If Hollande wins: SocGen, Paribas, & Credit Agricole will suffer

The French presidential elections are on Sunday, and while Francois Hollande isn't opening the champagne quite yet, his strong performance in the polls suggest that the Socialist candidate is probably putting some bubbly on ice. 

French bankers, meanwhile, will be left to drown their sorrows in something less sparkly.

But if Monsieur Hollande launches an outright offensive on French financial institutions, he might be left with having to pay for them, as their recovery still is very fragile and capital ratios and balance sheets are far from perfect. The crisis is far from over, given the lack of growth in France and more importantly the banking systems involvement in other Southern European countries.

I have previously argued that the time might have come for the French banks to rise to the occasion and begin deliver results for investors. So far, I have been terribly wrong.

In fact, the “Hollande effect” on the largest French banks is estimated as a 10% decrease in earnings for 2013, as new bank structures and levies seem inevitable under a Socialist president. This will lower the French banks' earnings potential for the next few years, and thereby increase the risk premiums on the banks. In addition, the tail-risk is represented by the kind of raging nationalisation that took place under Mitterrand, the last socialist president in France. This is in my mind a highly unlikely scenario; however, the nationalisation wave in Latin America is disturbing the market at present.

First reports then election result
Societe Generale gave the French sector some positive momentum today as the bank beat analysts’ estimates, although the surprise came from trading income. The prime objective for all the three of the largest French banks - BNP Paribas, Societe Generale and Credit Agricole-  is to continue to strengthen their capital positions. The valuation estimate levels for 2012 indicate great uncertainty about the banks' ability to do this without raising additional capital or damping their core earnings. Current Price-to-Book valuation estimate for 2012 is 0.51 for BNP, 0.3 for Societe Generale and 0.22 for Credit Agricole. This should still be regarded as crisis valuation levels and the pain will be substantial for equity investors if the banks are forced to issue new shares from these low valuation levels.

Conclusion
We shouldn’t overestimate the threat of a “War on finance”. Without further disturbances on core earnings from the French banks, they might be able to pull it through. Any rights issues announced will likely have a negative impact in the short run, but might just be the right thing as we are getting closer to the Basel dead-line in June. We should in the meantime focus more on French sovereign rates, that if they increase could put French banks in an equally rough spot as its Italian peers. Risk/reward is unfortunately getting less attractive as long as the status quo remains.

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I write regularly on the top 20 international banks for TradingFloor.com.  If you'd like to be notified whenever I write something new, become a member of TradingFloor.com - it's free! - and follow me or the "banking" category.  You can also keep an eye on all our banking coverage on our banks page. 

See my other articles on French banks:

http://www.tradingfloor.com/posts/why-french-banks-might-be-a-buying-opportunity---part-2-977052151

http://www.tradingfloor.com/posts/societe-general-bnp-paribas-credit-agricole-good-times-ahead-883947766

http://www.tradingfloor.com/posts/earnings-hit-for-french-banks---another-lost-month-ahead-1434757975