French Bank Earnings Signal Strength; Risks Clouding Outlookby
Consumer lending reducing BNP, SocGen vulnerability to market
High capitalization ratios may guard against oil losses
French banks are bucking the trend. For now.
With some of their European rivals including Deutsche Bank AG still reeling from full-year losses, French banks entered a tumultuous 2016 with the strongest earnings in almost a decade and pledged to reward shareholders with higher dividends. Their resolve is about to be put to the test.
In France, a focus on consumer lending has helped shield lenders from a selloff that reflected investors’ concerns about cooling emerging markets and plunging commodity prices undermining securities revenue. With investment banks across the continent eliminating thousands of jobs to boost profitability and meet tougher regulatory scrutiny, BNP Paribas SA and Societe Generale SA are expanding in fee-based and cash-rich activities, requiring less capital.
“They are in a better position than a lot of their rivals,’’ said Julian Chillingworth, chief investment officer at Rathbone Brothers Plc in London, which manages about 30 billion pounds ($42 billion), including some holdings in French, German and Swiss banks. “BNP and Societe Generale both have areas of expertise they can rely on even when the situation is harsher.’’
BNP Paribas rose 2.5 percent at 10:06 a.m. in Paris, while Societe Generale was up 3 percent. The pan-European Stoxx 600 Banks Index Wednesday extended a week-long rebound, helping pare losses this year to about 16 percent. Banks shares across Europe had the worst start to a year since 2009, reflecting concerns about their profitability.
Deutsche Bank reported its first full-year loss since 2008, while Credit Suisse Group AG shares plunged to the lowest since 1991 after bigger-than-expected restructuring charges erased earnings. Barclays Plc on Tuesday reported a 56 percent drop in fourth-quarter adjusted pretax profit, missing analyst estimates in a Bloomberg survey.
At Societe Generale, the shares slumped last month after the bank said it may miss its profitability target in 2016, citing “headwinds” including regulatory pressures and volatile markets. The Paris-based lender is projected to report a drop in profit this year, while BNP Paribas and Natixis SA are seen posting increasing earnings, according to analysts in a Bloomberg survey.
A drop in shares has pushed Societe Generale’s price-to-tangible book ratio to 0.47. That indicates it’s worth less than investors would expect to receive if the firm liquidated its assets. The European bank average is at 0.81, according to Bloomberg Intelligence.
“Certainly a lot of bad news is already in the price, but I wouldn’t necessarily rush to buy the shares,” said Jonathan Fearon, who helps manage 300 billion pounds at Standard Life Plc in Edinburgh. “We have a lot of headwinds to get through. Investment-banking growth plans are difficult to believe in this challenging revenue environment.”
French banks have focused on building their capital buffers since the global financial turmoil, with the following euro-area fiscal crisis forcing them to shrink balance sheets. In December, all four of the nation’s major lenders announced that they exceeded capital requirements set by the European Central Bank, giving them room to return money to shareholders.
BNP Paribas raised its dividend for 2015 to the highest in eight years, while Natixis is using extra reserves for exceptional payments to shareholders. Credit Agricole SA is selling stakes in regional lenders and targeting all-cash dividends. That compares with a dividend freeze at Deutsche Bank, while Barclays this week unexpectedly cut its payouts to shareholders for 2016 and 2017 as part of a wider overhaul.
Credit Agricole will present its latest profit targets at an investor day next week, while Societe Generale is preparing goals for the years through 2020.
Ada Di Marzo, a Paris-based partner at management-consulting firm Bain & Co., said that investors might have to prepare for lower profitability among European banks, with a return on equity of 10 percent becoming increasingly difficult to reach.
“The differences in bank performances are much bigger,” she said. “While many banks are showing a return-on-equity between 6 percent and 8 percent, others are losing money.”
The focus on consumer lending may become even more prescient if the oil bust continues. Plunging commodity prices are pushing up the share of bad energy loans across the financial industry. Societe Generale has said that it doesn’t expect a “significant impact” on its bad-debt provisions after running stress tests.
While European banks have more than $300 billion in loans to the oil industry, they’re still less exposed than their U.S. peers, according to Sylvain Broyer, chief euro-region economist at Natixis. He called this year’s bank stock selloff “completely unjustified.”
With some of the largest investment banks across Europe shrinking their securities units as regulators demand higher capital buffers against risky activities, French banks have signaled they remain committed to expand in some selective areas.
BNP Paribas has reinforced its lead in European corporate banking, a Greenwich Associates report showed, due to its deal with the retrenching Royal Bank of Scotland Group Plc, which is referring its former cash-management clients.
For its part, Natixis is betting on a continued takeover boom in the U.S., by agreeing to buy 51 percent of boutique advisory firm Peter J. Solomon Co. last month. Societe Generale, home to one of the world’s largest equity-derivatives businesses, is expanding in derivatives clearing and U.K. wealth management.
“French banks’ 2015 good results will be difficult to repeat this year,” said Christian Sole, a portfolio manager at Candriam Investors Group, which has about 90 billion euros ($98 billion) under management. “In investment banking, they’re betting to swim against the tide, and that might backfire.”