High yields reflect regulatory headwinds; Buy optionality at BNP
Upcoming regulatory changes have scope to lower capital ratios…
The Basel committee has issued proposals on credit, market and operational
RWAs, which in our view have scope to increase RWA densities at French
banks. The aim of the reforms is to benchmark the banks’ internal calculations
against an updated, more granular standard approach to capital requirements.
While cautioning that the proposals are still to be finalized, and that the
outcome could be considerably different, we attempt to estimate their impact.
Overall, we estimate on a conservative basis a 210 bp capital impact (of which
70 bp stems from the risk of removal of the Danish compromise), leaving the
four banks we cover with an aggregate 8.6% pro-forma fully loaded CET1 as
of now. It is possible, albeit not certain, that high asset intensity businesses
such as those operated by French banks are more vulnerable to increases.
…posing a risk to dividends, depending on phasing & calibration…
Assuming our forecasts for earnings and RWA inflation are correct, we
estimate that the banks will start reaching a 10% FL CET1 ratio net of
capital impacts in 2018, before mitigation. While this seems a reasonable
phase-in period, we are wary that market pressure will push the banks to
move faster towards higher capital ratios, in which case dividends cuts
could happen, unless other strategic options are considered.
…but not evenly priced in for the banks; BNP to Buy, CNAT to Sell
The four French banks trade on I/B/E/S consensus dividend yields of 4.6%-
4.9% (2015-17), vs. the sector on 3.8%, partially pricing in these headwinds.
But this is achieved on different payout ratios and capital sensitivities vary.
On balance, we see BNP and SG as more attractively priced for the
potential regulatory changes as they have lower payout ratios, while CASA
and Natixis’ share prices seemingly fully reflect the cushion provided by the
support of their parent shareholders. We prefer BNP as: (1) its valuation
multiple is low (8.8x 2015-17E avg. P/E and 4.7% yield vs. 13x and 3.8% for
the sector); and (2) we see ample room to generate capital with limited
earnings dilution, thereby safeguarding the dividend. We upgrade the stock
to Buy from Neutral. Conversely, we see CASA (Sell) and Natixis as more
exposed to RWA inflation, while trading at higher P/Es. Although only c.40%
of its revenues comes from asset management, Natixis also trades at a
premium to asset managers and we downgrade the shares to Sell from
Neutral on valuation grounds. We adjust our estimates for the French
banks ahead of 2Q15 results, and roll forward our valuation period to 2015-
19 (from 2015-17) to capture a gradual increase in capital requirements.