Vive la France: banks are looking good value

Kathleen Brooks
RISKS to the financial sector are finally starting to abate, according to a report by the International Monetary Fund (IMF) published earlier this month. It also reduced its estimates of bank writedowns caused by the financial crisis by $0.5 trillion.

But banks still face a mountain of challenges, and the future of the sector is set to look very different if the regulators get their way. Reforms proposed by the IMF include limiting the size of certain banking activities, pushing over-the-counter (OTC) derivatives onto an exchange and implementing a levy on banks, according to their size, to fund any future bailouts.

But are there any opportunities for investors to profit from a recovering financial sector? Yes, according to analysts at Credit Suisse, and investors should be poised to take advantage of good value stocks such as French banks that are trading at a 25 per cent discount to the rest of the European banking sector based on 2011 earnings estimates.

Even taking into account regulatory implications and French banks’ large exposure to Greece, estimated to be 25 per cent by the Bank for International Settlements (see chart), the bad news appears to be priced in.

French banks could actually perform well in an environment of stronger regulation. Reforms being discussed, for example higher capital ratios and taxes, could hurt banks’ profits unless they can pass costs on to their consumers. Bernstein Research says that French banks traditionally tend to pass on higher costs to customers (more than banks in Spain and Italy, for example) and so they should have no trouble clawing back higher charges without it affecting their bottom line. For example, new mortgage pricing in France has risen to five-year highs and French banks tend to have better pricing power over credit cards then some of their European peers.

For contracts for difference (CFD) traders who believe in French banks it’s worth searching out names that are in the best position to perform well in the coming months. Credit Suisse argues that BNP Paribas is a clear stand out. It has underperformed the European banking sector by 5 per cent (see chart) in recent months. But a surprise in earnings when they are released on 6 May – Credit Suisse believe that first quarter profits could beat consensus and reach €1.6bn – should support a relief rally in the stock.

Other banks to consider include Societe Generale and Natixis. The latter’s stock price has held up strongly in recent months (see chart) and there could be more upside to come. Credit Suisse analysts point out that Natixis would not be affected by the latest Basel Committee’s recommendations on bank capital rules since it is the least exposed of the big French banks to toxic assets.

CFD traders with a shorter time horizon might also want to consider Societe Generale, which announces its results on 5 May. Credit Suisse estimates that first quarter results could be €2.2bn, which would leave the bank on track to reach its target earnings of €8bn for 2010. Its share price has fallen more than 20 per cent since peaking in January, but if its earnings come in around the €2bn mark then expect a relief rally.

Overall the Western banking sector is looking weak. But there are pockets of value to be found and a long position in French banks could bear fruit in the coming months.


Tuesday 27 April
Lloyds Banking Group – trading update
Reckitt Benckiser – first quarter
BP – first quarter
Imperial Tobacco – interims
Renault – first quarter sales
Banco Popular – first quarter

Wednesday 28 April
British American Tobacco – trading update
GlaxoSmithKline – first quarter
Home Retail Group – first quarter
Royal Dutch Shell – first quarter
PPR – first quarter revenues
BBVA – first quarter
Iberdrola – first quarter

Thursday 29 April
AstraZeneca – first quarter
Barclays – first quarter
BG Group – first quarter
BSkyB – third quarter
Hammerson – trading update
HMV Group – trading update
Standard Life – trading update
Taylor Wimpey – trading update
France Telecom – first quarter
Michelin – first quarter
Banco Santander – first quarter

Friday 29 April
Rentokil – trading update
WPP Group – trading update