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Hollandaise Sauce

16 February 2012 By George Hay

Last year wasn’t much fun for France’s two largest banks. After a relatively benign first half, the euro zone crisis hit BNP Paribas and Société Générale with a vengeance: their shares finished the year down 38 and 58 percent respectively, while the cost of insuring their debt tripled. For good measure, the European Banking Authority forced them to raise capital.

Full-year results bear the scars. Both banks saw top-line income fall by around 3 percent as they embarked on deleveraging. Returns dipped below the cost of capital. BNP did a better job of protecting its bottom line – net income was down 23 percent compared to SocGen’s 39 percent – and it is still paying a dividend, contrary to its smaller rival. But both banks are feeling the pinch from shrinking investment bank revenues, asset disposals and provisions on Greek sovereign debt now reaching 75 percent.

Yet if everything else was set fair, both BNP and SocGen could roll with the punches. BNP has already done almost a third of its programme to cut risk-weighted assets by 75 billion euros, and its investment bank’s reliance on flighty dollar funding dropped by 57 billion euros in the second half. SocGen has reduced its dollar funding by almost the same amount. Both lenders have already hit their EBA capital targets, while the combination of three-year liquidity from the European Central Bank and an expanded collateral pool has removed fears a French bank could fall over.

This year may prove just as rocky as last year for the French banks – albeit for different reasons. France’s GDP will grow by a meagre 0.5 percent, according to the government forecast, while the threat of a Greek disorderly default doesn’t do much to boost confidence.

But the real concern is within France itself. The election of uber-favorite socialist candidate François Hollande to the country’s presidency in May could be a cause for worry. He is campaigning against the “faceless finance” he wants to “subjugate”, and advocates a UK-style split between retail and investment banking. As for incumbent Nicolas Sarkozy, he has started to unilaterally bring in a tax on financial transactions. So BNP and SocGen may have to stay in restructuring mode a bit longer than planned.


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