* Upgrade Credit Agricole and Natixis to Buy from Hold, remain Buy on KBC: best exposure to asset gathering trends
* Downgrade BNP Paribas and SocGen to Hold from Buy on weak French retail banking; we remain Hold on ING
* We initiate coverage of ABN AMRO with a Hold rating
- Asset gathering streams better positioned than loan-driven net interest income
Among the French and Benelux banks we cover, our preference for those with asset gathering exposure partly reflects our caution on net interest margins. We see retail investment flows as a cleaner way to play growth than loan demand. Margin support from rising rates is taking longer to flow through. Loan pricing and front-book pressure are unhelpful, despite fading mortgage re-financings.
- Credit Agricole, Natixis and KBC have the best exposure to these trends
More important than the top-down view is our bottom-up call that our three preferred names can drive positive jaws, earnings growth and multiple expansion via this business. We think banks owning insurance business have competitive and cost advantages over stand-alone players in France and Belgium. CASA and Natixis in particular benefit from their access to large affiliated branch networks to sell asset gathering products, without the associated fixed cost. We expect selective market share gains in 2018-2020 at CASA, Natixis and KBC in insurance and mix shifts into unit-linked to further support RoTEs. In Belgium, we see KBC’s high fee margins as sustainable, justified by product mix and higher gross investment returns. Continuing their bolt-on deal strategy in asset management for Natixis and CASA/Amundi, on top of strong organic inflows, adds higher quality earnings and should boost group valuation multiples.
- Downgrade BNP Paribas and SocGen to Hold from Buy
Our downgrades of BNP and SocGen reflect their exposure to French retail banking, where we see net interest income remaining under pressure in 2018, while the offset from asset gathering is much weaker than at Credit Agricole and Natixis. Our work on ‘jaws’ shows BNP and SocGen screen poorly when revenue growth is challenging.