Q3 earnings to sustain positive share price momentum
We expect the quarterly results to support our superior capital return story for French
banks, delivering c.6.0% yields (at a 45-50% payout) while trading at below 8x 2016E
earnings. Q3 should give the market confidence that EPS revisions have bottomed and
that capital build-up is in motion. What matters most in this earnings season is the
management outlook for 2017; we expect it to be reassuring, especially for BNPP.
Good Q3 driven by CIB rebound and resilient French Retail
A CIB profitability YoY comparison will look favourable, in our view. This should be driven
by solid performance in FICC while Equities should be flattish YoY, benefiting BNPP and
CAsa. In Retail, we expect resilient Q3 revenues, helped by a pick-up in mortgage
renegotiations in France this quarter, which should mainly benefit CAsa and SocGen.
However, adjusting for that effect, Eurozone retail revenue pressure should continue,
partly offset by modest volume growth, tentative re-pricing and management efforts to
boost fee-generative products. We expect operating costs to remain under control.
Capital & leverage ratios build-up to show progress in Q3
We are particularly positive on French banks’ ability to build capital We estimate a FLB3
CET1 ratio in 3Q16 of 11.2% for BNPP (including 5bp from the FHB first tranche IPO),
11.2% for SocGen and 12.0% for CAsa (including the €1.25bn capital gain booked in the
quarter). These ratios are after accruing dividends at a 45%, 50% and 50% payout, and
modest 0.5% RWA QoQ growth. Capital build should continue in the following quarters
and we forecast BNPP to reach 12.1% by 2017 (pro forma FHB full IPO), with SocGen at
11.7% and CAsa at 12.4%.
BNPP – a story we like; SocGen rated Buy, CAsa Neutral
We expect BNPP to outperform in an environment where the hunt for dividend yield is
intensifying. We value its defensive and quality earnings profile thanks to its diversified
franchise and self-help strategy in cutting costs. We also believe BNPP’s strategy to
gain market share in its CIB business is likely to exceed market expectations. BNPP
enjoys adequate capitalisation and offers an attractive dividend yield at c.6.0% in 2016-
17E while trading at less than 8x P/E and still at a 25% discount to book for 9.8% ROTE.
Next catalyst (4Q16/1Q17) will be clarity on regulation
We do not expect to learn much about progress on regulation in the Q3 results. But we
believe the potential reduction of ECB minimum requirements and dilution of the latest
Basel discussion papers’ proposals should have a manageable impact on French banks in
the coming months. However, we think French banks could provide some first
indications on SREP and the split between guidance/requirement components.