French bank shares have had a torrid 12 months in both absolute and relative terms.
Weak domestic growth, CIBM concerns and subprime risk have weighed heavily.
Naturally, this begs the question – is the worst already in the price? Our sensitivity
analysis suggests it isn’t. A return to early 1990s bad debt levels and revenue declines
would see sub-cost of equity returns and 2008e P/Es rising to 18-63x.
In this note, we’ve also considered the question of a bid for Socgen by a French
counterpart. Our conclusion is that while it may make sense financially – we’d look for
double-digit returns on investment – it falls down on a number of grounds, not least of
all, management’s willingness to sell. We’d never say ‘never’, but for the moment, we
see little reason to chase the bid.
Combined with a weak outlook for French retail and the prospect of further subprime
losses, we believe it's right to retain our cautious stance on the sector. We rate Natixis
Underweight (cutting target price to EUR9.7 from EUR18.6), Socgen Neutral (V) (target
price EUR84) and Credit Agricole Neutral (target price EUR20.5, down from EUR30.4).
However, to reflect its ‘safe-haven’ status and depressed valuation, we upgrade BNP
from Neutral to Overweight (with a EUR72 price target, down from EUR91.3).

目录

Stress-testing the numbers 7
Does a Socgen deal make
sense? 13
Subprime and monoline risks 18
A brief comment on French
retail banking 25
Forecasts and valuations 29
Disclosure appendix 37
Disclaimer 43