Friday, February 12, 2010

French Big Picture Banking, Economic and Capital Market Trends — Winter 2010


•4Q09 Results In Line, Medium Term Upside — Earnings season starts next week
and we do not expect major surprises from the French banks reporting. SG has
already warned on lower 4Q09 earnings due to markdowns. Natixis has indicated
that 4Q09 will be profitable. We expect BNP and CASA to report results in-line
with expectations. French Banks underlying earnings should benefit from the
resilience of their domestic retail, the recovery of their asset gathering businesses
and, over the medium term, their gearing to the credit cycle normalization.

• Domestic Retail and Asset Gathering Resilient — Domestic retail resilience is
sustained by earlier cuts to regulated savings rate supporting NII, and relative
recovery in market sensitive fees & commissions. The French insurance system
experiences steady inflows mainly in euro denominated funds.

•CIB Results Weak —
CIB should report a weak quarter impacted by c.35-45% qoq
drop in FICC revenues, 15-20% qoq drop in equities and modest growth in
financing & advisory. We expect the equities revenue decline to be partly
mitigated by resilient equity derivatives revenues, particularly at BNP Pari
bas and
SG due to their leading equity derivatives franchises.

• Credit Cycle Normalisation Supportiv — We expect the credit cycle recovery to
benefit the French banks. We
eestimate that BNP Paribas may benefit from an
uplift of 20% to its 2011 earnings if we use across the cycle provisioning ratios.
Equally SG could benefit from an uplift of 24% and CASA of 19%. Credit cycle
normalization underpins our positive stance on French Banks.

• Top Pick BNP Paribas —
We adjust our EPS estimates to take into account current
operating trends and weaker CIB revenues. We also increase our cost of equity
assumptions in line with market trends. As a result we decrease our TP for all
French banks. Please refer to the table below for a summary of the changes. BNP
Paribas remains out top pick among the French Banks.

French Big Picture

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