Executive sat down with Jean François Deroche chief executive officer of Indosuez, the wealth management arm at Crédit Agricole’s S.A. (CASA), and François Farjallah global head of the Middle East and Africa for Indosuez. In a November 2017 interview, the pair discussed Indosuez and CASA’s governance, international investments, and presence in the Middle East.
E Can you please explain the structure and governance of Crédit Agricole and Indosuez Wealth Management?
JF: We have a very simple structure: There are 39 independent cooperative mutual banks, which together hold 55 percent the majority of Crédit Agricole S.A., and the other 45 percent is listed on the stock exchange.
Crédit Agricole S.A. controls all other corporate activities: investment banking, private banking, insurance, consumer credit, and all retail banking outside of France.
E What was the impact on CASA’s recent simplication of its governance? Who holds the most power on the board today?
JF: Ultimately, the power is always with the 39 regional banks, because together they control 55 percent. The main change does not come from this simplification; the main change comes from the political body of the 39 banks getting together to decide what they want to do. The major change was made to ensure that now people are sitting together. Before, they were separate—you had the 39 banks, in the federation they were appointing people in CASA. Now, the people in charge of CASA.’s and the CEO keep their seat in the political body, and the people in the political body are on the board of CASA, which means you have two organs, but in fact, they’re the same people, and they all meet together.
E So is this better oversight now?
JF: Exactly, because they are together.
E Indosuez had a very bad experience in Greece, which led to the loss of $14 billion dollars And had worse, or equally bad, experience with the subprime crisis, which inflicted another $14 billion in losses. Today, you’re looking to acquire Commerce Bank. What are the lessons learned from the Greece and subprime experiences, and how are you going to mitigate risks associated to acquiring Commerce Bank?
JF: So, in terms of experience, I think Crédit Agricole’s bad experiences, which translated into losses in the beginning of the financial crisis, were not specific to Crédit Agricole. Most of the large banks during the 1990s and the 2000s were in a big expansion mode. They wanted to do everything everywhere. So you buy, and you develop. So on those two aspects, yes, we have been hurt by the subprime crisis, like 90 percent of the very large international banks, and we have made badly timed acquisitions, because I think the acquisition was back in 2006 in Greece, just before the crisis and the explosion.
Unfortunately, some of the other banks had made bad acquisitions in other countries like Russia, some in the US, in Brazil, whatever. I think it was a mistake, but it was a very common mistake done by many banks. What all banks and Crédit Agricole has learned from this crisis is that they become much more prudent in their approach to have more reasonable ambition; to focus on their strengths.
Retail banking is the heart of Crédit Agricole, and the group really wants to develop in markets that are really close to its own culture and geographical reach, so going to Greece was a bit far away. When you acquire, you need to have people sent over there who know the market, who come from the bank. Italy works much better because it’s much closer. In reality, it’s a story that started 20 years ago during the 90s, with Crédit Agricole investing in banks in Italy at that time.
The other retail markets are also markets that have been present for many years. In Morocco, we control Crédit De Maroc, which is one of the big retail banks [there]. In fact, it has been under our control for 30 years, so it’s historic. Other retail markets are much smaller. Yes, we [are involved in the] retail market in Poland, for instance, but it’s a story that began 15 or 20 years ago, with the consultants of a finance company that really extended its product offers to clients, so the group is more productive today.
[On the subject of] Commerzebank, I think what our CEO said was that we can’t not look at Commerzebank; he didn’t say we want to buy Commerzebank. So we’ll see what happens, and just can repeat what our CEO said, of course he said at some point that if the German government decided to sell and was looking for some buyers, that the group would look at it.
E Critics of Crédit Agricole’s international expansion are worried that many of its executives come from a regional level, and that they got catapulted with little global experience. How do you address these critics?
JF: I think this has changed dramatically in the past few years. Yes, our CEO comes from the group, but since he has been appointed, he’s [been] traveling quite a lot. To know what the group is doing everywhere, he’s going twice a year to the American zone, he’s going twice a year to Asia, he’s doing many things. And if you look at the composition, the number two of the bank Mr. [Xavier] Musca does not come from the group; he used to be a civil servant—head of treasury—he was even general secretary of the presidential palace with very [extensive] international experience.
If you look at the level right below the executive committee of the listed vehicle, you have a number of people who don’t come from Crédit Agricoles. They might come from Indosuez, they might come from Crédit Lyonnais—and with much broader international expertise. The CFO of the group, Mr. [Jérôme] Grivet, was from Crédit Lyonnais, which has a large international network. Mr. [Yves] Perrier—the CEO for Amundi, the number-one asset manager in Europe, one of the top eight in the world—came from Credit Lyonnais, and before that Société Générale, with a big international connection. So I think progressively it has become more international; this is probably a critique which had a lot of ground four, five, or six years ago, [but] I think it has been changing. I’m not saying it’s perfect, but it’s changing. If you look at the board, the person in charge of the board’s nomination committee of is an Italian lady, not a French person. So I think the group has realized that and has taken steps to evolve and become more international.
E In France, you are at almost 7,000 branches, which is triple your closest competition: Société Général has around 2,000, and of the other competitors, nobody has more than 2,500. How is this an opportunity, and how is this a challenge, especially since you’re looking at developing your e-banking platforms?
JF: In retail banking, [our] largest competitors are not Société Général or BNP [Paribas]. The largest competitors are other cooperative banks—Bank Populaire or Crédit Mutuel—which have larger number of branches than [Société Générale], BNP, etc. Then you have the other competition, which are the digital banks and those types of affairs. This week, there was a competitor who announced the creation of a new bank and new offer: Orange, the telephone company, a new entrance. So this is the real competition. Existing people, existing banks, new entrance in banks, and new digital players.
The approach of the group is to explain that the reality of this business is still about the clients. So you have people who try to approach the client with a very targeted approach, but usually it’s only a very small segment of the banking relationship you have with the clients.
The new offer from Orange, for instance, just started. They offer something very simple: You go to them and you get the checking account, the saving account, and the credit card, and that’s it. The reality is when a bank is like Crédit Agricole, you can do more things, you insure your house and your cars, you buy investment products, it’s much broader. So the group’s strategy is to develop its digitalization offer, because there is a revolution of the whole industry, but the motto of the bank and is 100 percent digital and 100 percent personal. Because what we believe is that the global relationship with the client cannot be only digital—the client wants to also have physical and direct contact with a banker to discuss various issues.
Private banks in general are lagging in terms of digitalization, because the older clients are less interested in new communication means. Now they’re catching up. And last year, we made a study. We interviewed a number of clients, and we said, ‘Ok, we’re going to launch a mobile app.’ What’s important to you? Is it to look at your account? Is it making transactions off your telephone? Of the two strong things that came out, one is, of course, to have access quickly [to] a view of my portfolio. The second one [is] that they want a very easy and secure way to communicate with their banker. If I do it by phone, it’s a bit old, but if I do it by Skype or FaceTime, this is not as secure, and I don’t like to talk about my bank account. This was a bit surprising for us; it was not what we had thought in the beginning. So we’re launching in 2018 an app by Indosuez, and we realized that the client does not just want the digital experience, they want to have somebody to talk to.
E Is that something you can provide?
JF: Yes, of course we provide that sort of communication, and the retail banking. That’s why Crédit Agricole says that our branches are very important for us, because in the end, this is where people like to [bank]. They might look at the internet and other things, but at some point, they want to walk in and talk to the banker, so this is why the motto is really 100 percent digital and 100 percent personal. And we believe that this is really our differentiating factor compared to people who only have digital.
E Let’s come closer to our part of the world. What are the main changes in the profile or the needs of your clients in the last two or three years, especially in the Middle East, and especially in light of the decrease of the price of oil?
JF: It’s two things. One [challenge] which affected everybody was the fact that we were living for a long while in an environment with very low interest rates. For people who [were] looking for a very secure type of investment to protect their wealth [rather] than trying to be very aggressive with wealth creation, it was very difficult environment because if you were for example just playing in a very secure type of interest rates investment, the yield was very, very low. So that’s one challenge that’s true for every client, including [those in] the Middle East. For the Middle East, I think what’s happening is that with the decrease in the oil price in general in the region, it probably created more need for the client to support their own business. So [clients] have been a little bit more prudent in exporting funds outside because they needed to support their own business; the cash flow might have been not as big as it was in the previous years, which created [the need for the client to support their own business].
Now this trend is being contradicted by another trend, which is the need for wealthy people in the Middle East to diversify, because this is the need of every wealthy person. They like to diversify, not to keep everything in one place. If you take countries like Lebanon, clients are [often] entrepreneurs. They or their families have amassed major fortunes by doing business. Their wealth is really here in Lebanon or the region. If they want to have some secure part of their wealth to be independent from the economic or political situation here, they need to have offshore wealth placed somewhere, which is not correlated with what’s going on [in the region]. In the past two years, as I said, [wealthy people] had to adjust their business to the slowdown due to oil prices. Now, it seems that people have adjusted to the lower price of oil, and can resume as before.
E Saudi Arabia, of course, beyond the decrease of oil prices, is also facing a lot of fiscal and other policy changes, which creates uncertainty for businesses that feel they are going to be targeted. We see a lot of family offices trying to relocate outside of Saudi Arabia, or even businesses trying to get their business or money out, and sometimes even families moving to Geneva or London in a time of uncertainty. Do you consider these as clients? Have you witnessed this type of clientele coming to the bank?
JF: It’s difficult to comment because movement offshore is always in and out, as I explained, all clients are entrepreneurs, so they do movement in both sides. I don’t feel a particular trend, [or anything] very extraordinary happening. You mentioned a big transformation that has started in Saudi Arabia—as you know, we have been present there for many, many years. We have been doing private banking since 1931, and so it’s a very important region for us. Of course we are following this transformation, [and] what seems obvious is that these changes are trying to strengthen the kingdom to make it move into the 21st century. But we didn’t see a particular trend from [our] clients.
E Economic fundamentals in Europe have been changing. For example, Spain, which was witnessing negative 2 percent growth in GDP, is now up to 2.5 to 3 percent, and it looks like it will stay like that for the coming two to three years. Britain increased its interest rate from 0.25 to 0.5 percent, most likely triggering a trend that we will see across Europe. How does this change the offers that you are making to your clients, and what do you expect for the European economy?
JF: I think the European economy is getting better. It went through a very big crisis for almost 10 years. It is promisingly recovering. While the cycles in Europe are not as mild as can be in North America or the Middle East and Asia, usually the move is milder. And its seems [that] right now, we’re entering a period where most of the European countries have a better prospect for the next couple of years—[but] that doesn’t mean that the European growth will become 5 percent. That’s not the type of growth we [will] enjoy, but at least it will be positive, [and] it will be above 1 percent, and, of course, it will create a much better environment.
For us, it doesn’t really change the type of offer that we do. The financial markets in Europe have been performing well anyway. So in terms of a particular investment proposals, etc., it does not make any big change.
E Lebanon is composed of family-owned enterprises. We don’t have huge corporations or corporate treasury account, so estate planning happens on paper here. We have our real estate—which is probably apartments, or land we have inherited or bought—and we have a bit of cash that we have put aside, and we get 6, sometimes 7 percent interest rates from Lebanese banks. Where does your offer, or Crédit Agricole Indosuez, come in to complement this estate planning? What is the pitch of Crédit Agricole Indosuez to the Lebanese client?
JF: You’re right, the main issue for clients with family enterprises is that their wealth creation is coming from their business, and from the investment side, they want to have wealth preservation. When you want preservation, the first thing that you want is safety. Crédit Agricole is one of the biggest and most solid banks in the world. It’s number five in terms of capital, and it’s really one of the top 15 in terms of fiscals very stable. This safety aspect is very important.
If they want to diversify their assets—we’re not trying to make them an offer in Lebanon because there are Lebanese banks—so if you want to diversify, you have to go abroad. If you want to go abroad, we have two [advantages]. First of all, we have [many offerings] in terms of locations, because we are present in Asia, in Europe, and in the American regions, so wherever you choose to diversify you can have a proposal from us. And you are going to get the same type of proposal whatever the product or investment you want to do. You will be able to locate it and book it in Miami, France, Switzerland, Luxembourg, Hong Kong, Singapore—wherever you like it. And the [range] of offers that we have is very large.
So if you look at all these elements, we don’t say that we’re the only bank that you can consider, but certainly amongst the four, five, or six banks that you will have to consider. On the other hand, the knowledge and the understanding of the region that we have is very strong and probably unique, because of the history of Indosuez. There has been presence in the Middle East since the 19th century. Our experience is long, and we’re very stable here. So if you combine everything we believe, then we’re really a good choice for these clients.
FF: And, if I may add, what differentiates our offering is our capability for tailoring things for each individual client. Real estate is one of the very important assets for the Lebanese in particular, so for real estate in Switzerland, France, and in the UK, we’re capable of accommodating these needs for the client. We really look at the needs of the client, we study what is still missing, because the needs that were 10 years ago are not today’s needs.