Could French banks have particular challenges coming through the coronavirus? In a note out this week, JPMorgan’s European banks research team outlined why they think BNP Paribas, SocGen, Natixis and Credit Agricole could have a particularly hard time in 2020.
While all banks can expect to suffer losses and writedowns relating to the virus, French banks are particularly exposed says JPMorgan. And they are exposed as a result of their corporate and investment banking (CIB) divisions.
Broadly, the problem is that French banks are particularly exposed to the equity derivatives business, where mark-to-market losses are expected to be unusually high. “In equity derivatives, we expect French banks to underperform U.S. peers due to their higher gearing to structured products which suffered mark-to-market losses related to the collapse in dividend swaps expectations,” say JPMorgan’s analysts. BNP alone lost ~€200m on equity derivatives trades in March according to Bloomberg.
Nor are equity derivatives the only issue. JPMorgan says French banks could also suffer from losses relating to the oil industry and to their exposure to hedge funds which were affected by last month’s spike in volatility.
In combination, these effects are forecast to reduce the return on equity at BNP Paribas to 1% this year, to create a negative return on equity of -1.2% at SocGen, to cut Credit Agricole’s return on equity to 1.8% and to reduce returns at Natixis to 1.9%.
JPMorgan doesn’t explicitly say so, but the pressure on returns could lead to renewed pressure for job cuts – if not in 2020, then certainly at the start of 2021.
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