Financials Watch – French election, positive for French banks

by: Tom Kinmonth

  • Macron very likely to win, but he will face major hurdles to implement plans
  • Short-term bank capital requirements unchanged, although tide is turning
  • Issuance to resume for French banks, led by Senior Non-Preferred
  • Cost of French bank funding to decrease, as market opens 3bps tighter
  • We favour French Tier 2 bank debt over Senior Non-Preferred
  • France is likely to increase its financial status, although behind London

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Macron very likely to win, but he will face major hurdles

Macron’s economic agenda is market friendly. He has pledged to pursue French labour market reforms and cut excessive public spending, while he is also a pro-European. Please find here, further details on the election result for other sectors and the country itself. As a caveat, despite Macron’s relatively positive economic agenda, it should be noted that he will face major obstacles in passing his programme. Macron could face the obstacle of not having a parliamentary majority.

Under France’s semi-presidential political system, if a president’s party is different to that of the majority of members in parliament, the government is divided – this is called “cohabitation”. Even presidents with the best intentions have struggled to pass reforms in France. In the past they have been blocked by vested interests, street protests and strikes. This does mean any positive impacts for the banks that we discuss below could indeed be diluted by the French parliamentary situation.

 Bank capital requirements unchanged before 2019, but potential longer term impact

One key positive for the French banks from a Macron presidency, could be bank capital requirements. Macron announced in February that he wished for European finance ministers, not regulators, to set capital rules for banks and insurers. He also proposed creating a form of oversight authority (a “parliament”) for the common currency and installing a ‘eurozone finance minister’.

France has four banks classified as GSIB’s, joint second in number with the UK, after the United States. This leads the French banks to have, relative to other countries, high capital requirements. The first capital requirement hurdle comes in the form of total loss-absorbing capacity (TLAC) requirements which begin in 2019. Do we think that the four major banks in France will have adjusted capital requirements before this date? No.

Could there be an impact in an impact in the longer term? Yes.

European harmonisation has witnessed strong convergence towards unified supervision in the past five years. However, Macron’s thoughts, combined with Trump’s intentions across the Atlantic, could change the global tide of continued increasing capital requirements for banks.

 Issuance to resume for French banks, led by Senior Non-Preferred issuance

French banks will now return to the market and continue to bolster their capital before 2019. Investor sentiment today will determine whether the banks issue before the second round, or after. Crédit Agricole entered the market under two weeks ago, therefore, the odds would be on a French bank testing the water perhaps before the second round is complete. Senior Non-Preferred will witness by far the greater issuance in our view. Please see here.

 Cost of French bank funding to decrease

French bank debt performance has significantly lagged other Europe countries this year, an excess return of 0.40% vs 0.89% for the index. Their debt performance has been the worse of any major country in the European index. We expect this now to change. French debt should perform well today. The market has jumped to the benefit on the French banks already this morning, funding costs are 3bps cheaper around the five year tenor. We favour Tier 2 French debt over Senior Non-Preferred paper, often for the 40bps of pickup.

 Macron’s view to benefit France from ‘Brexit’, as the UK suffers

Macron famously said in February that he wished for ‘banks, talents, researchers, academic and so on’ to cross the channel post-Brexit and setup in France. Macron has taken a hard line to UK banks stating that ‘no access to the market without any contribution and respect of the four freedoms of the EU’. A Macron presidency could scupper UK banks plans for a favourable agreement post-Brexit. In our opinion, the negative impact from ‘Brexit’ is often overstated for UK banks. France is indeed likely to increase its financial status somewhat, however, London should still remain superior in in terms of financial clout.