Contagion risks scare off investors in French banks
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Investors abhor uncertainty. They may not have much nice to say about Emmanuel Macron either. After the French president’s Renaissance party suffered in the European parliamentary elections, his call for a snap election knocked the prices of local stocks and bonds. A good performance by Marine Le Pen’s far-right Rassemblement National (National Rally) party has raised the risk of a split in the Euro’s support.
Investors fear an overall majority for the RN party and a surge of anti-EU sentiment. Share prices of French banks, holders of regional debt and dependent on the euro, have fallen sharply in response.
Fears in the government debt markets have pushed the yield on French 10-year bonds to as high as 3.2 per cent, the highest since 2012’s euro debt crisis. A previously narrow spread against equivalent German Bunds has opened up by 25 basis points this past week alone suggesting nervousness. Shares in BNP Paribas and Crédit Agricole have fallen 11 per cent since the election announcement last week and Société Générale shares are down 14 per cent, all down much more than the broader equity market.
Still, markets have priced in plenty of gloom. Opinion polls suggest that the RN could win at most 40 per cent of seats, large but not a majority. Assuming Macron continues as president until 2027, key foreign policy and defence issues remain in his hands. But there’s no doubt his power would be weakened.
Similarities with the rise of rightwing parties in the 2018 Italian elections are noteworthy. Spreads on Italian bonds then too jumped to historically high levels and have since narrowed. The EU has since added the “transmission protection instrument” to its toolkit where it can buy regional bonds to control the risk of fragmentation.
All three of the big French banks sit on the Financial Stability Board’s list of Global Systemically Important Banks. These require higher capital buffers to ensure no contagion follows from any mishaps. After years of risk weighted asset inflation, their shareholders may not welcome more regulatory scrutiny.
Most of this year’s price rally in French banks has dissipated in recent weeks. On current valuations BNP and Crédit Agricole offer a total yield -with buybacks — of 10 per cent and 8 per cent respectively over the next two years, using Visible Alpha estimates. Shares in the two are being more heavily shorted than Soc Gen, according to S&P data.
Macron has gambled that his mandate with French voters can withstand this latest threat. For contrarian investors, bank stocks offer a good way to follow that bet.
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