Orange opened a bank in October © Reuters
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Financial regulators in Europe like banks to be boring. Full of capital and light on leverage, the ideal institutions should be quick to adjust either as required. What if that dull but trustworthy enterprise was a telephone company, though? Orange fits the bill.
The French telecoms group opened a bank in October. The project looks set to confuse shareholders and analysts. Seen from a bull’s point of view, the new Orange Bank has its merits. As UBS analysts argued, it has “a strong brand and 28m mobile customers already”. Last week, Orange reiterated its target to acquire 2m customers within 10 years, equivalent to 2.5 per cent of the French savings market.
That would be quite an achievement. Going by what the top six French banks earned last year from retail banking, that much share could generate over €2.4bn in net income. Even half this number sounds like a lot; consensus estimates for 2019 for Orange put its after tax earnings at just €3bn. While that may sound a nice problem to have, shareholders and analysts may struggle to value a company with legs in two heavily regulated sectors.
Some industries, like carmakers, have long run in-house finance units. Two years ago, Renault launched a savings bank in Britain known as RCI, to help fund its car finance loans. In two years it has attracted about £2.1bn in deposits, equivalent to 0.25 per cent of UK retail deposits and savings. However, such sales financing has long been integral to Renault’s profits. More banking income probably would not register with its shareholders.
Orange’s strategy might even backfire. The market tends to under-price conglomerates. Telecom analysts know little about banks and may not assess risks properly. If the bank flounders, then shareholders will question why resources were wasted. Regulators might welcome another dull deposit-taking bank. It is less certain that investors will.
Should Orange start a bank? The Lex team is interested in hearing more from readers. Please tell us what you think in the comments section below.