Sector Report - French banks in 1Q21: Catching up to pre-COVID levels

  • In this report, we provide a wrap-up of the performance of the French banks BNP Paribas, Société Générale, Crédit Agricole and BPCE in 1Q21. We limit the report to these names as all other French banks in our coverage do not report 1Q figures.
  • Revenue generation at the top-four French banks rebounded significantly from last year’s trough, exceeding or at least matching pre-pandemic levels. Alongside this normalization, the investment banking arms of the banks were largely responsible for the 1Q21 revenue increase.
  • There was a positive LLP trend in 1Q21 (on an overall still-unsecure asset-quality basis) on the back of solid profitability and a diversified earnings stream at all four banks. Hence, we think the four banks will be able to absorb further loan-loss provisioning costs through earnings without eroding their capital base in 2021.
  • We provide three ideas on how to adapt to the most recent developments:
  • Readjust the quest for yield: Following the recent tightening and compression rally we are adjusting our quest-for-yield approach: we are not changing our base-case assumption that spreads will be supported; we do not expect substantial spread decompression. However, the relatively small differences between the individual credit tiers mean that small spread readjustments can turn an initial spread premium into disappointing total return. For this reason, we take a more measured approach to the hunt for yield (page 9).
  • Prefer callables vs. non-callables: Callable bonds, both SNP and sub, are effectively trading at a very low implicit call likelihood. We do not think that this properly reflects economic reality and decision-making on the part of the issuers. We therefore see value in callable paper.
  • Outperformance of green bonds: Green bonds have outperformed their non-green peers. Therefore we believe investors – irrespective of their investment policy – are well-advised to get involved in French green financial bonds; if possible already at issuance but there is also tightening potential in secondary trading.
  • In addition to these three general points of strategy, we provide a list of preferred single bond picks across the entire capital structure.

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