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We look at a number of issues in this note: scenario analysis, the
prospects of a bid for Socgen, and the potential for further
subprime-related losses
Our overall conclusion is that the market is pricing in a ‘severe’
economic slowdown, but not an early 1990s-type deep recession,
hence, we see further downside risks and remain cautious on the
sector, cutting target prices accordingly
We are, however, upgrading our BNP rating to Overweight from
Neutral, reflecting its ‘safe-haven’ status among French banks
French banks have been hit
hard
It’s been a year to forget for the management
teams of the French banks. After a buoyant start
in early 2007, it’s been downhill ever since, with
little respite. The main French banks’ share prices
have since declined 20-40%. The smaller and
more volatile Natixis is down 45% during that
period.
True, the whole banking sector has been hit hard
during this time. But even on a relative basis, the
French banks have underperformed the European
banking sector. We see a number of factors
behind the weakness:
High starting valuations As we highlighted
in our note, French Banks: Walking pace:
sub-sector growth looks likely (5 June 2007),
French bank valuations, while undemanding
in absolute terms, were hitting highs in
relative terms in Q2 07, in part driven by
takeover chatter.
Exhibit 1 The main French banks have fallen between 20%
and 40% since the beginning of 2007
50
70
90
110
130
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
absolute performance, Jan07 =
100
BNPP SocGen CASA
Source: Datastream
CDO/subprime risks: Market fears over the
CDO/subprime issue grew throughout H2
2007. And all four French banks appeared to
have some exposure, albeit modest in the case
of BNP.
CIBM fears: Related to the CDO issue is a
more generalised fear in the market that
otherwise buoyant CIBM revenues could be
hit harder in future by a slowdown in
structured finance activity, among other
things. For us, Socgen was of particular
concern (see All tunnel, little light, 16 April
2007), as it generated a significant proportion
of its CIBM revenues from trading, though
we could never have predicted the recently
announced loss stemming from alleged fraud.
Weak domestic growth: The French banks
have little to offer investors by way of
compensation for the CIBM concerns, in our
opinion. After all, the core French retail
businesses have been steady, but dull.
But all of this begs the questions: How bad could
things get, and how much of this is already in
the price? Answering such questions is never
easy. In this note, we attempt to provide some
context to readers for the current share prices. We
also touch on what we see as other important
issues for the French banking sector. Hence, we
divided this note into four sections (plus some
forecast appendices):
Sensitivity analysis: In the first section, we
consider what happens to earnings and returns
if we apply an early 1990s-style deep
recession to the current French business
models. For comparison, we also include
estimates for a painful, but less severe,
economic downturn.
Does a Socgen bid make sense? This is the
second ‘hot topic’ of the moment. We
consider the arguments discussed in widely
published news reports for and against a
Socgen takeover bid.
Could we see further CDO/subprime writedowns
or other related losses? In our third
section, we look at the potential magnitude of
additional losses on a bank-by-bank basis
using peer-group analysis from US
investment banks.
The outlook for French retail banking: We
provide some commentary on the domestic
situation.
Conclusions
Stress-testing the numbers
Exhibit 3 summarises the results of running two
scenarios on our 2007 French bank numbers, the
first applying early 1990s-type bad debts, with
sharp declines in CIBM and other revenues (the
‘deep’ recession), and the second, ‘softer’
scenario being less severe, but still representative
of a sharp economic slowdown.
Exhibit 3: Valuation metrics under the different scenarios
Summary BNP CASA Socgen Natixis
Deep recession 8.0% 6.1% 8.4% 1.6%
Severe slowdown 12.7% 12.6% 13.7% 6.3%
PE, deep recession 18.4 26.2 17.0 63.5
PE, severe slowdown 11.6 12.6 10.4 16.1
Book value per share* 44.8 14.5 58.6 12.1
Current price/book 1.44 1.41 1.40 0.92
* 2008e tangible
Source: HSBC esti
目录
Stress-testing the numbers 7
Does a Socgen deal make
sense? 13
Subprime and monoline risks 18
A brief comment on French
retail banking 25
Forecasts and valuations 29
Disclosure appendix 37
Disclaimer 43
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