French banks 'likely winners' from regulatory clampdown
A new report has identified French banks as potential winners from a souring in sentiment towards investment banks, as tougher regulations and higher capital requirements slash profitability across the industry. It could come as welcome relief after the country's banks were identified as suffering particularly badly from strictures of regulators and politicians alike.
BNP Paribas and Société Générale are likely to be the banks least affected by the growing threat of tougher regulation, which will cut profits at many major investment banks and force them in to a new round of job cuts and bonus reductions, according to a report published today by JP Morgan.
The relatively low exposure of the two banks to investment banking, with the business expected to account for only 37% of their group profits in 2011, is cited as the main reason for their outperformance compared to firms more heavily geared towards investment banking activities.
JP Morgan’s report comes weeks after analysts at Credit Suisse highlighted the higher capital charges being imposed on French banks’ trading operations by the authorities, with BNP Paribas and Société Générale required to put nearly three times as much capital behind their operations as some of their European peers.
The pressures on French investment banking businesses have been growing this year, with French politicians leading calls for caps on bankers’ pay, as well as tighter regulation of their activities.
However JP Morgan wrote in the research that French banks are expected to benefit more than their peers from an improving market for traditional lending banks, with JP Morgan saying that BNP Paribas and Société Générale were both “well positioned” to benefit from the improving credit environment, while banks such as Deutsche Bank and Goldman Sachs will see less gain from this change and will be more seriously affected by increased regulation.
The analysts wrote: “Wholesale and investment banks face increasing regulatory risk, with potential revenue risk and the prospect of higher capital requirements on market risks and derivatives counterparty risk weighted assets soon becoming reality.”
JP Morgan expects fixed income revenues to decrease by 25% over the next two years, with overall investment banking income falling 9%, which the bank’s analysts say will lead to new rounds of job cuts at many firms as well as reduced bonuses.
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