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Friday, 28 August 2009

Bank debt buybacks à la mode

Shares in Crédit Agricole rose by 7% on Thursday after it reported better-than-expected Q2 net profits, helped by resilient sales in its retail and asset management businesses and lower asset writedowns. France’s third-largest bank said it made net profit of €201m ($286m), flat on the first quarter but well ahead of analysts’ expectations. First-half revenues at €8.62bn rose 17% from a year ago.

But wait a minute, because at the beginning of the second quarter Crédit Agricole announced the result of its offer to repurchase up to £750 million of its outstanding £1,050 million Upper Tier 2 Notes. Crédit Agricole received valid tenders of £545,211,000 principal amount of the Notes, and agreed to pay £392,551,920 for those notes plus accrued interest.

Call me naive, but I make that a profit on the repurchase of those notes of £152,659,080, or about €175 million. So we can put 85% of the banks net profits down to the fact that it is doing so badly that it could buy its sub debt at a discount, and this is enough to cause the share price to rise by 7%.

Which is probably why CA repeated the same stunt in the third quarter booking a gain of C$63.6 million on a repurchase of C$212 million of Undated Deeply Subordinated Fixed to Floating Rate Notes.

Why make money out of risky lending when you can profit from your own crappiness? No doubt the directors will point to these profits as a reason to preserve their year end bonuses.

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