Boston, MA -- (SBWIRE) -- 07/12/2012 -- BMI View: While French banks have staged a shaky return to stability, divesting high-risk and capitalintensive assets, they remain highly leveraged and serious questions still linger over their asset quality. With France's economic recovery faltering, domestic demand for household and commercial credit is likely to remain subdued, and we do not expect to see a robust return to profitability in the near term. While we maintain our view that French banks remain stable, for the time being, we remain fairly cautious towards French financials in general. In particular, we see contingent risks rising from within the sector in addition to broader macroeconomic headwinds, and expect that a robust return to profitability remains off the horizon for the time being. Furthermore, we believe that a number of risks remain to be realised, posing further downside potential for French financial equities. Firstly, we expect that profitability will be restrained as banks rush to reinforce their balance sheets in order to comply with Basel III capital regulations. A number of French banks have pushed through significant restructuring plans, downsizing in order to reduce their exposure to eurozone sovereign debt. Furthermore, a number of banks have divested profitable subsidiary branches in Central and Eastern Europe and Africa in order to reduce overall risk exposure and help build up capital buffers. Banks are France Commercial Banking Report Q2 2012 © Business Monitor International Ltd Page 22 likely to continue selling capital intensive units throughout 2012, reducing risk-weighted assets in the process, as well as retaining further capital by cancelling dividends. While restructuring costs and the loss of profitable enterprises will weigh on earnings over the short term, we note that French banks appear to have been moderately successful in building up adequate capital buffers. The three major French banks, Société Générale, BNP Paribas and Crédit Agricole, have all achieved (or are close to achieving) the 9% Tier 1 capital ratio before the mid-2012 target, and we expect these figures to improve throughout the year - barring a major eurozone sovereign debt incident. That said, all three banks remain highly leveraged, with debt/equity ratios at 36.5x (Crédit Agricole, Q311), 24x (BNP Paribas, Q211) and 25x (Société Générale, Q311). French financials are currently trading at record lows in price-to-book terms, with Société Générale, BNP Paribas and Crédit Agricole currently trading at around 0.5 price-to-book ratio. While this ratio could be taken to imply these stocks are 'cheap' by historical standards, it more accurately reflects that investors do not believe that these banks assets are fairly valued - in particular with regard to banks holding sovereign securities issued by peripheral eurozone states (and even some core-eurozone sovereigns such as Italy). French banks are likely to be holding volatile securities such as periphera

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