* Read-through Overdone, Reiterate Overweight — BNPP’s US$9bn sanction
settlement has weighed on other French banks, notably SocGen. Not all banks may
be equally at risk. AQR-related concerns may also be rising; risks are manageable.
With French banks trading at 0.8x 2015E P/TBV for a c11%+ sustainable RoTE,
recent weakness represents an attractive buying opportunity. SocGen remains our
preferred bank trading at 0.7x 2015E TBV for 11-12% sustainable RoTE with
improving returns supported by provisioning normalisation as well as operational
gearing.
* French Retail Remains Cash Cow — Margins remain under pressure impacted by
low rate environment although partly offset by improving deposit mix, with further
25bps Livret A rate cut to 1.0% supportive for 2H14. At the same time, costs are
being managed while lower provisioning supporting high single-digit PBT growth.
SocGen best-positioned for provision ‘normalisation’ from 2013 levels of c60bps
* CIB Relative Resilience — French banks' corporate bias should allow for relative
FICC resilience. EUR-denominated issuance doubled in 2Q14 vs USDdenominated
up c14% yoy; disintermediation and improved periphery conditions are
at play. Although flow equity derivatives are likely to have been impacted by lower
volatility & activity, BNPP and SocGen's bias to structured products should hold
them in better stead
* International Retail 'J-Curve' — We would not rule out further AQR-related
coverage strengthening over 2Q-3Q14 although we expect manageable impact. For
example, SocGen's Romanian NPL coverage is already c70%. Beyond this, we
expect a significant provisioning 'normalisation' from International Retail which has
weighed disproportionately