27 May 2008
French banks outlook
Relief in the most volatile
activities?
Brice Vandamme
Research Analyst
(+44) 20 7545-1710
brice.vandamme@db.com
CIB and asset gathering to lead the trend
We think the French banks have already recognised the larger part of the required
writedowns in CIB assets, with the conventional credit cycle still to come. At a
country level, we expect French retail profits will help the banks deliver a more
defensive stream of earnings than the average European bank. Differentiation
between the French banks, however, is likely to be driven by differences in asset
gathering and corporate & i-banking, we believe. We see BNPP as best positioned
on this basis and our top pick in the sector.
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DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Industry Analysis
Top picks
BNP Paribas (BNPP.PA),EUR66.60 Buy
Companies featured
BNP Paribas (BNPP.PA),EUR66.60 Buy
BNP Paribas (BNPP.PA),EUR66.60 Buy
2007A 2008E 2009E
EPS Adjusted (EUR)7.53 7.28 8.29
P/E Adjusted (x) 9.6 8.9 7.8
Credit Agricole (CAGR.PA),EUR18.57 Hold
Credit Agricole (CAGR.PA),EUR18.57Hold
2007A 2008E 2009E
EPS Adjusted (EUR)1.69 1.32 2.09
P/E Adjusted (x) 13.6 14.1 8.9
Societe Generale (SOGN.PA),EUR66.70 Buy
Societe Generale (SOGN.PA),EUR66.70 Buy
2007A 2008E 2009E
EPS Adjusted (EUR)9.08 5.73 8.48
P/E Adjusted (x) 10.6 11.3 7.6
Global Markets Research Company
Early signs of easing pressures in CIB and asset gathering
We see early signs of easing profit pressures in investment banking and asset
gathering, likely offset somewhat by weakening conditions in retail, we believe.
Credit Agricole, Societe Generale and BNP Paribas have similar earnings mixes:
roughly 1/2 retail and specialised finance, 1/3 CIB, 1/6 asset gathering. While retail
activities have so far helped sustain earnings, CIB and AG delivered exceptional
charges and volatility. As big derivatives houses, the three large French banks
have been negatively impacted by high asset correlation and volatility in Q1: both
factors have eased in Q2 which should reduce pressure on investment banking
results, we believe. In addition, industry asset management data in 2Q08 point to
positive market impacts and a sharp slowdown in fund outflows in the second
quarter.
BNPP our top pick
BNPP has reported far lower write downs than the peer group with Euro 1.3bn of
charges against Euro 3.1bn and Euro 4.3bn at SocGen and CA respectively. Going
forward we think BNPP has the best potential to outperform through the cyclical
downturn in European banking: it has the most consistent cost control, better
positioning in asset gathering resulting in better flows (achieving net inflows in Q1)
and we expect it to continue to outperform at a revenue level. Furthermore we
expect BNPP will be the only French major to avoid a capital increase as we see
its 5.7% core tier one ratio as adequate given its low risk profile. Conversely, we
see CA as the bank with the poorest positioning, given its operating structure,
weaker historic cost control and exposure to structure credit.
The 3 large French banks at 7.8x 09E PE and 1.2x 09E TBV
The 3 large French banks we cover trade at a 6% discount to the Eurobanks by
09E PE and they look particularly cheap on an 09E P/TBVPS as they trade at a 30%
discount. Our target prices are based on SOTP. We rate BNP as a Buy due to our
fundamental expectations and substantial upside potential to our target price. We
rate Credit Agricole as a Hold due the limited upside potential to our TP. We rate
SG as a Buy due to the upside potential to our TP and its balanced business mix.
The main risk to our estimates on BNPP, SocGen and CA relates to the evolution
of capital markets as one third of revenues come from CIB. A further deterioration
of the economic environment could also trigger a stronger increase of bad debt
charge.

Table of Contents
Operational activity review .............................................................. 3
Revenue risk ahead but defensive profile remains ...................................................................3
Group results: revenue defensive, cost of risk up.....................................................................4
CIB: improving trend from Q1...................................................................................................6
Asset gathering: better conditions in April..............................................................................12
French retail: conditions are worsening but…........................................................................14
Capital positions.............................................................................. 16
Capital: no strong justification for a capital increase at CA .....................................................16
Share price performance................................................................. 17
BNPP outperformance / SocGen underperforming.................................................................17
BNPP................................................................................................. 18
Investment thesis ...................................................................................................................18
BNPP’s Sum-of the-parts ........................................................................................................19
Credit Agricole................................................................................. 20
Investment thesis ...................................................................................................................20
CA’s sum-of-the-parts .............................................................................................................21
Right issue ..............................................................................................................................22
Societe Generale ............................................................................. 23
Investment thesis ...................................................................................................................23
SocGen’s sum-of-the-parts .....................................................................................................24

Operational activity review
Revenue risk ahead but defensive profile remains
We think French banks are now entering a new phase: After 3 quarters of earnings led by
write downs, BNPP, CA and SG have to face the impact on their activity of the downside
phase of the banking cycle characterised by revenue going down, cost stabilising, cost of risk
increasing.
Slight relief in asset gathering and corporate & investment banking
So far, revenue line has mostly been impacted in asset gathering and corporate & investment
banking. The later remains the most volatile part of earnings. In these 2 activities, we see
early signs of slight relief:
􀂄 Correlation and volatility are down on capital markets so far in Q2 (cf. Figure 9 and Figure
10) which should ease the pressure on equity revenue in CIB as these 2 factors have a
negative impact on derivatives activity. Nevertheless market directional expectations are
not yet clear, as a consequence we do not expect a revenue rally on short term but an
improvement from Q1.
􀂄 In asset gathering, French asset management has booked a strong positive market
effect in April and outflows substantially decreased (cf. Figure 23)
Retail activities have a limited downside risk profile
Nevertheless, tough times are still ahead as revenue lines of retail banking and specialised
finance activities are just starting to reflect the impact of a recession. Due to the limited
leverage of French clients we think the downside risk is more limited than EU peers. Indeed
the cost of risk has also started to increase from 27bps of RWA in Q1 07 to 45bps in Q1 08,
but highs achieved in 2003 are not far at 55bps, which should limit the further impact.
BNPP is our top pick
􀂄 We have a Buy recommendation on BNPP and it is our top pick in France as we think it
has a very defensive net income line among European banks due to: (1) good cost
control (Figure 4) (2) a defensive revenue trend in CIB, (3) the limited likelihood of a
capital increase due to a 5.7% core tier one ratio that suits its low risk profile in our view.
􀂄 Credit Agricole is showing the strongest shift in future strategy freezing its acquisition
projects, focusing on cost control, reducing the CIB activities to core businesses,
launching a Euro 5.9bn capital increase and planning Euro 5bn of non-core asset sale.
Unfortunately we think the positive effects will be very long term and that this strategy
will have negative impacts on short term on CIB revenue. Furthermore we have
concerns about the governance as we think some strategic decisions do not reflect the
best interest of shareholders. We cannot find any justification of the Euro 5.9bn capital
increase in the P&L or in the balance sheet whereas it should have at least a 20%
dilutive effect on the 09E EPS. We rate it as a Hold.
􀂄 Société Générale has posted positive news in Q1 showing that the CIB franchise is not
dead after the E4.9bn trading loss announcement in January even if it has not proved to
be as defensive as BNPP. We think the market expected a strong positive surprise in the
Q1 results which did not happen. The recovery is likely to take time but we think the long
term trend of earnings are still interesting especially due to the highest exposure to
emerging markets among French banks.

Group results: revenue defensive, cost of risk up
At group level, French banks have shown that the defensiveness of BNPP which has been
steady since Q2 07 results is still strong.
Net income
Figure 1 shows that BNPP’s net income outperformed CA and SG in Q307, Q4 07 and Q1 08.
The performance of BNPP stems from lower write downs but also better underlying revenue
trend. Figure 1 also shows that CA’s net income was weaker than its 2 French competitors
over the same period.