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Spotlight on BNP Paribas, SocGen Q2 trading revenue after surge at US giants

All eyes will be on the market activities of BNP Paribas SA and Société Générale SA when they report second-quarter earnings, following a surge in trading revenues at U.S. banking giants such as JPMorgan Chase & Co.

French banks have been building themselves up as leading European investment banks, but their lack of scale compared to their U.S. cousins has created challenges. The coronavirus-induced market downturn in the first quarter highlighted those difficulties as BNP Paribas and SocGen's trading revenues slumped, contrasting with larger U.S. rivals.

Banks in France have singled themselves out as specialists in equity derivatives, such as dividend futures, a strategy that played against them when the European Central Bank recommended in late March that the continent's banks cancel dividends.

But analysts believe that much higher debt issuance in the second quarter should benefit French banks' fixed-income business.

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The poor performance of the banks' trading revenues weighed on their first-quarter profits. Return on average equity — a key measure of profitability — at SocGen was negative 1.16% in the quarter compared to 4.75% in the year ago period, while at BNP Paribas it fell to 4.91% from 7.49%.

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The ratio of Crédit Agricole SA, less exposed to equities, fell to 4.52% from 5.14%, while at Groupe BPCE, parent of retail networks Banque Populaire SA and la Caisse d'Epargne as well as investment bank Natixis — another derivatives player — ROAE declined to 1.08% from 2.20%.

And the overall outlook for 2020 is weak, with profits under pressure as low interest rates and tougher regulations bite.

The S&P Capital IQ consensus estimate for BNP Paribas' full-year net income is €5.47 billion, down from €8.17 billion in 2019, while Crédit Agricole's will come in at €2.67 billion compared to €4.84 billion in 2019. SocGen will be hit the hardest, with profits plummeting to €222 million from €3.25 billion.

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BNP Paribas kicks off second-quarter earnings for the big French banks on July 31, with SocGen and BPCE following on Aug. 3 and Crédit Agricole reporting Aug. 6

As dividend cancellations will no longer be an issue in the second quarter, it should be a "more normal type of quarter" in terms of trading, said Jérôme Legras, head of research at Axiom Alternative Investments.

"We've seen very positive results at the large U.S. banks so let's hope the French banks have benefited from that as well," he said, pointing to strong results in fixed income.

JPMorgan Chase CFO Jennifer Piepszak said on an earnings call earlier in July that the bank's second-quarter markets revenue soared 79% year over year, while Morgan Stanley's second-quarter sales and trading revenues surged 68% on the year as both equity and fixed-income trading increased significantly.

Legras said he was expecting a good performance in fixed income at the French lenders because demand for debt had returned after the market dried up in early March, when coronavirus lockdowns were enforced across the world.

"It's been almost a record quarter in terms of issuance. When the markets opened up again there was a deluge in issuance," Legras said. As a result, banks should have been able to benefit from higher fees and commissions, he said.

Thomas Rocafull, partner in the financial services practice at consultant Sia Partners, said the banks' trading results would be closely watched for signals on whether they had benefited from volatile trading on the financial markets due to the pandemic.

"Fixed income has done really well during the crisis, and that will continue because it's a financial tool that's a bit different and clients need funding at the current time," he said.

The economic impact of the coronavirus has also raised concerns of deteriorating asset quality at European banks, and analysts said that French banks will be no exception. France has been one of the European countries the hardest hit by the crisis with 30,223 deaths as of July 28, according to U.S.-based Johns Hopkins University, and the Bank of France is predicting an economic contraction of more than 10% in 2020.

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First-quarter nonperforming loans as a percentage of loans at amortized cost fell to 3.21% at Crédit Agricole, down from 3.36% in the first quarter of 2019, while at SocGen they dropped to 3.59% from 4.05%. At BPCE, they were down to 3.06% from 3.16%. Quarterly figures were not available for BNP Paribas.

French banks' NPL ratio at the end of 2019 was 2.47%, compared to 1.21% in Germany and 1.16% in the U.K. In Spain, the NPL ratio stood at 3.14% and in Italy at 6.74%.

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Rocafull said it would be too early to see the impact of the crisis on NPLs on French banks in the second quarter, but he said he was expecting higher provisions as lenders set aside funds for estimated losses related to the pandemic.

Loan defaults are likely to start taking place from September and when state-guarantee loans start coming due in early 2021, he said. France implemented a €300 billion loan-guarantee scheme in March, and the loans, with a maturity of between one to five years, are guaranteed at up to 90%.

SocGen and BNP Paribas have some of the lowest capital ratios among European lenders, although both managed to boost their ratios in the first quarter due to the ECB dividend recommendation.

The ECB on July 28 extended its recommendation for financial institutions not to pay out dividends until Jan. 1, 2021, and make use of their capital buffers for lending and absorbing losses.

"Capital is going to be under pressure, if risk increases and the NPLs rise, mechanically in the calculation of risk weighted assets and so capital, there is going to be an impact," Rocafull said.

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