investment bank as income.

So that results in an understatement of earnings from that source of about 50%. And furthermore, and this is sort of important to the catalyst that's brewing in 16, the Credit Agricole Group announced a transaction whereby a cross shareholding held by the corporate and investment bank of 25% of each of the regional banks was sold back to the regional banks at 105% of book value. That's an interesting transaction for a few reasons, but it results in a understatement of earnings power or capital buildup because they own this 25% stake collectively in each other, they don't reduce their share count by the 25%. They essentially only record the dividends on that 25% ownership in each other within their reported earnings.

Andrew Walker: There's something about France and these, like I know so many people and it's actually worked out pretty well, but like the Boer Odette situation where like Odette owns shares of Boer, Boer own shares of Odette, but because they own them in each other, they can't cancel them out. And you have to like do all this, it reminds me of Russian dolls, like Russian Destiny dolls. It's like, why can't these guys just start canceling out shares and stuff? It'd be so much easier. So I guess juror one-

Ross Levin: [crosstalk] I have to admit, we have a bit of a weakness for those sorts of complicated co-shareholding structures. We sort of have the view that if, you know, there must be a pony in there somewhere.

Andrew Walker: Okay, so door one is, I'm buying this way over capitalized, preferred yielding security at mid single digits. And that yield should grow pretty nicely because again, they're paying on a percentage of earnings. The earnings are growing nicely because of returns on equity, because the returns on equity are boosted by the mutual capital, all this type of stuff. So that's story number one. And that would yield, you can tell me if I'm wrong, it probably yields like IRRs in the low double digits if we follow that, it might even be better.

Ross Levin: Yeah. It's basically the compounding of book value, 7- 8% a year plus the dividend stream 5% a year, less whatever relevant tax or feed drag you might have.

Andrew Walker: Yep. But so that's store number one. And that's a great door, right? overcapitalise, pretty safe-ish security going for low double digits all in return, that's it. But I think the most interesting point is door number two, which is what happens if the catalyst that you talked about is brewing comes to the path? So I'll just flip it over to you. What is the catalyst and what is the history there?

Ross Levin: So that transaction I mentioned earlier back in 2016, I call it the Eureka transaction, where the Credit Agricole regional banks bought out the stake that the corporate and investment bank had in them. At 105% of book is an interesting transaction. It catalyzed a degree of dissatisfaction among the still predominantly retail shareholder base of the CCIS. The majority of the CCIS, if you can believe it, are still held by the original purchasers. So the annual turnover is roughly 10% of what's outstanding, but there's a fair amount of repeat business within that. The majority of these have never actually turned over, and the majority of the supply, as far as we configure, is essentially demographic, meaning people who are annuitizing at retirement or trustees sort of liquidating estates and things like that.

So those folks actually had not had such a bad time of it. In price terms, they've had, you know, more than a double over the last few decades. But if you include the compounding or reinvestment of dividends over that period, you know, they're up maybe five X over the last three decades, which is not, you know, an amazing IRR, but it's a pretty decent compounded return for you know, retail savers. And it's been fairly tax efficient for them. So they weren't wildly unhappy even though these sort of discounts had emerged through the fact that the book values had grown much faster than the prices. However, when they saw the corporate and investment bank, you know, the sort of Parisian investment bankers getting taken out at 105% of book while their recourse to liquidity was to sell to opportunistic and in some cases, you know, disagreeable international-

Andrew Walker: [crosstalk] Sell to people who are possibly recording a podcast currently.

Ross Lavin: You know in fairness are our investors in general are very likable people, and some of them are even sympathetic, you know, endowments and foundations and the like. But nonetheless the retail shareholder base, which had been very quiet and sleepy and still remains to a large extent, sleepy was able to be roused, if you will, by the perceived unfairness of that transaction. There had also been some favorable changes in French law over time almost particularly in 2008. and there is also this sort of mounting over capitalization. And there has also been a trend across French mutual banking including the Credit Agricole group to eliminate via fairly fully priced redemptions or buyouts non-mutual capital of otherwise mutual groups.

So you put all that together and it afforded, you know, a group called Adam, Association for the Defense of Minority Shareholders in France, ourselves, a couple of French institutions and a large number albeit a tiny minority in a [laugh] of the total number of French retail savers to organize around a campaign to seek the redemption of these instruments at book value. That campaign has several legal arguments or angles. It also has an economic logic in that these instruments are fairly expensive capital, and in any event, they are dramatically excess capital at this point. Though again, they were not always and furthermore, it's got a sort of a cultural element in that for most of the history of the Credit Agricole Group, there was not non-mutual external capital of the regional banks. Most of the regional banks don't issue this form of non-mutual external capital. And the other major mutual French financial institutions have taken out analogous forms of capital. And furthermore, two of the regional banks of the Credit Agricole Group, which had been issuers of this form of capital, bought out all of their CCIS shortly after large discounts emerged back in 2009, though that was before the Credit Agricole Group ran into some issues in Greece and had to spend a number of years licking those wounds.

Andrew Walker: And just correct me I want to go into all this, but just correct me if I'm wrong, these CCIS like they're sold by the regional mutual, right? But it means they're generally sold geographically, right? So if you're the regional mutual in Northern France, you would buy from the regional mutual, and if you're in the southeast, you'd buy from the southeast. And I do think, and we'll address all the things, I think there is an element of fairness to it, right? Like we have had several of the mutuals, as you said, take out these CCIS and it seems a little unfair. Like if my grandma bought CCIS in Northern Europe, for her to have her CCIS kind of languish at 20 or 30% of book or whatever it is. Whereas if your grandma bought them in southern France, she gets taken out at par one day just because, you know, she bought 20 years ago and she gets taken on a par just because that bank decided it's the right thing to do. And they're all kind of interconnected, you know and we can address that as we go on.

Ross Levin: [crosstalk] There's sort of fairness arguments in the sense that these are the clients of the Credit Cole group, and they were put into these securities by the Credit Agricole.

Andrew Walker: [crosstalk] It's a mutual, so they're also the owners of the Credit Agricole Group.

Ross Levin: Exactly. There's also sort of equity arguments, if you will, from one region to the next. You know, why is one group being afforded an exit at a fair price while another is not? I think there are also questions of reputation that are very important here and are likely to become more so. You know, the Credit Agricole Group seeks to build up a business in you know private banking. The Credit Agricole Group controls the predominant asset manager in Europe Amundi, which is, you know, if not the BlackRock of Europe certainly aspires to be. So there are reputational issues around that. I think there are also reputational issues around running regulated financial, where you have elements of your capital structure trading at enormous discounts. I think it introduces, as we've seen with Credit Suisse an unnecessary vulnerability to the narratives of-

Andrew Walker: [crosstalk] You mentioned, you mentioned Credit Suisse, Western Alliance. Now there was all sorts of stuff going on, but their stock drop from 60 to eight in a day. And, you know, a lot of people say, oh, it's just the stock price, it doesn't matter. And if you're running Apple, yes, it doesn't matter if your stock's down 50% in a day or not, you might have some disgruntled employees with their stock options. It doesn't matter. Western Airlines, they literally said, Hey, our largest customers were calling us up and being like, we've got to move our money. Like your stock price is telling us you're going bankrupt. We've got to move our money. When you're a bank and you've got something trading at 20% of book, you are reliant on the capital markets. And that 20% of book eventually it can come back to bite you. Your Credit Suisse example was a great one as well.

Ross Levin: Now, in fairness you know we're certainly not thinking that an outcome. It's likely here, we're long and this is one of the best deposit franchises in all of Europe much less in France. And these are some of the most overcapitalized financials of scale that we're aware of. So you know, it's a certainly we think a theoretical rather than a practical vulnerability, but it's one that I would presume the Credit Agricole management is, is quite sensitive to.

Andrew Walker: Yeah. It's just, I think as finance creatures value investors, you can say, ''Oh, the stock price doesn't matter'', and 90% of the time, you're right. But when you've got something that's capital markets dependent, like a bank is, it's the 10% where you can be right.

Ross Levin: [crosstalk] It also creates some vulnerability to changes in capital treatment, to the extent that a portion of your capital structure is subject to some form of dispute or ambiguity we saw that with, you know, trust preferred securities in the United States, or with discos, which were an earlier form of kind of cocoa like security in Europe, there's been a tendency for these legacy instruments to get cleaned up as a matter of kind of good regulatory and ratings agency housekeeping.

Andrew Walker: So we've talked about the cleanup. I want to both talk about what a cleanup of these would look like, and there have been some historical examples as you mentioned, and kind of point to those historical examples.

Ross Levin: Yeah, sure. So, you know, the aggregate amount of CCIS outstanding in terms of their, you know, book value or their net assets, or their claim is roughly 7 billion euros. Now that 7 billion euros is trading in the market at roughly 1.4 billion euros, 20%. And, and I should mention that these instruments trade some off exchange through crosses among French brokerages. But they do have quotes on Euro next, Paris, and they do trade consistently on the Euro next.

Andrew Walker: We haven't mentioned one yet, so why don't we mention one or two, just both, so investors can go look at them and know what we're pointing to.

Ross Levin: Yeah, sure. So two of the more liquid names are CNDFP Caisse Reg Credit Agric Mut Nord France or CAFFP, that's Credit Eel de France. One of the more amusingly ticker is CRAFP.

Andrew Walker: Look, Ross, you come on the podcast first time and you're going to pitch crap to the audience.

Ross Levin: You know, there may be a pony in there somewhere.

Andrew Walker: So CNDF, I'm looking at CNDFP, today you and I are talking August, what is it? Is today? August 5th? I can't remember. Eighth.

Ross Levin: Eighth. All day.

Andrew Walker: We were talking August 8th. It's traded about 750 shares at about 1330 euro per share. So could you just give an example of where is the stated book value or where is the, would the book value of this be?

Ross Levin: The book value's going to be about 5.2 times that figure. So I don't have it in front of me, but it's, you know 60 Euros or something.

Andrew Walker: Okay, great. So, book value's about five X, it's got a dividend yield of about 4%, as we talked about, and that should grow as the earnings growth. Okay. So let's go to examples of historical kind of buyouts of these CCISs. How have those tended to trade?

Ross Levin: Well, so two of them there've only been two that was in 2009. Both of those buyouts occurred at a around 80% of book value and required a two-thirds vote of the CCI holders to approve the the takeout. So those are the two buyouts, sort of in toto of CCI issues by Credit Agri regional banks. the other major trade corporate finance transaction within the group is that 2016 deal, where 25% of each of the regional banks was bought back by the regional banks at 105% of book. There are also ongoing buyback programs by all of the CCI issuers. I would say, though, that only four of them are you know, really very material at present. But that number has been growing. You know, a couple of years ago, or three years ago, we would've said that that only one was a material you know, repurchaser.

And so there does seem to be some recognition of, you know, excess capital and the discounts as sort of an attractive corporate finance opportunity on the part of the banks. There have also been a number of other transactions in other French mutuals that are kind of important. The BPCE group bought out all of its CCIS, which had been owned by Natixis, which was then publicly traded. I believe that transaction was at 105% of book that was in 2013. And sort of kicked things off, but there've been a bunch of subsequent transactions where little public stubs of otherwise mutual entities got bought out. Credit Mutual bought out the publicly traded stub in one of its central entities. The CIC group that was CICFP. There was a buyout of Lucinda, which was a leasing affiliate of Credit Facia. You know, and each of those transactions occurred at about 105% of book.

Andrew Walker: And you mentioned that the, some of these banks are trying to buy back their shares. What does the buybacks look like? Because given the low liquidity I'm guessing they're not going on the open market and trying to execute like a 10 B five buyback or something. Are they going door to door and knocking on people's doors and saying, ''Hey, if grandma has some of these press from 30 years ago, will take them off your hands?''

Ross Levin: Yeah. Sorry, by the way, I misstated the ticker of the CIC group. It was actually CCFP and I should know that because we owned it. So the manner of the buybacks for the CCIS is unfortunately in the open market. And the reason that that's unfortunate is that the AMF rules on open market repurchase programs are fairly restrictive in terms of both percentage of volume and the ability to lift offerings. And so they are dramatically constrained by the open market daily volumes. So you'll have a CCI issuing bank announce their ambition to purchase maybe, you know, 6% of the outstanding CCIs or as much as 10% in a two year period, you know, or even a one year budget. And then you'll find that they come up dramatically short. Yeah. Because that, that 6% or 10% ambition represents 60 or, you know, a 100% of the annual on exchange volume. There have been some indications that they, you know, would be more aggressive if they could, but you know, those are hints and emanations.

Andrew Walker: That's it. I mean, a buyback, again, if they're paying out 30% of their earnings as dividends to the prefs buying back these preps at 20%, a face is hugely because you divide it back at 20% of face, your remaining group gets a greater share of that 30%. So it is just hugely accretive to do that. Let's talk about risks here, right? So risk number one would be, ''Hey, Ross is crazy.'' These companies decide never to call these away. And I think we've addressed that, ''Hey, you'll just do the'', you know, assuming the math is right, 5% dividend now plus 7 - 8% compounding of capital for all the reasons we discussed. So let's put that risk this time. The other two risks that would jump out to me are I guess, just one big risk. But these are banks, right? They're overcapitalized now, but they're French banks. You mentioned Italy's taxing banks. It's not like France has never seen banks blow up, Europe's never seen banks blow up. How do you think about that risk or any other risk that you see to these?

Ross Levin:
You know, well, I mean, I suppose there's some risk that under some future political circumstance France could, you know, leave the euro or the Euro could break up. I don't frankly know that I'm adding much value to those sorts of speculations. you know, France is a country that did, you know, nationalize its banks within the memory of those now living, if not those on this call, you know, the nature of the precedents around bank nationalization in France are such that if that were actually to occur, we would A, likely be excluded. Because the credit group as mutual entities didn't participate in those nationalizations, although at the time, they didn't have these capitalistic external securities. Secondly, if a nationalization were to occur, it would be a home run for us in terms of the likely valuation at which that would occur.

So I think our, you know, mid end risk is pretty limited. You know, these are fairly conservative lenders. they only lend within their particular regions of France. They're typically lending on you know, single family homes, and there's not much of a housing bubble in France. They do sort of local CNI loans and some local municipal lending. We really haven't seen much in the way of troubling credit issues in, you know, over multiple cycles. So in that sense, I think we're somewhat sanguine. You know, if there were a dramatically inverted yield curve for a long period of time or that would be, you know, troublesome because these are sort of classic banks that you know take in shorter term deposits and lend longer term fixed. That's something of a generic risk. I think the principle risk that we have, you know, had to manage and underwrite is the time horizon. The moderate liquidity. So you really need to line either the sizing or the nature and terms upon which you're bringing capital into the investment with, you know, potentially long and uncertain time horizon for, you know, what we think is likely to be a highly favorable workout.

Andrew Walker: One person who I was talking about with this said, he was like, I've never seen, and again, nothing on this is financial advice, but he, he was like, look, I've never seen something where the base case is so clearly like low to mid double digit IRRs, and then one day you'll just wake up to like a three or four X in your portfolio. And that is not investing advice. But that's how someone described to me. I was like, ''Oh, damn, that's a pretty good podcast pitch.''

Ross Levin: [crosstalk] Hold on. Let me offer another potential sort of, you know, bear case.

Andrew Walker: Oh, I was coming out with some more, but yeah, please go ahead.

Ross Levin: No. Which would be that, you know the yield on the Credit Agricole corporate and investment bank is about 9%. And that's the yield because it generates a very healthy ROE, both nominal and actual and it trades at a modest, you know, discount to its book value and it has a 50% payout ratio. So perhaps, you know, another bear case in terms of valuation more so than fundamental drivers is, you know, well, if these things traded a 5% dividend yield and you can buy something that's more liquid and has the same label on the can at a 9% dividend yield, maybe that's your downside.

Andrew Walker: Yep. So kind of the opportunity cost downside, like, hey, as you said, get a higher dividend yield, maybe not the huge discounts to book, but you get a much more liquid entity that you've kind of got a lot more visibility into the business. Let me ask, speaking of Credit Agricole, right? So when we buy these CCIs, we are buying issues from the regional mutual. So I guess my question is if I buy in northern France and Northern France blows up, I do know all the regional mutual own stakes in each other, and that's kind of some of the circular happening. But if Northern France blows up, do I have any recourse to all the other ones? Or do investors who are looking at these really need to think about, like, read through the balance sheets of the specific regional ones to really understand how each individual one's looking.

Ross Levin: From an equity perspective, they are, you know, independent of one another and in their lending and deposit taking functions, they are, you know, independent in the sense that the country is divided regionally and there's no sort of crossover. However, they do share in common a stake in the corporate investment bank, which on average represents perhaps 20% of their equity. And they do share in a cross shareholding in each other which represents about 25% of their equity. And then on top of that, there is a systemic or regulatory undertaking to support each other in extremis which is really more of a consideration for depositors than it is for the equity.

Andrew Walker: So basically if there was runs on the banks or, you know, we had another GFC, it's hey, we're not going to let our depositors take a haircut, but we'll absolutely zero out the creditors and equity if we need to. Let me just along the lines of the whole group, so we've got the regional banks, and then you mentioned Credit Agricole. To what extent if Credit Agri, you know, I'm not crazy familiar with their investment bank, but we've seen investment banks blow blow up on weird stuff before. Right? And obviously a lot of the regionals own equity in Credit Agricole, but if Credit Agricole went ka bluey, you know, what would happen to these regional banks in the regional press? Would it just be a hole in the balance sheet, but because they're so over capitalized, it's doable, or are they going to find out, oh, we've guaranteed a lot of these obligations and it's a systemic risk?

Ross Levin: Yeah. The, you know, just for context, the group has about 105 billion euros in equity capital, and of that roughly 44 billion sits at the corporate and investment bank and the balance sits at the regional banks. The corporate investment bank runs a CT one ratio that's more conventional meaning-

Andrew Walker: [crosstalk] 25.

Ross Levin: Exactly. And, you know, so just to put sort of, you know, some sense of scale on things the corporate investment bank does run a fairly large balance sheet although most of it's fairly low risk that wasn't always the case. Back in 2011, 12 and into 13, the Credit Agricole Group really did get itself into some trouble via its Greek affiliate on Parisi. You know, they weren't alone. there was something of a complete, you know, totalizing financial crisis in Greece at the time, but because of the recourse to the parent they ended up having to put in you know, billions of euros of support for that Greek entity, which left not the group, but the corporate and investment bank a bit thinly capitalized relative to what regulators post-crisis wanted to see.

And so there were some valid concerns in, I don't know, a decade ago that the, the regional banks might have to participate in some sort of a rights offering or substantial support for the corporate and investment bank. And while there was, you know, some support, and arguably the Eureka transaction was effectively a means of transferring some capital to the the corporate investment bank, I think that sort of sensitivity is somewhat behind us. There has been a real retrenchment and you know reassertion of control of the corporate investment bank's activities on the part of the regional banks. The corporate investment bank has emphasized lower risk and sort of, you know, balance sheet light, i.e. asset management business to a large degree subsequent to that episode and, and the Credit Agricole Corporate investment bank you know, has really not given people cause for concern in recent years.

Andrew Walker: Let me switch to one more oh, did my computer freeze? Nope. I think we're good. Sorry, I told you Ross just before we started, my computer decided to blow up its battery. So, but I think we're fine. One more. So if as an investor, you can go onto the Credit Agricole website and get financials for, you know, financials for the overall group, if you're researching an individual one, how do you kind of do research on the individual side of this?

Ross Levin: Yeah. You can go to the individual you know, mutual issuers website and pull their filings. You can pull their filings from the AMF website, which is the sort of the equivalent of Edgar here in the states or CIDUP in Canada. You can also pull them down if you are a supporter of Michael Bloomberg. [laugh]

Andrew Walker: I got mine from Bloomberg, but I had just done a dumb search of, we mentioned CNDF, which is Conor de France. I had done a dump search and didn't see anything online, so I was wondering if there was a way for the non Michael Bloomberg donators to go check out the financials.

Ross Levin: Yeah. No, they've all got websites and the French language financials are available. They don't necessarily all offer English translation, but Google Translate is your friend.

Andrew Walker: Yeah. It, it's so funny. 10 years ago I remember looking at the Japanese companies and it's just so funny. Google translate for financials. Yes, it's not a hundred, a hundred percent, but it is just so good. It's really opened up the world for looking at foreign investments. Look, I think we've gone through most of my questions. Obviously there's a lot more here. We've mentioned the two or three ones that were not financial advice obviously, but people can go use to jump off and they can kind of follow those threats to find more. But is there anything you think we should have talked about, people should be thinking about as they kind of think through these opportunities or anything else?

Ross Levin: I mean, obviously there's a lot of different directions we could go. You know, there's a I guess an old saying maybe from the muni bond business that the incremental yield on a muni bond issue is about 20 basis points for every 30 seconds of additional explanation it requires. And you know, we're pressing on an hour, so maybe that's a good indication for the prospective IRR here. But no, I think you've covered it reasonably well.

Andrew Walker: Let me ask one, just one more. I do think there is an element to, hey, you know, if everyone who owned a c i who was a local French resident contacted the bank, I was like, I'd like you to convert these. I do think the bank might be a little more receptive as, look, I'm a silly foreigner who I spent my first day in Paris two weeks ago. Right? But can I contact a regulator or something to let them know, ''Hey, you've got these shares outstanding at 20% of face that doesn't make sense for anyone.'' Is there a way to kind of maybe self catalyze that process a little bit?

Ross Levin: Well, I think that an organized campaign of contacting a financial issuer's regulator is probably no way to make friends. What I think would be you know, more prudent would be contacting the Credit Agricole IRR because you'll find that the the presentation to regulators and fixed income investors is very much about the Credit Agricole group. Because they wish to benefit from the perceived and real excess capitalization of the regional banks in their communications with that constituency or those constituencies. But when they speak to equity investors, they tend to emphasize the Credit Agricole corporate investment bank. And they said sort of, you know, fob off the you know, regional bank inquiries as sort of outside of scope. I strongly suspect that as the yawning discounts on the Credit Agricole Regional Bank equity in the form of CCIS come to be seen as a distraction verging on a problem for the Credit Agricole SA equity, or for their discussions with the ratings agencies and fixed income investors, this situation will resolve itself more readily.

Andrew Walker: So, and I like what've you said, they contacting regulators, never a way to make a friend. You are definitely right. But if investors are interested in this, I think if they are interested, they do work, they should consider reaching out to the Credit Agricole, investor relations and just saying, ''Hey, 20% of book value doesn't make sense for anyone here.'' Some type of cleanup could probably, there's a mutually beneficial situation that can do everything here. Cool. Ross, this has been fantastic. Again, I wish I spoke French and had deep expertise in kind of French securities law, but I just think this is an absolutely fascinating idea that, again, I think in terms of risk returns for people who are willing to do the work, put up with a little illiquidity, nothing's financial advice here, but I think it's a really, really interesting situation. So, Ross-

Ross Levin: [crosstalk] Yeah. It's perfectly fun to do a desktop analysis, but you know, I'd strongly recommend you take your significant other on a diligence tour. There's plenty of nice places to visit throughout France.

Andrew Walker: You know, I told you, because you and I met up for lunch just before I just went on the Babymoon and we spent a day in France and I hear you, but I actually preferred Barcelona and not to be too dismissive of an interesting idea, but we can talk about my preferences for European culture sometime else. Ross, this has been great. We're going to have to have you back on for, I know we've got Irish banks we could talk about. We've got Demutualization, we could talk about. Ross is an expert on all things financial, so we'll have to have him back on in the near future.

Ross Levin: Thanks for the time.


[END]