CRARY Credit Agricole SA (PK)

By Noemie Bisserbe 

PARIS--Crédit Agricole SA said it will sell back the 25% stake it holds in the group's regional lenders in a move aimed at easing concerns about its capital strength but that could also dent its earnings prospects.

The announcement lifted the French bank's shares. By midmorning Wednesday they were up over 11%, making Crédit Agricole the leading gainer among financial stocks on the Stoxx Europe 600 banks index.

Crédit Agricole said its regional lenders will pay around EUR18 billion ($20 billion) to buy back their shares.

The Paris-based lender, France's second-largest listed bank by assets, announced the restructuring plan Wednesday as it reported a 28% jump in fourth-quarter net profit to EUR882 million in the three months to the end of December. Revenue was up 11% at EUR4.29 billion, lifted by a pickup in loan demand.

The move to revise its structure highlights the pressure on European banks to fortify their balance sheets and improve transparency to woo investors, amid volatile markets and demands from regulators.

European banking shares have suffered sharp losses since the beginning of the year amid concerns that global central banks struggling to boost growth will worsen an already tough environment for lenders.

"The current environment is such that we can no longer afford to have investors believe, rightly or wrongly, that the group is weak on capital, " Chief Executive Philippe Brassac told reporters. "This allows us to address the issue on capital once and for all," he said.

The French bank had been working for months on a plan to revise its corporate structure--which has for a long time weighed on its valuation--and to ease tensions within the bank. Crédit Agricole is 56%-owned by the group's regional retail banks. In turn it controls 25% of these lenders--a structure analysts say is too complex.

The transaction will have a positive impact on the bank's capital buffers. Crédit Agricole's core tier-one ratio, which compares top-quality capital such as equity and retained earnings with risk-weighted assets, would reach over 11%, well above the 9.5% threshold set by regulators, up from 10.7% in December.

The deal will be financed in part by a 10-year loan of EUR11 billion at a 2.15% interest rate by Crédit Agricole to its regional lenders and should be completed this summer, the bank said. Crédit Agricole will also pay back EUR5 billion in cash deposits to the regional lenders to unwind an intragroup guarantee mechanism.

The proposed transaction could, however, impact the bank's earnings growth going forward.

Crédit Agricole's domestic retail lenders contributed EUR236 million to net profit in the fourth quarter, up 14% from a year ago, while the group's corporate and investment bank posted a 78% drop in net profit to EUR50 million.

Mr. Brassac said that the corporate and investment bank's earnings this quarter were in part dented by a one-off loss on a real estate portfolio in Italy, and its risk profile remained low. He said the group had no plans to trim its investment bank further.

Crédit Agricole's large insurance and savings management business, which posted a 17% increase in net profit to EUR462 million this quarter, should also help support growth.

Mr. Brassac said Crédit Agricole will target a return on tangible equity--a measure of profitability--of more than 10% over coming years. The bank previously targeted a return on tangible equity of 12% in 2016.

The bank will detail its medium-term strategic plan at a presentation to investors on March 9.

It proposed a dividend of EUR0.60 a share on 2015 earnings, compared with EUR0.30 last year.

Write to Noemie Bisserbe at noemie.bisserbe@wsj.com

(END) Dow Jones Newswires

February 17, 2016 05:30 ET (10:30 GMT)

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