French banks could handle a capital hit caused by their exposure to peripheral sovereign debt, but have fallen victim to negative market sentiment, David Byrne, director of fund management at Swiss Canto Funds Centre in London, told CNBC.
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The investment manager said this week that French banks probably did not need recapitalizing, but had fallen victim to a “bunker mentality” on the part of investors.
“The problem for all the French banks is perception. They can take the capital hit, they are probably adequately capitalized. But perception is reality,” said Byrne.
“Real money investors are giving the French banks the thumbs down. We are back to the situation in 2008 with banks not trusting other banks. Unfortunately it can take quite a bit to turn that around.”
In a September 29 research report by Fitch Ratings called ‘French Banks: Under Market Fire,’ analysts Eric Dupont and Alain Branchey write:
“French banks’ current capital ratios do not compare favorably with some large European peers, and market participants fear capital to be too weak to absorb the falling values of sovereign bond portfolios,” they said.
However, the authors also said that any additional write-down needed on Greek government bonds will be “affordable relative to earnings and capital” for French banks. So far, Greek sovereign bonds that mature up to 2020 and are held on banking books have been written down by 21 percent through profit and loss.
Should a 50 percent write-down of Greek debt occur, French banks would suffer a 3.3 billion euro impairment charge and a 1.7 billion reduction in equity. “Such write-downs are very small compared to French banks’ equity bases,” Dupont and Branchey write.
French banks have limited exposure to peripheral debtfrom Ireland, Portugal and Spain, say the authors. Exposure to Italian government debt is higher, with BNP Paribas holding 22.8 billion euros, and Credit Agricole holding 8.7 billion euros.
However the report states: “Fitch considers that even under severe stress there will not be a default of the Italian sovereign.”
Nonetheless, some industry participants say that recapitalization is required irrespective, if only to reassure the markets.
“Whether it is true or not, everybody now believes that French banks are undercapitalized. That is why we need a recapitalization,” Philippe Brossard, president of economic research firm, Macrorama, told CNBC last week.
Should the French government seek to recapitalize its banks, support would come in the form of hybrid debt or other temporary programs, as opposed to common equity, according to Fitch’s French banks report.
“This could be viewed as an acceleration in response to market pressure, of incremental capital improvement that would be likely to occur anyway in the next few years,” analysts Dupont and Branchey said. “While this may provide some market comfort in the near term, it is unlikely to be viewed as a comprehensive solution on its own.”
Brossard said: “I think the government has to concentrate on the very largest banks. We have to concentrate on the ‘too big to fail’ banks, before it is too late. Really, the question mark is about Societe Generale and BNP Paribas.”
So far, French politicians have remained adamant that the country’s banks do not need recapitalizing.
On September 25, the country’s central bank head and ECB governing council member, Christian Noyer, told French newspaper Le Journal du Dimanche that French banks had no need to recapitalize, as the sector was robust and profitable. He added that the banks were not hiding toxic assets, and had substantial capital bases, comparable to those of other European banks.
However, Noyer said that should ‘extraordinary’ events occur, French banks could, if necessary, re-access the support facility established by France in 2008.
BNP Paribas, Societe Generale and Credit Agricole shares were all up as of October 6.
