French banks have privileged perch for debt crisis

BNP Paribas SA

29/10/2026 12:32

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Neil Unmack
LONDON, Oct 29 (Reuters Breakingviews) - French banks are giving their country's debt crisis a Gallic shrug. BNP Paribas BNPP.PA and Société Générale SOGN.PA are boosting returns and retiring shares, even as investors dump Paris’s bonds. France’s large listed lenders have low exposure to the sovereign and are looking healthier than they have in years. That puts them in a good position to weather increasingly turbulent markets.
At first glance, French banks seem under the cosh. The sector’s shares have underperformed peers amid a selloff in government bonds. On some metrics, they are deemed to be among the riskiest banks in Europe. The average implied cost of equity, which measures the return investors implicitly require to hold the shares, is roughly 15% for Crédit Agricole CAGR.PA, BNP Paribas and Société Générale, according to a Breakingviews calculation using Visible Alpha data. As a rule of thumb, the number is usually closer to 10%. A higher cost of equity suggests that investors see the French banks as riskier propositions.
That reaction is out of whack with the lenders' relatively healthy position. In previous crises - think Greece or Italy - banks were loaded up with sovereign debt and bad loans. In France's case, the largest banks look strangely immune to the sovereign's travails. On average, Gallic lenders hold just 2% of their assets in domestic bonds, whereas in Italy that number is closer to 10%. Société Générale, as of the third quarter, had just €7 billion of direct government bond exposure. For BNP Paribas, that figure is a mere €19 billion, or less than 1% of the bank's assets. 
Accounting subtleties also help. Many bonds are held at cost, which means falls in value don’t always need to be deducted from earnings or capital. And euro zone rules allow banks to apply a zero risk weighting to sovereign bonds. Société Générale estimates that a 100 basis point shift in French spreads versus Germany would erode its common equity Tier 1 by less than 1 basis point.
Sovereign jitters can also push up banks' funding costs, eroding lending margins. Here French banks could be exposed, particularly as closely-regulated domestic deposits can reprice more quickly than long-dated assets like mortgages. But the fallout looks manageable: rates are already high, and banks have been steadily replacing maturing lower-yielding assets with higher returning ones. Analysts expect BNP Paribas's net interest margin this year to be nearly 30 basis points higher than in 2024, according to Visible Alpha estimates. Wholesale funding markets, meanwhile, seem benign: many bank bonds yield less than government debt, implying that investors deem them less risky.
Lastly, credit losses may jump as France pursues austerity to bring down its budget deficit. Already, European Central Bank surveys suggest banks are tightening lending standards. Here too, the risks look measured. Even at Société Générale, which is more exposed to its homeland than BNP, its French retail and private banking unit will account for less than a third of 2026 operating profit, as per Visible Alpha estimates.
The coming year could bring more pain for banks. If far-right leader Marine Le Pen wins the presidency, she might be forced to raise taxes, which could hit lenders and stifle the economy. She might also pick a fight with Europe, raising fears of a French euro exit and a deposit flight from the country. The three largest French banks' average price to earnings multiples have fallen by around 25% since the start of the year, to around 6.5. True, those multiples fell to around 3 during the 2011 crisis, amid fears of a euro breakup. But so long as Le Pen, or whoever governs France, can keep the Brussels-bashing to a minimum, French bank valuations will have room to bounce back.
     
Follow @Unmack1 on X
     
CONTEXT NEWS
Société Générale on October 29 reported a return on tangible equity of 12.3% for the nine months ending in September, above its full-year target of 11%.
The group reported a record €5.4 billion of net income in the period, up 17% from the first nine months of 2025.
BNP Paribas on October 28 reported a 13.5% increase in net income in the third quarter, at €3.45 billion, and announced a €1.3 billion buyback.

(Editing by Aimee Donnellan; Production by Streisand Neto)
((For previous columns by the author, Reuters customers can click on UNMACK/neil.unmack@thomsonreuters.com))