Crédit Agricole and BNP Paribas have delivered top returns despite the many challenges facing European banks
By Rochelle Toplensky
France has more to offer investors than striking workers.
Its banks have produced shareholder returns to rival those of JPMorgan Chase JPM 0.69%▲ and Citigroup, C 0.15%▲ and there is no reason why the trend can’t continue.
U.S. bank stocks have generated average total returns of 17.1% over the past year, more than three times the 5.5% delivered by European peers.
Two big French lenders, however, are outliers.
Crédit Agricole shareholders have made a total return of 32% over one year, while BNP Paribas BNPQY -0.16%▲ investors have gained 27.8%—in the range of the largest U.S. banks.
Europe’s banking sector is unloved among investors. Banks are smaller than their U.S. rivals, as the regulatory patchwork in the European Union holds back cross-border consolidation.
Lenders face ultralow and even negative interest rates; anemic economic growth; trade tensions; increasing regulation; and competition from nimble financial-technology startups as well as much better funded U.S. rivals.
Last summer, regulators estimated that the banks would need €134 billion ($149 billion) in extra capital by 2027, though recent comments byAndrea Enria, chair of the European Central Bank’s supervisory board, have raised hopes that the figure might be much smaller.
However, the French economy has performed better than most of its European peers, putting the country’s lenders in a stronger position, while a competitive domestic market has kept bank executives on their toes.
This has allowed BNP Paribas and Crédit Agricole to maintain stable, investor-friendly business models: growing revenue, trimming costs, building capital and paying dividends.
As Europe’s third largest bank by market value, BNP has the scale many of its peers lack.
It has kept revenue and profit steady by focusing on servicing companies from the European Union that go abroad and foreign companies coming into Europe.
The bank reported a return on tangible equity of 10.3% for the three quarters through September and a respectable 12% Tier 1 capital ratio at the period end.
Crédit Agricole is roughly half the size of BNP. It offers traditional banking services but also insurance and mutual funds; it even owns the EU’s largest asset manager, Amundi.
This financial-platform business model somewhat insulates it from the region’s ultralow interest rates, and profit and revenue have grown modestly over the past few years.
At the end of September, the lender had an 11.7% Tier 1 capital ratio.
Europe’s banking environment isn’t getting any easier, and protests against French President Emmanuel Macron’s reforms could trip up the domestic economy.
Cost cutting is therefore likely the main lever for French banks to improve returns from here. France’s employment rules make this expensive and complex, yet there is fat to cut. BNP has a high cost-to-income ratio of 70%, while Crédit Agricole sits at a leaner 60%.
The past doesn’t predict the future, yet both banks do have a record of delivering strong returns through trying times.
BNP stock appears particularly cheap on 0.72 times tangible book value and a dividend yield of 6.3%. Crédit Agricole shares have risen to trade at roughly 0.95 times, with a yield of 5.6%.
JPMorgan said Monday that it is expanding in France by buying a piece of BNP Paribas—some of the bank’s former offices near the Louvre in central Paris.
U.S. investors might want to follow suit.
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