Key points
- J.P. Morgan predicts short-term pressure on French banks due to political instability.
- A potential government collapse and early elections increase uncertainty and equity costs.
- A new corporate tax surcharge will negatively impact earnings for major French banks.
- Société Générale is highlighted as a particularly attractive investment opportunity.
J.P. Morgan analysts have issued a report assessing the impact of political uncertainty in France on its banking sector. The analysts express concern over Prime Minister François Bayrou’s planned confidence vote, scheduled for September 8th. This vote heightens the risk of a government collapse and subsequent snap parliamentary elections.
The resulting instability increases the cost of equity for French lenders, contributing to recent market volatility, as evidenced by a widening of French government bond spreads.
While J.P. Morgan expects the impact on bank capital and earnings to remain limited in the near term, the uncertainty remains a significant factor.
A more direct threat to bank profitability stems from a newly introduced 10 percentage point corporate tax surcharge on companies with revenues exceeding €3 billion. This surcharge, initially slated for fiscal year 2024 and halved in 2025, may persist through 2026, according to J.P. Morgan.
The analysts estimate that this would reduce 2026 earnings per share by 0.9% for Société Générale, 1.6% for BNP Paribas, and 3.3% for Crédit Agricole. Despite these headwinds, J.P. Morgan remains optimistic about the long-term prospects for the French banking sector.
The report highlights the attractive valuation of several French banks, particularly Société Générale. Trading at a low price-to-earnings ratio and net asset value, with strong projected return on net asset value, Société Générale presents a compelling investment case.
This positive outlook is further bolstered by the expectation of substantial share buybacks: €2 billion in 2026 and €2.5 billion in 2027. These buybacks contribute significantly to the overall yield, estimated at 11% annually from 2025 to 2027, exceeding the sector average of around 8%.
J.P. Morgan concludes that the diversification of French banks’ business models mitigates their exposure to domestic political risk. While BNP Paribas derives approximately 25% of its revenue from France, Société Générale and Crédit Agricole each generate roughly 40%.
Furthermore, their sovereign bond holdings are geographically diversified, with France representing only a fraction of their overall portfolios (12% for BNP Paribas, 25% for Crédit Agricole, and 30% for Société Générale). This diversification limits their vulnerability to potential volatility in French government debt.
