Stress testing the French banks

- "Trimming target prices by c12% on average after our comprehensive stress test. Although valuations have become more attractive in recent weeks, we believe caution is still de rigueur, given uncertain market and economic conditions and the sovereign crisis. We have conducted a comprehensive stress test on French banks to measure their ability to withstand a deteriorating environment. We are cutting our target prices by c12% on average and reducing our EPS forecasts by single digits over 2010E–12E. We also provide our Q2 forecasts in this report."
- "We stress test 2012E TE, earnings and solvency for eight risks, (hopefully) encompassing all of investors’ main concerns: sovereign risk, market-related revenues, banks tax, Basel III, funding cost, asset quality, toxic assets and loan growth. In total, we estimate that French banks’ solvency in our stress test would drop 3.4pp to 6.0% in 2012E proforma, equivalent to a hit to capital of about €60bn. The sector’s earnings would nearly halve to €12bn, and the TE would drop 14% to €135bn."
- "Under this scenario, only BNPP would have an ET1 above 7%, and Natixis would be close at 6.5%. Both CA and SG would have significant capital deficits versus an ET1 ratio target of 7% (€11bn and €6.6bn, respectively). While our stress test suggests the gap might have to be bridged by a rights issue, we note that a phasing and possible wateringdown of new regulation proposals could help CA and SG build more capital than we actually model in our stress test, therefore reducing the need for fresh capital. That said, BNPP and Natixis too would likely build more capital, which they could redeploy via buy-backs or acquisitions."
- "BNPP looks to be the most solid French bank, in our view, and has been unjustifiably hit by market concerns. We reiterate our Outperform rating and view recent share-price weakness as a good buying opportunity."
- "We remove Natixis (Outperform) from the Credit Suisse Focus List. Natixis is resilient in our stress test but after a strong relative performance, we believe a pause for a breather may be justified in the short term: we remove it from the Focus List. SG and CA both look cheap but in our stress test face significant capital deficits, thus at times of risk aversion we prefer to err on the side of caution. We reiterate our Neutral ratings on both."
CreditSuisse French Banks 20100702