French bank earnings signal strength amid dismal outlook

PARIS / Bloomberg

With some of their European rivals including Deutsche Bank AG still reeling from full-year losses, French banks entered a tumultuous 2016 with the strongest earnings in almost a decade and pledged to reward shareholders with higher dividends. Their resolve is about to be put to the test.
In France, a focus on consumer lending has helped shield lenders from a selloff that reflected investors’ concerns about cooling emerging markets and plunging commodity prices undermining securities revenue. With investment banks across the continent eliminating thousands of jobs to boost profitability and meet tougher regulatory scrutiny, BNP Paribas SA and Societe Generale SA are expanding in fee-based and cash-rich activities, requiring less capital.
“They are in a better position than a lot of their rivals,’’ said Julian Chillingworth, chief investment officer at Rathbone Brothers Plc in London, which manages about 30 billion pounds ($42 billion), including some holdings in French, German and Swiss banks. “BNP and Societe Generale both have areas of expertise they can rely on even when the situation is harsher.’’ The pan-European Stoxx 600 Banks Index has fallen 19 percent in 2016, the worst start to a year since 2009, with investment banks among the hardest hit. Deutsche Bank reported its first full-year loss since 2008, while Credit Suisse Group AG shares plunged to the lowest since 1991 after bigger-than-expected restructuring charges erased earnings.
2016 ‘Headwinds’
At Societe Generale, the shares slumped last month after the bank said it may miss its profitability target in 2016, citing “headwinds” including regulatory pressures and volatile markets. The Paris-based lender is projected to report a drop in profit this year, while BNP Paribas and Natixis SA are seen posting increasing earnings, according to analysts in a Bloomberg survey. A drop in shares has pushed Societe Generale’s price-to-tangible book ratio to 0.47. That indicates it’s worth less than investors would expect to receive if the firm liquidated its assets. The European bank average is at 0.81, according to Bloomberg Intelligence.
“Certainly a lot of bad news is already in the price, but I wouldn’t necessarily rush to buy the shares,” said Jonathan Fearon, who helps manage 300 billion pounds at Standard Life Plc in Edinburgh. “We have a lot of headwinds to get through. Investment-banking growth plans are difficult to believe in this challenging revenue environment.”French banks have focused on building their capital buffers since the global financial turmoil, with the following euro-area fiscal crisis forcing them to shrink balance sheets. In December, all four of the nation’s major lenders announced that they exceeded capital requirements set by the European Central Bank, giving them room to return money to shareholders. BNP Paribas raised its dividend for 2015 to the highest in eight years, while Natixis is using extra reserves for exceptional payments to shareholders. Credit Agricole SA is selling stakes in regional lenders and targeting all-cash dividends. That compares with a dividend freeze at Deutsche Bank, while Barclays Plc on Tuesday unexpectedly cut its payouts to shareholders for 2016 and 2017 as part of a wider overhaul.
Credit Agricole will present its latest profit targets at an investor day next week, while Societe Generale is preparing goals for the years through 2020. Ada Di Marzo, a Paris-based partner at management-consulting firm Bain & Co., said that investors might have to prepare for lower profitability among European banks, with a return on equity of 10 percent becoming increasingly difficult to reach.
“The differences in bank performances are much bigger,” she said. “While many banks are showing a return-on-equity between 6 percent and 8 percent, others are losing money.”
The focus on consumer lending may become even more prescient if the oil bust continues. Plunging commodity prices are pushing up the share of bad energy loans across the financial industry. Societe Generale has said that it doesn’t expect a “significant impact” on its bad-debt
provisions after running stress tests.