The French bank bonds – opportunities amidst a seeming crisis

In July, we provided a quick commentary about the political situation in France and its implications for the French banks. Following President Macron's call for a snap election in late June, France's political landscape splintered into three main coalitions: the far-right, the left-wing, and the centrist alliance. This political division created significant challenges for the minority government, hindering its ability to pass new legislation, particularly in light of growing concerns about France's public debt.

The French government faced considerable difficulty in securing approval for the 2025 budget, as the political coalitions presented conflicting demands. Consequently, France's financial markets experienced substantial volatility in recent months, fuelled by increasing concerns over the budget deficit and the government's capacity to manage it. These concerns were reflected by downgrades from major credit rating agencies: Moody’s downgraded France’s sovereign rating by one notch, while Fitch placed the country on a "Negative" outlook.

Key events relating to France and French sovereigns

Table 1 – A brief timeline and description of key events

Date	Event	Brief Description
9 Jun ‘24	Announcement of snap election	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.
7 Jul ‘24	French legislative elections	The French legislative election held across two rounds resulted in a three-way split in the government between the right-wing, far-left and centrist coalitions – with Macron’s centrist alliance being the smallest of the three.
11 Oct ‘24	Fitch revised France’s outlook	France’s outlook saw a revision to “Negative” albeit the rating was still affirmed at “AA-”. A possible downgrade could follow if it fails to implement a credible medium-term fiscal consolidation plan over the medium term.
25 Oct ‘24	Moody’s revised France’s outlook	Moody’s similarly revised France’s outlook from “Stable” to “Negative”. The announcement mentioned that the decision was owing to the increasing risk that France’s government will be unlikely to implement measures that would prevent sustained wider-than-expected budget deficits and a deterioration in debt affordability.
6 Dec ’24	French PM receives vote of no confidence	French Prime Minister Barnier and its minority administration (as part of the centrist alliance) failed to garner sufficient votes to survive the no-confidence motion that was backed by the right-wing and far-left parties. The vote of no confidence was tabled after Barnier forced through the parliament with its 2025 budget proposal, which saw a drastic reduction in the budget deficit from 6% to 5% of GDP.
14 Dec ’24	Moody’s downgraded France’s sovereign rating	Moody’s downgraded France’s sovereign rating from “Aa2” to “Aa3” while revising the outlook from “Negative” to “Stable”. Moody’s explained that the decision reflects its view that the country’s fiscal position will be substantially weakened over the coming years, contributed by political fragmentation that impedes meaningful fiscal consolidation.
17 Dec ’24	Moody’s downgraded French banks’ credit ratings	Following the downgrade of France’s sovereign rating, Moody’s subsequently downgraded the ratings of most French banks – including three under our coverage, BNP Paribas, Credit Agricole, and Groupe BPCE. The downgrade was a result of a drop in sovereign rating, reflecting a reduced uplift from government support.
3 Feb ‘25	2025 Budget successfully passed	Newly appointed French PM Bayrou forced a revised 2025 budget bill through the parliament successfully, which sees a reduction in the budget deficit to 5.4% of GDP. The revised 2025 budget subsequently received approval from the French Senate, now awaiting to be signed into law by French President Macron.

The consequences of the political drama

Chart 1: French 10y sovereign yield and spread against the German 10y sovereign yield

The political uncertainties led to a jump in French sovereign bond yields, with the French 10-year sovereign rising sharply after the announcement of the snap election. Markets demanded a higher premium on France’s longer-tenor sovereign bonds as the government is expected to have considerable difficulties consolidating debt and reducing the budget deficit. Against their German equivalents, spreads between the French and German 10-year sovereigns nearly doubled, significantly exceeding the historical average of 40 basis points (“bps”) recorded across the past decade.

Concerns over the deteriorating budget situation fuelled greater yield volatility. Initially expected to win, the increasingly popular right-wing National Rally party was expected to introduce policies that would exacerbate the deficit. The eventual three-way split might seem like a better solution, but the fragmented government and inability to effectively introduce new legislation enabled the continuation of this volatility.

Fortunately, the situation appears to be improving under the leadership of President Macron's newly appointed Prime Minister, François Bayrou. Since January 2025, parliamentary discussions regarding the 2025 budget have seen more agreement across political coalitions, although threats of a vote of no-confidence persisted for some time. As of early February, several components of the revised budget have successfully passed through government approval. As a result, the French 10-year bond yields saw some respite from the peak in early January. 

How were the French banks impacted?

French banks were among the first to feel the impact of political instability. Across the first two weeks of June 2024, when President Macron called for a snap election, share prices of BNP Paribas and Societe Generale (“SocGen”) declined by an estimated -15% and -18% respectively. Volatility was also observed across bond prices of the four major French banks’ bonds, though the extent of the fluctuations was less pronounced compared to that of their respective share prices.

Concerns arose regarding the French banks' sovereign holdings, as they were believed to be among the largest holders of local sovereign bonds. However, we note that the actual proportion of French sovereign bonds relative to their total assets is relatively small, with BNP Paribas, Credit Agricole and SocGen holding low single-digit percentages, while Groupe BPCE holds low ~10% (Table 2). As such, we expect the revaluation of sovereign bonds following the yield spike to have a minimal impact, given the limited size of these holdings.

Table 2 – French banks’ holdings of French sovereign bonds

	French Sovereign Holdings as of 1H24 (EUR bn)	Proportion of total assets as of 1H24
BNP Paribas	45	2%
Credit Agricole	83	4%
Groupe BPCE	182	12%
Societe Generale	38	2%
Sources: Bloomberg Finance L.P., EBA 2024 Transparency Exercise.

Following the downgrade of France's sovereign rating, Moody's downgraded the issuer ratings of seven French banks, including the three in our coverage. The long-term issuer ratings for both BNP Paribas and Credit Agricole were downgraded by one notch from "A1" to "Aa3," while Groupe BPCE's long-term counterparty risk assessment was revised downward from "Aa3(cr)" to "A1(cr)," though its issuer rating remained unchanged. This downgrade reflects a weakened capacity for the French government to support the banks if necessary. More specifically, it was the removal of a one-notch rating upgrade based on government support that led to the downgrade for the French banks.

As of February 2025, we observed that credit spreads for the four French banks are back to similar levels to the start of June 2024, before the snap election was announced. While further widening of spreads was initially anticipated, given the influence of sovereign bonds on banking bonds, we instead saw a minute compression in spreads throughout this period. This suggests that bond investor sentiment was not significantly affected by the political developments, which is unsurprising given the size and stability of these banks.

Although the immediate impacts are seemingly contained, we are cognizant of potential long-term consequences as the domestic retail market represents a significant portion of business for French banks. A weaker retail market could lead to a slowdown in loan growth and deterioration in loan quality which consequently constrains profitability. That said, the impact may vary from bank to bank as some are better diversified outside of France.

Ultimately, the impact on these banks will depend on the government's ability to balance fiscal spending with economic growth. While the current French government appears to be moving in the right direction, it is likely to take some time before the longer-term effects become clear. In the meantime, we briefly review the recent performance of the French banks, which have just released their FY24 results.

Commentary on the French banks’ recent financial performances

Before diving into the results in greater detail, it is important to note that we have not observed a significant impact stemming from the political uncertainties in France since June 2024. While there may have been a slight increase in the cost of risk for some of the French banks, this is more likely attributable to a general deterioration in macroeconomic conditions rather than political factors.

Overall, FY24 proved to be a great year for the French banks, with all four institutions reporting growth in revenue and net income (Chart 2). Interest rates staying higher for longer helped with sustaining net interest income, while the heightened market and trading activities were a boost to investment banking. 

Chart 2 – French banks’ net income (including minority interests) over the past 5 years (in EUR m)

BNP Paribas – EU’s banking giant leading in stability and consistency

For the full year ended 31 December 2024 (“FY24”), BNP Paribas reported another year of growth with both revenue and net income rising by +4% YoY. Revenue went up from EUR 46.9b in FY23 to EUR 48.8b in FY24, whereas net income rose from EUR 11.2b to EUR 11.7b during the same period. BNP Paribas achieved a positive jaws effect for FY24, with the revenue growth outpacing the increase in operating expenses (+2.1% YoY).

Among the European banks within our coverage, BNP Paribas stands out not only for its significant market share across the EU but also for its consistent and stable growth amidst shifting macroeconomic conditions. Backed by a strong, globally diversified business franchise, BNP Paribas demonstrates an ability to adapt effectively to rapidly changing market demands, distinguishing itself from other major European banks.

As of 31 December 2024, BNP Paribas reported a Common Equity Tier 1 (CET1) ratio of 12.9%, which decreases to 12.4% after accounting for Basel IV requirements. Relative to other major European banks, BNP Paribas has one of the lowest CET1 ratio buffers (to regulatory requirements) at approximately 210 basis points. Management has further indicated plans to reduce this ratio to 12.3% by the end of 2026.

Despite this, given BNP Paribas' consistent track record of staying profitable, we see minimal concerns with its capital buffer at the moment. For temporary or seasonal fluctuations to capital or risk-weighted assets, we expect the banks’ profits to be sufficient to offset such impact and allow its capital ratios to stay stable.

Societe Generale (“SocGen”) – Non-interest income a significant boost for FY24

SocGen saw significantly improved results in FY24, with net banking income (revenue) and net income rising by +6.7% and +48.7% YoY respectively. Net banking income rose from EUR 25.1b in FY23 to EUR 26.8b in FY24, while net income increased from EUR 3.5b to EUR 5.1b across the same period. In addition to the rise in net banking income, SocGen effectively managed its costs throughout the year, reducing operating expenses by -0.3% year-on-year in FY24.

SocGen's performance came as a positive surprise, especially considering prior concerns about its results. We highlighted that the Group was previously unable to benefit significantly from the rate hikes as it did not enjoy higher net interest income from its traditional banking operations in France, unlike other non-French banks. This was because of France’s regulations that impose a floor rate on consumer deposits, which rises with interest rate increases.

Although SocGen was spared from the recent rating actions by Moody’s, its outlook was revised to “Negative” earlier last year, with a possible downgrade in credit rating if profitability remains weaker as compared to peers with similar ratings. However, given the Group’s strong recent performance and the likelihood of sustained profits, we believe a revision to a “Stable” outlook is probable for the bank.

As of 4Q24, SocGen’s CET1 ratio stood at 13.3%, approximately 310 bps above the regulatory required levels. The bank intends to maintain the CET1 ratio above 13% across 2025 following the adoption of Basel IV, with a target of 13% by 2026. Given the substantial capital buffer, SocGen’s capital ratios are not a concern at present. AT1 investors may want to monitor SocGen’s CET1 ratio closely, given its historical challenges with earnings volatility.

Credit Agricole Group and Credit Agricole S.A. (“CAG” and “CASA”) – Diversified business lines creating opportunities for growth

FY24 was another strong year for Credit Agricole, with both the Group and CASA recording continued growth in revenue and net income. At the Group level, revenue is up +4.3% YoY from EUR 36.5b in FY23 to EUR 38.1b in FY24, whereas net income rose +4.7% from EUR 9.1b to EUR 9.5b across the same period.

Similar to BNP Paribas, Credit Agricole has demonstrated consistent and stable growth over an extended period, particularly with the Group seeing a +5.6% compounded annual growth rate (“CAGR”) in underlying revenue from FY15 to FY24. The Group’s return on tangible equity (“RoTE”) also reflects this stability, increasing to 14.0% in FY24, surpassing the management’s target of 12.0%. Given its highly diversified business lines, operationally and geographically, Crédit Agricole has benefited from opportunities beyond France. Non-traditional banking segments, in particular, saw stronger growth in FY24, with most individual business lines recording net income growth exceeding 10% YoY.

The Group reports one of the highest CET1 ratios across the European banks, with CAG’s CET1 ratio at 17.2% as of December 2024 and 740 bps worth of buffer to regulatory required levels. CASA’s CET1 ratio is lower at 11.7% as of December 2024 but still holds a considerable 300 bps buffer to regulatory levels. Crédit Agricole’s consistent profitability has largely offset any increases in risk-weighted assets resulting from the growth of various business lines, and we expect the bank to continue managing its capital prudently.

 

Groupe BPCE (“BPCE”) – Unaffected by the political turbulence despite its sovereign holdings

Net banking income rose +5% YoY for BPCE, up from EUR 22.2b in FY23 to EUR 23.3b in FY24. With operating expenses largely unchanged throughout the year, BPCE saw a substantial increase in net income – rising by +26% YoY from EUR 2.8b in FY23 to EUR 3.5b in FY24. This growth was broad-based across all business lines, particularly with its two major divisions ‘Retail Banking & Insurance’ and ‘Global Financial Service’ reporting revenue growth of +4% and +8% YoY respectively.

Initially, we had concerns regarding BPCE’s FY24 financial results, given its significant holdings of French sovereign bonds. However, we believe the impact of the revaluation of these sovereign holdings was minimal, considering BPCE’s overall strong performance. The cost of risk also increased by +19% year-on-year, from EUR 1,731m in FY23 to EUR 2,061m in FY24, but this was largely due to a low base in FY23. Instead, there was a YoY decline in the cost of risk for 4Q24, falling from EUR 744m in 4Q23 to EUR 596m in 4Q24.

With more than two-thirds of BPCE’s income contributed by the domestic French market, the banks’ results are likely most reflective of the “damage” from the political uncertainties. Thankfully, it gave the affirmation that the political instability had little effect on the French banking sector. BPCE recorded +103% YoY underlying net income in 4Q24, amidst the peak of political turbulence that saw the previous French PM Barnier getting the vote of no confidence.

Overall, BPCE’s strength lies in its diversified financial services offerings in France, which have helped to mitigate the impact of slower traditional banking growth. Approximately 50% of the bank’s net banking income is derived from non-traditional sources, such as insurance, asset management, and trading activities. These business lines are likely to continue driving BPCE’s growth in the near term.

In terms of capital, BPCE’s CET1 ratio stood at 16.2% as of December 2024, with a pro-forma ratio of 15.6% after accounting for upcoming acquisitions. At the pro-forma level, BPCE’s CET1 ratio holds a significant buffer of around 500 bps to the regulatory requirements. Additionally, S&P Global Ratings upgraded BPCE’s long-term issuer rating from ‘A’ to ‘A+’ earlier in July 2024, citing the bank’s enhanced capacity to absorb losses through increased senior non-preferred issuances.

Recommendations from the four French banks

Table 3 – Recommended French USD senior non-preferred and SGD Tier 2 bonds

Issue	Ask Price	Yield to Call/ Maturity	Years to Call/ Maturity	Bond Credit Rating (S&P/Fitch/Moody’s)
BNP 5.786% 13Jan2033 Corp (USD)	102.06	5.42%/ 5.48%	6.90/7.90	A-/A+/Baa1
SOCGEN 6.691% 10Jan2034 Corp (USD)	105.78	5.77%/ 5.90%	7.90/8.90	BBB/A-/Baa2
BPCEGP 4.600% 21Jan2035 Corp (SGD)	100.64	4.45%/ 4.36%	4.92/9.93	BBB/BBB+/Baa2
BPCEGP 5.000% 08Mar2034 Corp (SGD)	102.65	4.28%/ 4.43%	4.05/9.05	BBB/BBB+/Baa2
ACAFP 4.250% 14Jan2035 Corp (SGD)	100.58	4.12%/ 4.08%	4.91/9.91	BBB+/A-/Baa1
ACAFP 5.250% 07Sep2033 Corp (SGD)	103.88	4.06%/ 4.39%	3.55/8.55	BBB+/A-/Baa1
Sources: Bloomberg Finance L.P., Bondsupermart, iFAST Compilations. Data as of 18 February 2024.

While the French banks may appear largely unaffected by political developments, current credit spreads on French banking bonds are slightly wider compared to their European banking peers. This is likely due to a modest premium which markets have priced in for the banks’ business exposure to France. However, we believe this creates a favourable opportunity for investors considering these banking bonds.

Within the USD space, the highlighted senior non-preferred (“SNP”) papers – BNP 5.786% 13Jan2033 Corp (USD) and SOCGEN 6.691% 10Jan2034 Corp (USD) – offer relatively attractive yields for their respective investment-grade ratings, although both bonds have a relatively extended duration. Due to their higher seniority compared to Tier 2 subordinated and Additional Tier 1 (“AT1”) bonds, the risk of loss absorption is lower for SNP bonds, making them more suitable for conservative investors.

In the SGD market, BPCEGP 4.600% 21Jan2035 Corp (SGD) and ACAFP 4.250% 14Jan2035 Corp (SGD) are recent issuances that have disrupted the market, offering yields above 4% to call despite their investment-grade ratings. For context, most SGD bonds offering yields above 4% are typically either high-yield or perpetual securities. As such, BPCE and Credit Agricole’s Tier 2 bonds are particularly appealing, given the very tight spreads in the SGD fixed income space.

We generally focus on the yield to call for Tier 2 subordinated bonds, as regulations incentivize issuers to redeem and refresh Tier 2 capital earlier. Once again, we wish to highlight the embedded loss absorption features on Tier 2 subordinated bonds, although they rank below AT1 bonds in terms of priority for loss absorption.

Table 4 – French banks’ USD AT1s

Issue	Ask Price	Yield to Call	Years to Call	Bond Credit Rating (S&P/Fitch/Moody’s)
BNP 5.125% Perpetual Corp (USD)	95.95	6.77%	2.74	BBB-/ BBB/ Ba1
BNP 9.250% Perpetual Corp (USD)	108.24	5.94%	2.74	BBB-/ BBB/ Ba1
BNP 7.000% Perpetual Corp (USD)	101.30	6.58%	3.49	BBB-/ BBB/ Ba1
BNP 4.500% Perpetual Corp (USD)	88.27	7.34%	5.02	BBB-/ BBB/ Ba1
ACAFP 4.750% Perpetual Corp (USD)	92.51	6.66%	4.09	BBB-/ BBB/ -
ACAFP 6.700% Perpetual Corp (USD)	97.56	7.05%	9.60	BBB-/ BBB/ -
Sources: Bloomberg Finance L.P., Bondsupermart, iFAST Compilations. Data as of 18 February 2024.

The risks associated with AT1 bonds have always been a concern for us. Investors should exercise caution when investing in these papers due to their highest priority for loss absorption among banking bonds and the potential for coupon deferrals during periods of financial losses.

Accounting for these risks, BNP’s 5.125% Perpetual Corp (USD) bond stands out amidst these concerns. With just 2.7 years to call and an exceptionally stable performance by BNP Paribas, the BNP 5.125% offers an attractive ~6.8% yield to call, despite its (pseudo) investment-grade rating. BNP Paribas' consistent track record of profitability helps alleviate many of the risks commonly associated with AT1 bonds—namely, the risk of loss absorption due to unexpected needs to absorb losses, as well as the risk of coupon deferrals in order to preserve capital. Given BNP Paribas' strong and growing profitability, we consider these risks to be relatively well-managed, while the yield on this bond is largely more attractive compared to other USD AT1s.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in BNP 4.750% 15Feb2034 Corp (SGD) and BNP 5.830% 23Aug2034 Corp (AUD), and the analyst who produced this report hold a NIL position in the abovementioned securities.