French bank shares have performed particularly poorly since 3Q14 results, largely thanks to concerns about the weak macro environment and low rates impacting domestic retail, notes Jefferies.
Omar Fall and his colleagues at Jefferies, in their research report dated November 19, 2014 titled: “French Banks – The tail wags the dog”, note the current market concern on domestic retail is overdone.
French Banks: NII and fees are key drivers
The Jefferies analysts point out that French bank shares have performed poorly in the recent past, despite aggregate numbers coming in within 3% of consensus expectations. As can be deduced from the following graph, French retail made up some 20% of group PTP at BNP Paribas SA (EPA:BNP) (OTCMKTS:BNPQY), 38% at Societe Generale SA (EPA:GLE) (OTCMKTS:SCGLY) and 49% at Credit Agricole SA (EPA:ACA) (OTCMKTS:CRARY) in 9M 14 on a clean basis (ex exceptionals):
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Fall et al. note the drivers of weakness in French banks have been what has impacted most European retail banking revenues, namely weak macro and low rates. According to the analysts, NII and fees are the two key drivers of the topline, though both have suffered in recent years.
However, Fall and colleagues anticipate more positive prospects on both fronts.
Delving deep into various components of French retail topline, the analysts note fees and commission constitute some 40% of revenues. Market sensitive fees arising out of sale of mutual funds, securities and insurance have performed well this year, up some 3% YTD.
The Jefferies analysts note that service fees relating to overdraft and account management fees are tracking well below the broader French macro.
Upgrade BNP to Hold
Fall et al also point out that following significant underperformance this year, BNP Paribas SA (EPA:BNP) (OTCMKTS:BNPQY)’s challenges are reflected in estimates. Moreover, BNP again saw no operating leverage at 3Q14 results. The analysts view M&A at the group as favorable given BNP’s previous excellent integration track record.
The Jefferies analysts have upgraded BNP Paribas SA (EPA:BNP) (OTCMKTS:BNPQY) from “Underperform” to “Hold” with an unchanged price target of €44.60. Their price target is based on a single stage GGM model (RoTe of 10%, CoE of 11%). BNP trades on a headline 0.9x TNAV multiple.
However, the analysts pruned their Societe Generale SA (EPA:GLE) (OTCMKTS:SCGLY) EPS estimates by 1% in both 2015 and 2016 to €5.38 and €6.02, respectively, driven primarily by marginally higher expenses and provisions. The Jefferies analysts retained their “Hold” rating as despite the cheap headline valuation of 0.7x TNAV, they believe material improvement in CEE are required before turning more positive on the stock.
The Jefferies analysts have assigned a “Buy” rating on Credit Agricole SA (EPA:ACA) (OTCMKTS:CRARY) and pegged the target price at €14.50, based on a single stage GGM model (RoTe of 13%, CoE of 11%).