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Investing.com -- Barclays has adjusted its stance on the French banking sector, reiterating its Overweight ratings on BNP Paribas and Credit Agricole while cutting Societe Generale to Market Weight due to valuation concerns.
“We think spreads of high-quality French banks adequately compensate for elevated political uncertainty,” analyst Soumya Sarkar said, but recent spread compression at SOCGEN prompted the downgrade.
He notes that Societe Generale’s Senior Non-Preferred (SNP) spread no longer carries the 40-50bp discount versus Credig Agricole seen during the 2024 snap-election period.
Domestic sovereign exposures across French banks remain limited, with holdings of government bonds standing at around €300 billion, or just 2.4% of total assets.
Sarkar notes that French banks’ exposure to the sovereign is lower than peers in Italy and Spain, and that a large portion of exposures is held at amortised cost, tempering market-to-market volatility.
He adds that BNP and Credit Agricole would likely withstand a one-notch sovereign downgrade from Moody’s or S&P without mechanical rating pressure, reflecting what they describe as stronger operating resilience.
BNP and Credit Agricole are seen as the strongest diversified names, with the analysts arguing that both groups maintain manageable sovereign exposure and benefit from broad geographic and product mix.
Sarkar also highlights that funding plans for 2025 are largely completed across the sector, which should support spreads into year-end. Issuance has been front-loaded, with BNP and Credit Agricole having executed the bulk of their senior and subordinated funding.
He points out that only La Banque Postale has significant remaining issuance to complete.
Political risk remains a defining driver of French bank spreads, with a clear premium versus non-French peers. However, Sarkar argues that French bank bonds have outperformed domestic government debt, noting that the Groupe BPCE spread versus OATs has tightened significantly since mid-2024.
The analyst expects this relative performance to hold as long as issuance pressure stays contained and fundamentals remain stable.
The downgrade of Societe Generale is tied to valuations rather than balance sheet risk. Barclays notes that the bank’s spreads have converged toward Credit Agricole and BNP, removing the pricing discount seen during the 2024 snap-election period.
“We think SOCGEN should trade wider than the two largest diversified French peers,” the analysts write, arguing that a roughly 10bp spread differential at the SNP level would be more appropriate in current conditions.
BNP and Credit Agricole remain the preferred picks within the French banking universe, backed by what Barclays sees as stronger long-term fundamentals and the potential for credit spreads to re-tighten toward the tighter end of core European peers.