By Maya Nikolaeva and Matthias Blamont
PARIS (Reuters) - France's Credit Agricole (PA:CAGR) said on Tuesday it took a 708 million euro (£563.5 million) hit from its stake in troubled Portuguese lender Banco Espirito Santo (BES) (LS:BES), nearly wiping out its second-quarter net profit.
BES, in which Credit Agricole has been a shareholder since the early 1990s, posted a 3.6 billion euro first-half loss last week and unveiled higher-than-expected provisions to cover exposure to companies owned by its founding Espirito Santo family.
Credit Agricole, which is majority owned by a network of cooperative regional lenders and owns 14.6 percent of BES, said second-quarter net income fell 97.5 percent to 17 million euros.
Adjusted net income rose to 1.003 billion euros from 682 million a year earlier.
"Today the group (BES) must deal with the issues specific to the Espirito Santo family and which took place outside the sphere of the bank's corporate governance and which were unknown to us," Credit Agricole Chief Executive Jean-Paul Chifflet told journalists.
"We can only regret having been misled by the family with which Credit Agricole was trying to create a true partnership to build the biggest private bank in Portugal."
Credit Agricole had five representatives on the board of BES as of the end of last year, including two of its four deputy chief executive officers: Xavier Musca, head of international retail, asset management and insurance, and Bruno de Laage, in charge of retail banking in France. The French bank now has two board members.
Credit Agricole took a 502 million euro hit reflecting BES's losses and recorded a 206 million impairment charge on the value of the stake, which it wrote down to zero.
"Frankly, we expected the exceptional charge," a Paris-based trader said.
LEGAL ACTION?
Chifflet added that France's third-largest listed bank was closely following the investigations and audits currently underway at BES and that it supports the new management.
"The new management has indicated that it would consider taking legal action, and we will take part," Chifflet said.
Portugal will spend 4.9 billion euros to rescue its largest listed bank under a plan unveiled on Sunday.
Credit Agricole said it remained on track to hit its goal of increasing net profit by more than 60 percent in two years by cutting costs and selling a wider range of existing products to customers to combat slow growth in France.
The bank has been selling minority shareholdings and pulling out of markets such as Greece to meet tougher post-crisis regulation and improve profitability. It returned to profit in 2013 after two years of losses.
Quarterly revenue fell 6.1 percent to 3.934 billion euros. That was above a mean analyst estimate of 3.91 billion, according to figures compiled by Thomson Reuters I/B/E/S.
Net income from French regional banks fell 8 percent in a "sluggish market with the gloomy economic environment coupled with an unfavourable regulatory climate".
Operating expenses were stable, while loan-loss provisions were down 19.6 percent, mainly due to an improvement at Italian consumer-loan unit Agos Ducato.
Agricole's corporate and investment bank, restructured since the financial crisis, posted a 8.8 percent rise in underlying revenue.
(Editing by James Regan and Jason Neely)