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14 January 2009
French banks
Facing the credit cycle-
Changes in TP and Ests.
Brice Vandamme
Research Analyst
(44) 20 7545 1710
brice.vandamme@db.com
The big credit test
2008 was marked by write-offs, and French banks have now entered 2009, the
year of credit downturn. The long-awaited deleveraging is finally about to start,
with its impact on revenue lines. But as unemployment has recently spiraled to
levels last seen in 1993, French banks are unlikely to avoid the big credit quality
test despite the government’s support, which should eventually provide liquidity
and capital. We have a Buy on Societe Generale and remain cautious with Holds
on BNP Paribas and Credit Agricole.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
Societe Generale (SOGN.PA),EUR31.70 Buy
Companies featured
BNP Paribas (BNPP.PA),EUR32.06 Hold
2007A 2008E 2009E
EPS Adjusted (EUR)7.60 2.84 4.88
P/E Adjusted (x) 9.8 11.3 6.6
Credit Agricole Group (CAGR.PA),EUR8.06 Hold
2007A 2008E 2009E
EPS Adjusted (EUR)1.69 0.02 1.23
P/E Adjusted (x) 13.6 490.9 6.6
Societe Generale (SOGN.PA),EUR31.70 Buy
2007A 2008E 2009E
EPS Adjusted (EUR)9.08 1.27 4.60
P/E Adjusted (x) 10.8 24.4 6.7
Global Markets Research Company
Deleveraging at last
While the French economy is less leveraged than EU peers, it has reached higher
levels of household debt, at 48% of GDP in 2008, than in the early 90s.
Furthermore, French banks’ balance sheets are more leveraged than EU peers,
with TE/assets of 2.2% vs. 3% for EU banks. As in the 90s, we expect at least a 2-
year deleveraging process in order to cut the loan to deposit ratio to 110% from
125%. This process should weigh on lending activity and revenue generation.
Government has not said its last word on banks’ capital
Funding shortfall (loans – deposits) in France rose exponentially to Euro 330bn in
2008. While debt capital markets are starting to reopen, the Euro 305bn
government plan is needed to guarantee the coverage of this shortfall. A second
Euro 10.5bn capital injection is also likely: preference shares should be favoured
by the government to boost core T1 ratios by 50bps. But at 10%, the cost of
preference shares would reduce our 09 estimates by 7% on average.
Not immune to credit quality deterioration
We adopt a more cautious view on French banks’ credit quality as their large
corporate loan books should weigh on P&L in 2009. We expect a quick doubling of
NPLs from 3% to 6%. We highlight that applying the loan loss ratio (LLR) of
147bps faced by French banks in 1993 would reduce our 2009 earnings forecasts
by 47% and book values by 8%, but neither would be in loss-making territory.
Cutting forecasts and TPs
This report changes TP and/estimates for several companies under coverage. For
a detailed listing of these changes please see page 25. We cut 09e EPS by 25%
for SocGen & 16% for Credit Agricole, in line with our recent downgrade of BNPP.
We cut TP to Euro 62 for SocGen and to Euro 10 for Credit Agricole. We maintain
a TP of Euro 42 for BNPP. We rate SocGen Buy & have Hold recommendations on
Credit Agricole and BNP Paribas.
0.9x P/TBV; capital markets a key risk
A volatile end-08 drove French banks’ P/B down to a third of their 1998-2008
average & as much as 30% below their 1996 lows. If we exclude intangibles, the
3 French banks covered in this report trade at 0.9x 09e tangible book value (TBV),
which is still above the 0.6x to 0.7x for the EU banks sector in the early 90s. We
do not think that French banks have already reached their trough valuation
multiples. Downside risks: capital market conditions as risky assets on b/s could
continue to generate losses & expected loan losses. Upside risk:early economic
recovery, which should ease bad debt pressure. TPs are based on SOTP (see p25).
Table of Contents
Investment thesis .............................................................................. 3
Outlook ....................................................................................................................................3
Valuation ..................................................................................................................................3
Risks ........................................................................................................................................3
Summary............................................................................................ 4
Facing the credit cycle ..............................................................................................................4
Top pick: Societe Generale .......................................................................................................5
Activity and deleveraging ................................................................. 6
Muted activity over the next two years.....................................................................................6
French economy leverage is at a high.......................................................................................6
French banks are more leveraged than their peers...................................................................8
Two years to go to 110% loan to deposit ratio.........................................................................9
What supports our deleveraging scenario?.............................................................................11
Liquidity and capital: government ready....................................... 13
Leverage has a cost ................................................................................................................13
Euro 330bn funding shortfall ...................................................................................................13
Low interbank and securitisation needs..................................................................................14
The government plan covers the funding shortfall..................................................................16
New funding source: Livret A .................................................................................................17
Credit quality to the test................................................................. 19
Is the low risk profile reputation overdue?..............................................................................19
Defensive margins ..................................................................................................................19
French economy in downturn phase ......................................................................................20
Non-performing loans have the potential to double................................................................21
Stress test: 93-style provisioning would halve our 09 estimates ............................................24
Forecast changes............................................................................. 26
Higher bad debt charge and lower activity..............................................................................26
BNP Paribas...................................................................................... 28
Volatility still high in 1H09 .......................................................................................................29
Fortis abandoning insurance unit? ..........................................................................................30
Credit Agricole Group ..................................................................... 32
Low traded volumes and high CIB risk exposure....................................................................33
Societe Generale ............................................................................. 35
Exposure to CEE .....................................................................................................................36
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