Crédit Agricole hit by €202m loss but is banking on recovery

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Credit Agricole was hit by a €202m (£178m) write-down on Greek sovereign debt in the second quarter but the French bank's profits came in ahead of expectations and it struck an upbeat tone on its financial strength.

France's third-largest bank by market value unveiled second-quarter net income down 10.6 per cent to €339m. Its international retail-banking arm suffered a €418m net loss as it wrote down €527m at Emporiki, its Greek operation.

Investors were cheered by the limited impact of the Greek crisis on the bank and management's dismissal of concerns over its ability to raise funding.

Jean-Paul Chifflet, the chief executive, said there was "a lot of irrationality linked to catastrophic situations".

The bank's confident tone boosted European banking shares, which have been battered by concern about lenders' exposures to bonds issued by Greece and other troubled eurozone countries and fears of a knock-on panic that could leave banks unable to refinance their borrowings in markets.

The bank said money available from US money market funds had roughly halved but that it could fill the gap with alternative sources of finance from Asia and the Middle East.

Crédit Agricole's comments also spurred a cut in the cost of insuring against debt defaults by financial institutions after three weeks of almost relentless increases.

The Markit index of financial companies' credit default swap prices eased to 239 yesterday so that insuring €10m of debt across the index for a year would cost €239,000. The index hit 253.93 on Wednesday – a level not seen since the financial crisis was in full swing.

Gavan Nolan, a credit analyst at Markit, said: "We have seen a tightening of spreads today in a reversal of the pain in recent days when most banks have widened a lot.

"Crédit Agricole's numbers are better than expected and there has probably been some profit-taking on short positions because spreads have widened so much in recent weeks and people are taking a bit of risk off before [US Federal Reserve chairman] Ben Bernanke's speech."

Lloyds Banking Group was the biggest UK beneficiary of the reduced cost of debt insurance, tightening by 17 basis points to 310 from the day before.

Royal Bank of Scotland also rallied yesterday but by only 11 basis points, leaving it at 330 basis points – close to the 345 level it hit on Tuesday.

Crédit Agricole's shares rose 4.8 per cent. Société Générale, which bore the brunt of recent fears about French banks' exposures to the eurozone crisis, rose 2.6 per cent.

Barclays and RBS both climbed by more than 5 per cent.

Greece's finances continued to cause market jitters. The country's sovereign debt yields rose yesterday on fears that a deal struck between Greece and Finland could scupper the bailout agreed earlier this summer.