By Lionel Laurent
PARIS Fri Nov 11, 2011 10:15am EST
PARIS Nov 11 (Reuters) - French banks such as BNP Paribas and Societe Generale, which suffered huge share-price declines in the summer as investors fled
euro zone risk, have yet to reassure financial markets they are doing enough to withstand the crisis.
Their cost of funding -- a crucial sign of market confidence that also affects profitability -- remains stubbornly high, even after a raft of announcements including sweeping asset sales and more aggressive writedowns on Greek debt that were designed to cut borrowings and soothe market fears.
Some investors and analysts fear that French banks, which nonetheless managed to stay profitable in the third quarter, are still reacting too slowly to the spread of the euro zone debt crisis as it plunges Greece and Italy into political turmoil and pushes up borrowing costs for
France.
"When you look at the French banks' results, a big part of their profitability comes from the fact they are booking gains from their own debt," said Yannick Naud, portfolio manager at Glendevon King Asset Management.
"(Borrowing costs) are still at abnormally high levels, not too far from 2008-2009."
Credit default swap prices show the cost of insuring BNP, SocGen and Credit Agricole's 5-year and 10-year debt has gone up by around 15 to 25 percent over the past month. Other industry-wide gauges such as the euro-dollar basis swap are at crisis-era levels, said Glendevon King's Naud.
The recent rise in French sovereign borrowing rates, exacerbated by Italy's ills but also by Thursday's erroneous downgrade of France by Standard & Poor's, is especially unnerving.
France's status as a core "AAA" economy with low levels of household debt was a key reason why its banks could borrow cheaply on wholesale markets up until the summer.
MORE ASSET SALES?
While a 'bazooka' deal to solve the eurozone's ills would no doubt help ease the pain, some believe that ultimately French banks will be forced to act first by cutting their balance sheets more aggressively than previous announcements suggest.
This is likely to hurt the global economy as banks move from cutting their U.S. dollar lending -- such as aircraft, shipping and real-estate funding -- to hacking into euro-denominated assets, even if there is room to focus on trading portfolios.
BNP, France's biggest listed bank, still needs to cut its "risk-weighted" balance sheet by a whopping 155.3 billion euros to meet tougher Basel III solvency targets, on top of the 70 billion euros in asset sales that have already been promised, according to research from Mediobanca.
Taken together, BNP, SocGen and Credit Agricole would need to sell some 600 to 800 billion euros in notional funded assets through to 2013, or double what has already been announced, according to research from UBS.
"(This) will come cheap to neither the domestic economy nor bank (profits) in the interim," UBS analyst Omar Fall said.
Some stock-pickers say that regardless of the outlook for future profits, French banks are trading at crippled valuations -- less than half their book value -- and offer a lot of upside if the worst fears for the eurozone do not come to pass.
But the choice, as one London-based analyst puts it, is between two unprecedented outcomes: a French sovereign downgrade with skyrocketing bond yields, or a radical move by the European Central Bank.
"If you start assuming France is going to go the way of
Italy you don't want to own these banks, because funding costs are going to skyrocket," he said. "But I think that the European Central Bank will intervene before anything like that happens."
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