Crédit Lyonnais hits hard times

Date: 28/03/1996

By Tim Jones

ONE year on from the biggest rescue package in European banking history, French state bank Crédit Lyonnais is still far from wiping the slate clean.

On 21 March, the bank revealed that it had only just scraped a symbolic 2-million-ecu profit, flying in the face of its five-year business plan which foresaw profits of as much as 75 million ecu.

In the same week, French Finance Minister Jean Arthuis hinted that the bank would need a further state bail-out even after the removal last year of 21 billion ecu of bad loans and 7 billion ecu in subsidies. This was a climb-down for a bank once talked about as France's answer to the mighty Deutsche Bank.

An ill-timed and highly aggressive expansion plan aimed at turning Crédit Lyonnais into Europe's leading retail banker, with fingers in pies ranging from French equity holdings to a Hollywood studio, went badly awry, confirming every prejudice against nationalised companies.

All the problems which have hit French banks over the past five years - losses in the property market and the increased quantity of bad and doubtful debts caused by companies going bankrupt during the recession - hit Crédit Lyonnais doubly hard as it over-extended.

Three years of accumulated losses, culminating in a 2-billion-ecu loss in 1994, finally blew the whistle. The bank had to own up to losses worth 6.6 billion ecu in troubled real estate lending, 3 billion ecu from its ownership of MGM Studios and 7 billion ecu from equity holdings in domestic companies.

Once they were totted up, Crédit Lyonnais' book of bad debts (where the yield to the bank was virtually nothing) came to a hardly believable 21 billion ecu - only marginally less than the Czech Republic's gross national product in 1994.

There was simply no way the bank could continue to operate without writing off a large chunk of this debt book, and that is what the French government did.

The bank had to form a subsidiary, to be called the Consortium de Réalisation (CdR), which would take control of the 21 billion ecu of assets and sell them over a five-year period. Losses arising from the sales were originally given an unlimited guarantee by the state, but the European Commission capped this at 7 billion ecu.

Now the bank has cleared its balance sheet and has replaced its source of losses with a state loan at the monthly money market rate, representing 1.4 billion ecu in interest payments last year.

New chairman Jean Peyrelevade was hopeful that the bank would return to profitability within three years and could be privatised within five. But this was always going to be easier said than done. The bank had the implicit backing of the state, 65,000 employees and operating costs more than 10&percent; above those of its main private sector competitors. Suddenly, it would have to compete on the markets with resentful rivals.

They claim that the bail-out distorts competition in France, is an excessive burden on the French taxpayer and gives Crédit Lyonnais a head-start in the property sector since it does not have to make provision against losses like everybody else.

Competitors' resentment was highlighted two weeks ago when Société Générale filed an appeal at the European Court of First Instance against the Commission's approval of the bail-out.

The sell-off began with Crédit Lyonnais' Dutch unit, CLBN, going to Belgium's Générale de Banque for 58 million ecu in September last year and, a fortnight ago, the news that MGM had been put up for sale by CdR for as much as 1.6 billion ecu. Yet the downturn in profits for 1995 shows it will be far from plain sailing for the bank.