French Banks Balance Sheets Strengthen, Buy BNP: GoldmanVW Staff
Goldman Sachs has a new report out on French Banks. They believe that French banks are in far better shape currently than the banks were in 2011. Goldman thinks BNP Paribas (BIT:BNP) (EPA:BNP) (OTCMKTS:BNPQY) and SG top the list in terms of balance sheet strength. Below is the full report from Goldman Sachs Equity Research department.
The funding tensions of 2011 prompted the French banks to accelerate efforts to restructure their balance sheets, and at BNP and Societe Generale SA (PINK:SCGLY) (EPA:GLE), new disclosure to track them. We add CA Group to our funding analysis. The three banks all show liquidity reserves in excess of their short-term funding, declining loan/deposit ratios, better asset and liability matching, and higher core capital ratios. However, differences persist: (1) on our liquidity ratio screens, Societe Generale SA (PINK:SCGLY) (EPA:GLE) while disclosing that it is LCR compliant, still appears to be trailing peers; (2) on simple leverage, we continue to see the mutual banks’ listed subsidiaries as more vulnerable, in particular CASA’s is currently at over 40x (similar to 2008, unlike peers). Overall, we see BNP as more conservatively funded and capitalized, including on simple leverage.
French Banks: Pressure on profitability prompts cost-saving initiatives
Shoring up balance sheets has been costly to earnings. For instance, we estimate the fall in corporate center revenues, mainly due to higher funding costs, has taken off 2 points of ROTE at BNP and SG. Banks are thus aiming to reduce costs. We estimate that, in isolation, the planned costs savings over the next three years equates to 4 points of cost/income and 2 points of ROTE for French banks. That said, we estimate that even after these initiatives, French banks will continue to trail European peers on efficiency, and therefore on profitability, with the exception of BNP, the bank with the most ambitious efficiency drive in France.
French Banks: We prefer BNP (CL Buy) most, CASA (Sell) least; upgrade Societe Generale SA (PINK:SCGLY) (EPA:GLE) to Buy
BNP Paribas (BIT:BNP) (EPA:BNP) (OTCMKTS:BNPQY) remains our preferred pick in France due to: (1) its stronger balance sheet; (2) currently higher profitability levels, later compounded by higher cost savings, and, in the shorter term, a pick-up in fixed-income market shares, as suggested by 2Q DCM data; (3) attractive valuation: 5.4x 2015E P/E, adjusting for capital above 10% B3 CET1 (at 24% of its market cap). We also upgrade SG to Buy (from Neutral): We see the bank as a measure behind BNP Paribas (BIT:BNP) (EPA:BNP) (OTCMKTS:BNPQY)on balance-sheet strengthening, but similarly cheaply valued after adjustments.
Conversely, we keep our Sell on CASA, which we see as too lowly capitalized on Basel 3 and on simple leverage, a hurdle which we see as hard to clear with the current intragroup RWA reduction strategy. For CASA, leverage appears all the harder to reduce as its unlevered returns are lower than peers. Adjusted for its lower capitalization, CASA’s headline valuation discount becomes a premium to its peers.