At over $75bn, French banks have the largest collective exposure to Greece of any group of banks in the world. So say the BIS’ latest data, which place German banks second on this unenviable list with around $43bn of exposure. French banks are heavily involved in Greece, especially the big four banks (Credit Agricole, BNP Paribas, SocGen and BPCE), which together account for more than half of French banks’ exposure. Credit Agricole, for instance, has a 91% stake in Emporiki Bank, Greece’s fifth-largest lender by assets, while SocGen has a 54% stake in the much smaller Geniki Bank. But despite the hype currently surrounding all things Greek, the market seems unmoved. While French banks’ CDS spreads have risen over the past few weeks, they have not moved further than other financial institutions’ and are certainly not at levels that imply an imminent crisis. Has the market got it right?

We believe so. $75bn is a headline-grabbing number, but it is small in the context of French banks’ balance sheets. The big four alone had total assets exceeding €5tn at end-2009 and over €170bn of core Tier 1 capital at end-Q110. As a group, therefore, French lenders seem securely cushioned against any major problems in Greece. This is also true at the individual level. Credit Agricole has by far the largest exposure to Greece through its stake in Emporiki, whose total assets and total loans stood at €27.9bn and €22.0bn respectively at end-Q110, representing 1.8% and 6% of Credit Agricole’s total assets and loans respectively at end-2009. And its core Tier 1 capital stood at €64.7bn at end-Q110 – more than double Emporiki’s entire balance sheet. Credit Agricole’s strength against its Greek exposure is replicated by the other banks. Geniki, in which SocGen has a majority interest, had a balance sheet of just €4.8bn at end-Q110 (compared to SocGen’s €1tn), while BNP Paribas and BPCE’s total exposures to Greece are very manageable at €8bn and €2.1bn respectively.

But the market’s confidence in the major French banks does not just reflect its view that they have managed their Greek risk well. It is also a function of their relatively strong performance throughout the crisis and, more particularly, over the past year. The banks’ Q110 results show that all four are continuing to improve their performance. None of them has posted a quarterly loss since Q109 (see Chart 1). In fact, three of the four posted a net profit of over €1bn in Q110, while the profitability of all four is trending steadily upwards.

French banks’ quarterly net profit

Source: Company data.

This increasing profit trend is partly due to the favourable investment banking environment, which has boosted most major global banks’ trading profits. But more important has been the improvement of the economic environment and French banks’ own risk management, which have combined to make them both more profitable and more secure institutions. The chart below shows both dynamics in action. Provisions appear to have peaked at each of the big four French banks, lessening their impact on the banks’ income statements. At the same time, the banks’ Tier 1 capital ratios at end-Q110 were much improved on capital levels at end-Q109.

French banks’ quarterly provisions (LHS) and Tier 1 capital ratio (RHS)

Source: Company data.   *BPCE Tier 1 ratio as at end-Q209.

In short, therefore, the market has it right. French banks are profitable, well managed and strongly capitalised institutions. Their exposure to Greece is small compared to their overall size and should not trouble them. There is no reason why their recent good performance should not continue.

Nick Smallwood - Credit Analyst

Disclaimer:

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