French banks should make fewer sparks on the stock market this week than their Spanish and Italian counterparts. While BNP Paribas is due to publish its annual results tomorrow, followed by Société Générale on Wednesday and Crédit Agricole SA on Thursday, the markets are not expecting the big night… results. “French banks will suffer from the comparison with their European peers. They benefit less from the rise in interest rates than in other geographies, while their costs are increasing,” notes Antonio Roman, equities manager at Axiom AI.
While the rise in interest rates has boosted net interest margins in countries where the proportion of variable rate loans is high, French banks are still penalized by the specificities of their market. “The question of the usury rate, which limits the ability of banks to pass on the rise in rates to their customers, has made a lot of noise. But if margins on real estate loans remain lower than neighboring countries, it is also because the French market is very competitive, with mutual banks holding 70 to 80% of the market share,” specifies Antonio Roman.
French banks will therefore not follow the trend of record results published by their neighbours, like Deutsche Bank, which in 2022 recorded its best annual profit in 15 years. The Factset consensus is counting on an annual result of 1.445 billion euros for Société Générale, a drop of 75% compared to 2021. The accounts of the red and black bank will bear the stigma of the sale for a pittance of bread. its Russian subsidiary Rosbank. “This loss, which has already materialized in the second quarter results, has however been priced in by the markets. This should not affect the valuation of Société Générale”, anticipates Sylvain Perret, equity analyst at AlphaValue.
For Crédit Agricole SA, the listed subsidiary of the mutualist group, the Factset consensus is counting on an annual result of 4.6 billion euros, which would represent a drop of 20.7% compared to 2021. Crédit Agricole is suffering more from the increase in the cost of remuneration for regulated savings accounts, which will be felt even more in 2023. In total, this French specificity should cost CASA the equivalent of 15% of its results by the end of 2023, says Antonio Roman. In addition, “Credit Agricole has bet on diversification in insurance and asset management, two less buoyant businesses in the current environment,” notes Sylvain Perret.
Thanks to the weight of corporate and investment banking in its business mix and to its greater geographical diversification, BNP Paribas should do well. The Factset consensus expects net income to rise to 10.45 billion euros for the year 2022, compared to 9.48 billion euros last year.
2023 objectives and distribution announcements
The 2023 objectives of French banks in terms of income will be scrutinized closely as they will indicate their propensity to take advantage of the rise in rates. “Will French banks end up taking advantage of this new deal or will they watch the train pass? asks Sylvain Perret. Only BNP Paribas has so far sent a clear signal by announcing in the third quarter that it expects to generate almost 2 billion euros of additional profit compared to its objective for 2025 thanks to the increase in net income from ‘interests.
Traditional ball and chain at the feet of French banks, whose size of physical networks weighs on the operating ratio, the question of costs will also be looked at with great attention. “French banks are under strong inflationary pressure on wages. The voluntary departure plan under study at BNP Paribas Personal Finance illustrates the fact that they are looking for ways to offset the costs,” notes Antonio Roman. Last week, the Dutch ING was sanctioned due to an expected increase in costs in 2023.
Shareholders will be on the lookout for distribution announcements. Unicredit’s share price soared 8% last week after the Italian bank said it wanted to return nearly 5.25 billion euros to its shareholders this year. Generosity should be less strong in France. While the regional banks of Crédit Agricole via SAS Rue La Boétie have increased their stake in the capital of CASA in order to support the stock market price, the market is not expecting a share buyback program. Similarly, uncertainty weighs on the distribution announced by Société Générale. “Will the ECB authorize the bank to pay its dividend on the basis of the underlying result excluding the impact of the sale of Rosbank? asks Antonio Roman. As for BNP Paribas, investors will await details on the proceeds of the sale of Bank of the West and the share buyback program that should result from it.
The valuations of French banks should not, on the whole, be upset by the results published this week. Although their price experienced a catch-up effect during the last quarter, still marked in January 2023, it essentially follows the evolution of the macroeconomic situation in Europe. Adverse scenarios, for which French banks have increased their provisions, have not materialized. Although profitability tends to gradually return to its pre-2008 level – the consensus expects a return on capital (ROE) of 9% for BNP Paribas, 6.6% for CASA and for Société Générale – the multiples remain quite weak and lower than those posted before the financial crisis. The price-to-book ratio of BNP Paribas should be 0.6 times and those of CASA and Société Générale at 0.3x, according to Factset.
