Quick Commentary – France might be panicking, but you don’t have to

Quick Commentary – France might be panicking, but you don’t have to

• Recently, French President Macron called for a snap election following his party's defeat by the right-wing National Rally in the European Union parliament elections. Since the announcement, share prices of French banks within our coverage — BNP Paribas, Societe Generale, and Credit Agricole — have fallen. Bond spreads on SGD and USD bonds offered by these banks have also widened, though to varying degrees.
  
  
• The snap election announcement has introduced uncertainty about France's future, given the strong showing of the right-wing National Rally in the polls. Market concerns have focused on the party's potential spending plans, which could exacerbate France's budget deficit. France currently holds one of the largest budget deficits among Eurozone countries, surpassing the regional average.
  
  
• France has completed the first round of elections on 30 June 2024, with the second round scheduled for July 7, 2024. The right-wing National Rally secured the most seats with 33.15% of the votes, followed by the left-wing party at 27.99%. Macron's centrist alliance garnered only 20.76% of the votes.
  
  
• Following the first round of election, the French stocks opened higher, and the banks reversed some of the losses previously seen. Given the outcome of the first round, investors anticipate a hung parliament in France, which is preferable to the right-wing party securing a majority. While concerns persist about France's debt problems in a divided parliament, the immediate fear of a worsening budget deficit may be mitigated.
  
  
• Returning to French bank bonds, we observed spreads widening significantly upon the snap election announcement. Although markets have stabilized somewhat, additional risk premiums remain priced into French sovereign bonds, affecting French bank bonds as the banks are the major holders.
  
  
• In the short term, mark-to-market losses on French sovereign bonds could impact French banks' balance sheets. However, Moody's indicated that the impact may be limited, as sovereign exposures subject to valuation losses account for approximately 12% of banks' CET1 capital on average.
  
  
• In a worst-case scenario where we see greater volatility owing to the elections, we expect to see French banks potentially de-risk from France, reducing their exposure and operations domestically. We believe that BNP Paribas and Credit Agricole would see a smoother transition, owing to their extensive international presence. Meanwhile, Societe Generale and Groupe BPCE would face greater difficulties as they have a higher dependency on the French economy.
  
  
• We maintain confidence in French banks for now, with the likely results of a hung parliament having minimal operational impact on them. For investors, we do not see default risk significantly increasing as a result of the elections, and should consider holding on to the bonds.
  
  
• Particularly, BNP Paribas presents an attractive opportunity being the largest bank in the EU with robust overseas diversification across its various business lines. Investors willing to tolerate some uncertainty regarding France may find BNP Paribas' stability appealing, while noting that there might be some potential, but likely limited, impact to its capital in the short to medium term.
  
  
• Within the SGD credits space, BNP Paribas’ Tier 2 subordinated papers BNP 5.250% 12Jul2032 Corp (SGD) and BNP 4.750% 15Feb2034 Corp (SGD) are very attractive in our view – at about ~4.5% yield to call in addition to BNP Paribas’ high credit quality.
  
  

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in BNP 4.750% 15Feb2034 Corp (SGD), and the analyst who produced this report hold a NIL position in the abovementioned securities.

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