French Big Picture: Banking, Economic and Capital Market Trends – Summer 2010c

- Easing 'big picture' concerns — "French banks performed well through the recent
European stress-tests. French banks still pass after stress-testing sovereign risks on the banking book and using a 6% core Tier 1 hurdle rate. Moreover, the recent Basel 3 guidance eases market concerns over potential risks from NSFR, leverage ratios, and the treatment of financial investments & minority interests."
- French retail resilience — "Although we expect some deceleration through the course of the year, as favourable base effects diminish, we believe that French retail offers relative resilience. Net interest income is being supported by strong sight deposit growth and an improving funding mix, while financial fees & commission benefit from higher market levels. France is one of the few major European markets that is bucking the deleveraging trend."
- Credit Cycle Plays — "French banks are likely to continue to benefit from the turning credit cycle, notably in their wholesale and international books. Based on Moody's data, 2Q10 defaulted volume stood at US$3.5bn, significantly below the 5-year quarterly average of US$32bn."
- A Perfect Storm In Equity Derivatives — "BNP Paribas and SocGen carry amongst the leading equity derivatives franchises globally, a key area of weakness in 2Q10. In this report, we demonstrate the relationship between this business and changes in correlations, dividend expectations and volatility. We believe that this area will be the key 'soft spot' in the forthcoming results."
- Updated Estimates — "We have adjusted forecasts modestly for BNP Paribas (2011E & 12E down 1% and 3% respectively) and SocGen (2011E & 12E down 2% and up 2% respectively). We upgrade our Natixis earnings materially to €0.42 in 2011E (from €0.29) and €0.49 (from €0.38), mainly driven by lower loan loss provisions as Natixis benefits from the significant turn in the wholesale credit cycle, although we remain significantly below consensus (8-14% under). Taking into account a lower cost of equity, we upgrade our price targets for each of BNP Paribas (€62 from €60, 10.8% cost of equity), Natixis (€3.4 from €3.0, 11.2%) and SocGen (€54 from €50, 11.2%)."
- Overweight French Banks, Buy SocGen — "In our recent publication The Bank Strategist, we rated the French banks Overweight and highlighted SocGen as one of our Top 5 European bank picks. The French banks should continue to benefit from a turning credit cycle and relatively resilient pre-provision earnings trends. With the worst of the legacy assets issues behind us, we believe that SocGen remains best-placed to exploit these trends."
Citigroup French Big Picture 20100729