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French banking egalité

5 November 2015 By Dominic Elliott

Societe Generale and Credit Agricole have more fraternité than their share price moves on Nov. 5 imply. After both posted third-quarter results, SocGen’s stock rose as much as 6 percent in morning trading while its French rival’s fell by the same amount.

Both banks had mixed quarters. SG’s firmer showing was down to it growing French retail banking top line versus the same period last year, while avoiding a big decline in its international business. But its trading revenue suffered more than at many rivals. The August increase in volatility hurt its equity derivatives positioning and decreased retail and commercial demand for its structured products.

Credit Agricole, meanwhile, managed to keep a reasonable handle on costs. But falls in revenue in investment banking and asset management weren’t offset by a rise in savings and insurance products sales.

Still, market volatility is exacerbating minor operational differences. And SocGen’s third-quarter market-share gains in domestic retail banking may be hard to sustain despite it increasing a return-on-equity target by 1 percentage point. A 4.2 percent rise in revenue comes in the context of a flatlining market: BNP Paribas’ revenue fell 3 percent over the same period, while Credit Agricole’s was broadly unchanged. SG’s superior digital business may be giving it a leg-up for now. But online banking in other countries has become fiercely competitive.

Meanwhile, both banks’ capital levels look at once similar and underwhelming. SocGen’s common equity Tier 1 ratio stood at 10.5 percent at the end of September, with Credit Agricole’s at 10.3 percent. Each recorded a 10 basis points increase over the quarter, but they’re still some way off the European average. SocGen may be about to get a boost from selling its remaining 20 percent in the Amundi asset management business now majority owned by Credit Agricole. But the latter can also point to the way in which its equity-flush parent, a collection of French regional lenders, can theoretically transfer capital to it under certain conditions.

Credit Agricole’s decision not to overhaul this convoluted structure anytime soon has been significantly influenced by regulators. That justifies a slight discount to its peer in terms of price-to-book value. But given their similarity otherwise, the recent divergent stock price moves look overdone.


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