26-Etude Fitch Banques Françaises

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Banks France  Major French Banks Semi­Annual Special Report Review and Outlook Resilient Performance Domestically, But International Results Disappointing Summary Analysts As with several other large banks in Europe, the H110 results posted by leading Janine Dow French banks were much improved on comparable achievements for 2009. While [phone] this is encouraging, Fitch Ratings is not expecting any positive impact on the banks’ [e-mail] Long‐Term (LT) IDRs in the near future, and the Outlook on these is Stable. Eric Dupont [phone] One of the major banks, BNP Paribas (BNPP), saw its LT IDR downgraded by one [e-mail] to ‘AA−’ in June 2010, largely reflecting the size of its corporate and investment banking (CIB) activities, and slightly below international peer average capital ratios, according to Fitch’s calculations. In September 2010, the Individual Ratings of Groupe BPCE (GBPCE) and its subsidiary Natixis were upgraded to ‘C’ and ‘C/D’ respectively. These rating actions reflected the reduced risk profile at Natixis and the indirect positive impact on the two banks’ profitability and capitalisation. At the same time, the hybrid instruments issued by group entities were upgraded to ‘BBB‐’ from ‘BB’. Table 1: Ratings Assigned by Fitch to Major French Banks LT IDR/ LT Rating Individual Support Support Rating Outlook ST IDR hybrids/prefs Rating Rating Floor Crédit Agricole AA‐/stable ...

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France Special Report

Analysts Janine Dow [phone] [e-mail]

Eric Dupont [phone] [e-mail]

www.fitchratings.com

Banks

Major French Banks SemiúAnnual Review and Outlook Resilient Performance Domestically, But International Results Disappointing

Summary As with several other large banks in Europe, the H110 results posted by leading French banks were much improved on comparable achievements for 2009. While this is encouraging, Fitch Ratings is not expecting any positive impact on the banks’ Long‐Term (LT) IDRs in the near future, and the Outlook on these is Stable.

One of the major banks, BNP Paribas (BNPP), saw its LT IDR downgraded by one notch to ‘AA−’ in June 2010, largely reflecting the size of its corporate and investment banking (CIB) activities, and slightly below international peer average capital ratios, according to Fitch’s calculations.

In September 2010, the Individual Ratings of Groupe BPCE (GBPCE) and its subsidiary Natixis were upgraded to ‘C’ and ‘C/D’ respectively. These rating actions reflected the reduced risk profile at Natixis and the indirect positive impact on the two banks’ profitability and capitalisation. At the same time, the hybrid instruments issued by group entities were upgraded to ‘BBB‐’ from ‘BB’.

Table 1: Ratings Assigned by Fitch to Major French Banks LT IDR/ LT Rating Individual Support Outlook ST IDR hybrids/prefs Rating Rating Crédit Agricole AA‐/stable F1+ A B 1 BNP Paribas AA‐/stable F1+ A B 1 Groupe BPCE A+/stable F1+ BBB‐ C 1 Société Générale A+/stable F1+ A‐ B/C 1 Banque Fédérative du AA‐/stable F1+ A n.a. 1 Crédit Mutuel Source: Fitch

Support Rating Floor A+ A+ A+ A+ A+

H110 results for France’s large banks highlight a number of common threads which are discussed more fully later in this report. Briefly, these are as follows.

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Retail banking is being brought to the forefront of business development, particularly in Q210 — Société Générale (SG) bucks the trend and continues to focus heavily on CIB.

Loan impairment charges experienced a sharp contraction.

The domestic retail networks performed well, spurred on by still dynamic loan growth and low default rates, but results posted by the international retail banking divisions were, on the whole, poor, with the exception of BNPP.

No major difficulties in accessing the wholesale funding markets have been experienced; access is easing following the squeeze at the height of the April 2010 “Greek” crisis.

Capital adequacy ratios are improving but large French banks are not the best capitalised among European peers; market pressure for increasing capital is likely to continue and Fitch believes French banks will try to address this issue mostly by retaining earnings. Nevertheless, rights issues cannot be ruled out.

25 October 2010

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Prospects and Outlook for the Ratings In Fitch’s opinion, BNPP is the best placed among the leading French banks, reflecting mainly its broad geographic diversification and real efforts made to reduce its higher risk CIB business (note that within CIB, BNPP’s franchise in the wholesale financing markets has grown substantially). Furthermore, and despite the obvious concentration risk which this poses, Fitch believes those banks which are squarely focused on the French retail domestic market should expect to post fairly stable, and marginally improving, results in the foreseeable future.

Crédit Mutuel Centre Est Europe (CMCEE) (where Fitch assigns ratings to the issuing vehicle, Banque Fédérative du Crédit Mutuel (BFCM)), is the only large French bank to have survived the recent financial crisis without suffering any ratings adjustments. GBPCE has experienced a real improvement in its results since H209; management appears confident that valuation adjustments on its legacy securities will not require substantial further adjustments in the short term and, if so, it is likely that a repeat of the group’s satisfactory H110 performance will prove sustainable.

Crédit Agricole’s (CA) troubled international division is being restructured and, in any event, such activities are still relatively modest in terms of the group as a whole. Fitch is more hesitant about prospects for SG. The group’s continued development of its CIB and international retail businesses does not appear to be risk‐free. Potential for development in Russia is sizeable and Rosbank (81.5% controlled by SG; ‘BBB+’/Positive) is well placed but the operating environment remains volatile and recent results achieved in Russia have been weak.

Fitch expects banks globally to come under increasing pressure to strengthen capital. Particular attention is being paid to developments related to the Basel Committee’s drive to improve the quality of bank capital. The Basel Committee’s decision to allow the inclusion of genuine third party minority interests into qualifying capital will be particularly welcome but those banks with large CIB businesses will inevitably be hit by requirements to provide more fully against risks associated with their trading activities.

The Outlook for the LT IDRs of all leading French banks is Stable. The Support Rating Floors for these banks, at ‘A+’, is high and, provided this does not change, large French banks will continue to achieve this high minimum.

Economic Update France emerged from the global financial crisis in 2009 having suffered one of the mildest recessions among European peers, with 2009 GDP declining by 2.5% versus a euro zone average decline of over 4% for the same period.

France's Q2 2010 GDP performance surprised on the upside‐ registering 0.6% quarterly growth instead of Fitch’s projected 0.2% quarterly growth rate. The positive performance was driven by robust private consumption and investment, while the net trade contribution continued to be negative (on account of import growth outpacing exports). Fitch expects France to register 1.4% growth in 2010, with medium term growth reverting back to the long term average (of around 2%) at 1.8% in 2011, and 2.1% in 2012.

On the fiscal front, France’s mixed record of fiscal discipline coupled with the impact of the financial crisis have placed its public finances in a weak position vis‐ a‐vis peers, with the deficit at 7.5% of GDP and debt at 77% of GDP in 2009. The government has articulated its commitment to reducing the deficit to 3% by 2013. To achieve this target, a number of consolidation measures have been proposed, including the non‐replacement of half the retiring civil servants, a freeze on real current expenditures, and a review of local authority and healthcare spending. Fitch has highlighted that significant downside risks to the government’s consolidation programme exist.

Major French Banks SemiúAnnual Review and Outlook October 2010

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A major item on the government reform agenda has been overhauling the pension system, projected by the Pension Advisory Council to run a deficit equivalent to 1.7% of GDP in 2010. Proposed reforms have centred on raising the retirement age to 62 years (from 60) by 2018, and include a number of tax measures that are expected to contribute 0.53% of GDP in savings by 2013. According to the government projections, the proposed measures are expected to balance the pension books by 2018. The measures were approved by cabinet in July 2010, with adoption expected by end‐October 2010. Although the French retirement age will still be among the lowest of France’s peers, Fitch considers the reforms to be necessary in underpinning French creditworthiness.

Consolidation and Strategic Changes To date in 2010, very little consolidation and strategic changes have been carried out by the major French banks. In June, BNPP announced the merger of its Turkish banks, Turk Ekonomi Bankasi (‘BBB‐’ Stable/’F3’) and Fortis Bank A.S., which is expected to be completed during Q111. BNPP’s Turkish banking activities are conducted in equal partnership with the local Colakoglu group. Under the terms of the proposed merger, BNPP will retain a 50% stake in the enlarged merged bank which will have a domestic deposit market share of around 4%.

In September, GBPCE completed the sale of a regional bank, Société Marseillaise de Crédit (SMC) to SG. SMC enjoys a reasonable franchise (4% deposit market share) in the south of France and SG believes it will complement the activities of its own regional bank, Crédit du Nord (CN, ‘A+’/Stable/‘F1+’). The price agreed by BPCE is EUR901m (including a EUR29m dividend), high at nearly three times book value. Proceeds of the sale are being used by GBPCE in October to repay some of the capital support still owed to the French state (seeCapital). GBPCE has earmarked a number of businesses as non‐strategic (most are involved in the real estate sector but these also include Coface, the export credit guarantor) and disposals are expected when market conditions permit.

Oddo et Compagnie (‘BBB+’/Stable) announced, in August 2010, its intention to acquire Banque d’Orsay (‘BBB+’/Rating Watch Negative) but this transaction is not significant as it involves small players in the French banking sector.

Table 2: Ranking by Assets and Equity — Major French Banks Equity Assets (EURbn) June 10 June 09 June 10 Crédit Agricole (CA) 76.4 71.6 1,900.6 BNP Paribas (BNPP) 73.2 59.6 2,237.0 Société Générale (SG) 41.5 33.2 1,133.7 a Groupe BPCE (GBPCE) 39.5 32.2 1,123.9 Crédit Mutuel Centre Est Europe 22.8 20.0 447.5 (CMCEE) a GBPCE June 2009 figures are proforma since the group was created in July 2009 Source: Bank presentations, adapted by Fitch

June 09 1,732.5 2,289.3 1,058.9 1,083.3 428.5

CA has merged its consumer finance businesses and Fitch believes additional consolidation of business lines will be sought within the large French banking groups as these strive to cut costs.

BNPP’s integration of the Belgian and Luxembourg businesses acquired in April 2009 from Fortis (referred to in this document as Belux) is progressing well. Synergistic cost savings totalling EUR402m have been achieved (of which EUR282m were in H110), slightly ahead of the original plan.

In June 2010, BFCM announced a strategic partnership with Spain’s Banco Popular Espanol (‘A’/Stable) where the intention is to establish a new joint‐venture bank. BFCM also announced its planned acquisition of a 50% stake in the consumer finance Banque Casino from the Casino supermarket chain.

Major French Banks SemiúAnnual Review and Outlook October 2010

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Table 3: Major French Banks ‐ Key Operating Performance Indicators in H110 & H109 CA BNPP SG GBPCE Change Change Change Change H110 H109 (%) H110 H109 (%) H110 H109 (%) H110 H109 (%) Operating income 17.3 15.0 +15 22.3 19.6 +14 12.9 11.0 +18 11.9 8.1 +47 (EURbn) Operating profit (EURbn) 3.9 2.2 +81 6.9 4.3 +62 2.7 0.7 +312 3.0 ‐2.9 n.a. Operating profit/ 0.44 0.25 +0.20 0.65 0.39 +0.26 0.50 0.12 +0.38 0.57 ‐0.53 +1.10 av. assets (%) Operating profit/ av. 10.64 6.31 +4.48 19.46 16.28 +3.18 13.52 3.96 +9.56 14.64 ‐17.63 +32.27 equity (%) Source: Bank presentations, adapted by Fitch

Banks

CMCEE Change H110 H109 (%) 5.5 4.7 +16

1.6 0.74

14.60

0.8 0.39

9.11

+91 +0.35

+5.49

Major Banks: Performance Trends and Outlook According to Fitch’s calculations, the performance of the large French banks improved considerably in H110, with aggregated operating income and operating profit increasing by 20% and 263% respectively on comparable figures for 2009 (see Table 3).

All major French banks are focusing on the development of their retail banking activities. Nevertheless, CIB contributions still represent a sizeable portion of operating profits at both BNPP and SG (see Table 4) and this inevitably contributes to results volatility particularly at times of weak capital markets activity, characterised by thin volumes and high market volatilities, such as those noted in H110.

As can be seen in Table 5, BNPP stands out among large French banks as having achieved the most balanced mix of divisional contributions to revenues. GBPCE and CMCEE are clearly the most dependent on French retail banking, followed by CA which dominates the domestic retail market. BNPP’s international retail banking activities have been brought to the forefront, largely as a result of the acquisition of the retail and commercial banking Belux activities of Fortis. (The acquisition dates from April 2009 but the Belux impact only feeds into results from H209).

Contributions from specialised financial activities (which include a wide range of businesses, spanning consumer finance, leasing and factoring) and from the asset management divisions appear to be stagnating.

The operating profit detailed in Table 4 and revenue shown in Table 5 are taken from Fitch’s spreadsheets. They differ from figures reported by the banks as certain items, notably the revaluation of own debt and gains on disposal of private equity investments, are classified by Fitch as non‐operating. Nevertheless, reclassification were much lower in H110 than in H109.

Table 4: Leading French Banks’ Divisional Contributions to Operating Profit in H110 & H109 CA BNPP SG GBPCE CMCEE Divisional contributions (%) H110 H109 H110 H109 H110 H109 H110 H109 H110 Domestic retail banking 71 104 14 20 33 n.a. 63 n.a. 56 International retail banking ‐7 ‐3 13 4 14 n.a. 1 n.a. 9 Corporate & investment 31 49 43 62 59 n.a. 21 n.a. 31 banking Specialised financial 12 16 8 5 4 n.a. 4 n.a. 0 services Asset management & 13 16 8 10 4 n.a. 6 n.a. 3 private banking Insurance 18 22 5 6 6 n.a. 0 n.a. 24 Activities in run‐off (legacy ‐15 ‐62 n.a. n.a. ‐11 n.a. ‐1 n.a. n.a. CIB businesses) Other ‐22 ‐42 9 ‐7 ‐8 n.a. 6 n.a. ‐22 Total operating profit 3,913 2,156 6,912 4,270 2,697 654 3,038 ‐2,904 1,619 (EURm) Source: Bank reported data, adapted by Fitch

Major French Banks SemiúAnnual Review and Outlook October 2010

H109 44 20 45

0

8

27 n.a.

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Table 5: Leading French Banks’ Divisional Contributions to Operating Income in H110 & H109 CA BNPP SG GBPCE CMCEE Divisional contributions (%) H110 H109 H110 H109 H110 H109 H110 H109 H110 H109 Domestic retail banking 51 55 15 16 30 33 60 79 59 57 International retail banking 9 11 23 20 19 21 2 2 18 20 Corporate & investment banking 18 21 29 39 30 51 14 17 11 14 Specialised financial services 11 12 15 13 12 12 4 5 0 0 Asset management & private banking 9 7 10 10 8 11 7 9 4 4 Insurance 6 5 3 3 2 2 0 1 10 9 Activities in run‐off (legacy CIB businesses) ‐2 ‐6 n.a. n.a. 0 ‐16 1 ‐24 0 0 a b Other ‐2 ‐3 5 0 ‐1 ‐16 12 10 ‐2 ‐5 Total revenue (EURm) 17,242 14,984 22,340 19,607 12,905 10,967 11,946 8,127 5,466 4,694 a SG reported large negative debt revaluations in H109 b GBPCE has several non‐core activities which are included in this line Source: Bank reported data, adapted by Fitch

Retail Banking Retail banking is being propelled to the forefront of business development at all the leading French banks. BNPP’s international retail and commercial banking businesses are far larger than its domestic business, but for all other leading French banks, the domestic networks still represent the most important pillar of this business line. GBPCE’s retail and commercial banking business is almost exclusively domestic; CMCEE is branching out into Germany and Spain, but these activities are still small in relation to its sizeable domestic business.

Domestic Retail Banking: Domestic retail banking activities performed well across the board for major French banks in H110. France’s mature retail banking market does not offer overly exciting growth prospects but progress reported by large French banks in this segment has been steady, with loan growth averaging an annual 5.3% to end‐June 2010, spurred on by buoyant demand for housing loans, and deposit inflow has been strong. Table 6 below shows growth in operating revenue generated by the French networks for all large French banking groups and improving pre‐tax contributions made by all the domestic networks.

SG announced plans to further integrate its domestic retail banking activities, conducted through CN, Boursorama (its online bank) and, since September 2010, SCM. The intention is that these activities should “converge”; in practice, this is likely to signify greater standardisation of systems, products and back‐office functions. Nevertheless, according to SG’s strategic plan announced in June 2010, domestic retail banking is expected to generate only 23% of net income by 2015.

Asset quality in the domestic loan books continues to hold up very well (cost of risk averaging a low 42bp of average loans in H110). Retail housing loans are proving to be the most dynamic loan product within the division, with growth for such loans hovering around 10% during H110. This reflects low interest rates, the relative

Table 6: Major French Banks – Domestic Retail Banking Details H110 & H109 CA BNPP SG GBPCE Change Change Change Change H110 H109 (%) H110 H109 (%) H110 H109 (%) H110 H109 (%) H110 Operating income 8,839 8,246 +7 3,350 3,111 +8 3,823 3,656 +5 7,217 6,445 +12 3,229 (EURm) Impairment provisions 1,059 1,146 ‐8 236 234 1 448 444 1 613 572 +7 348 (EURm) Operating profit 2,780 2,240 [phone] [phone] +11 1,912 1,227 +56 912 (EURm) Pre‐tax profit(EURm) 2,780 2,230 [phone] [phone] +11 1,930 1,240 +56 915 Impairment provisions/ 46 70 ‐24 36 43 ‐7 53 66 ‐13 35 n.a. ‐ n.a. av. loans (bp) Loan growth (%) 4.0 6.4 5.4 6.9 4.0 Source: Bank presentations, adapted by Fitch

Major French Banks SemiúAnnual Review and Outlook October 2010

CMCEE Change H109 (%) 2,699 20

426

374

380 n.a.

‐18

+144

141 ‐

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stability of real estate prices in France (with signs of strong recovery in 2010, particularly in major urban areas) and continued government support extended to first time and other lower income buyers, plus the temporary extension of tax advantages for certain buy‐to‐let properties. Demand for SME/professionals loans fell back, reflecting low confidence levels and hesitance in making investment decisions. On the positive side unsecured consumer finance has started to rebound.

The low interest rate environment and market volatilities are discouraging retail investors from placing excess liquidity in specialised managed products and all banks are experiencing a surge in levels of on‐balance‐sheet — particularly sight — deposits. The French networks reported average deposit growth in the region of 6% for the 12‐month period to end‐June 2010.

International Retail Banking:results of the international retail banking The activities are more mixed. For BNPP, comparison of H110/H109 results posted by its international retail banking division is not appropriate because Belux’s activities distort comparisons; for other banks, it is the performance of selected subsidiaries (notably Greek) which is having a negative impacting on the performance of these divisions. Table 7 highlights the particularly weak performance of CA’s international retail business.

For BNPP, none of its international retail banking divisions was loss‐making in H110 and contributions from Belux are growing. Nevertheless, loan growth remains fairly sluggish in all areas and is negative in the US. BancWest (‘AA‐’/Stable/‘F1+’) returned to profit and signs of improving loan quality have begun to feed through (impairment charges were down to 147bp of average loans in H110; H209: 337bp). The group’s Mediterranean (North Africa, Turkey and Ukraine) division returned to a small profit, reflecting far lower impairment charges at the Ukranian subsidiary but H110 net results at Banca Nazionale del Lavoro (‘AA‐’/Stable/‘F1+’) were negatively affected by a 45% rise in impairment charges and fell back on comparable results for 2009.

For SG, H110 contributions from its international retail and commercial banking business were fairly flat (at net income level, down just 3% to EUR239m on comparable results for 2009), largely due to mounting impairment charges. Operations in Russia and certain other central and eastern European (CEE) subsidiaries remain loss‐making, but management confirms that credit demand is returning in Russia, one of the group’s priority markets. In Romania, where SG holds a 59.4% stake in BRD (‘BBB’ Stable/’F3’), impairment charges nearly doubled to EUR94m and this remains a trouble spot for the group. However, improvement is noted in other countries while steady progress is demonstrated by the networks in North Africa. SG has a 54% stake in the small Greek Geniki Bank, whose risk‐ weighted assets total EUR4bn; management advises that impairment charges are still high at this bank, although on an improving trend.

CA’s international retail banking activities are clearly focused on Europe and the Mediterranean region and disposals of small, non‐core units continue (eg, in

Table 7: Major French Banks – International Retail Banking Details H110 & H109 CA BNPP SG GBPCE Change Change Change Change H110 H109 (%) H110 H109 (%) H110 H109 (%) H110 H109 (%) Operating income (EURm) 1,616 1,608 0 5,183 3,849 +35 2,423 2,356 +3 231 203 +14 Impairment provisions 787 563 +40 944 1,447 ‐35 700 609 +15 41 101 ‐59 (EURm) Operating profit (EURm) ‐275 ‐56 [phone] [phone] ‐9 30 ‐74 +141 Pre‐tax profit (EURm) ‐654 26 n.a. 930 200 [phone] ‐10 33 ‐61 ‐154 a Cost of risk/av. loans (bp) n.a. n.a. ‐ 103 175 ‐41 208 181 +14.9 n.a. n.a. ‐ Loan growth (%) n.a. n.a. ‐ n.a. n.a. ‐ ‐0.9 ‐2.3 ‐ n.a. n.a. ‐ a Fitch estimates Source: Bank presentations, adapted by Fitch

Major French Banks SemiúAnnual Review and Outlook October 2010

CMCEE Change H110 H109 (%) 987 933 +6 303 291 +4

142 145 n.a. n.a.

170 182 n.a. n.a.

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Uruguay). The Italian market is key to the group and further branch acquisitions were announced in June 2010, following which, according to management, CA will rank seventh among Italy’s banks.

The Polish, Egyptian and Moroccan subsidiaries continue to develop well but contributions from equity‐accounted investments in Portugal’s Banco Espirito Santo (‘A’/Negative) and Spain’s Bankinter (‘A+’/Stable) fell back, reflecting the more troubled operating environments in those countries. Emporiki Bank of Greece (Emporiki), in which CA holds a 96% stake, has proved to be a problem for CA. Emporiki’s negative contribution to CA’s pre‐tax profit reached EUR900m in H110, which includes EUR569m of loan impairment charges, EUR445m of goodwill impairment charges and EUR44m of redundancy charges. A restructuring plan is in place and management does not expect Emporiki to return to profitability before 2012.

The international activities of CMCEE are limited to Targobank in Germany (EUR11bn loan book), the international book of the consumer finance company Cofidis (around EUR3bn), a stake in a small Moroccan bank and its partnership in Spain. GBPCE’s international retail activities are small, mainly focused on the French overseas dependencies and territories.

Corporate and Investment Banking (Ongoing Business) Although contributions from CIB are reducing as a proportion of overall results, they remain significant for BNPP and SG. As CIB results are volatile, the performance of these divisions can greatly affect overall consolidated results posted by these large French banks.

H110 CIB results were mixed. H110 operating revenues fell back on comparable results for 2009 at BNPP and SG, reflecting a fall in fixed income contributions at both banks and a poor performance at SG’s equities division. Within CIB results, the common theme is a marked decline in contributions from capital markets activities, notably in Q210, a sharp upturn in contributions from wholesale lending activities and a pronounced reduction in the level of impairment provisions.

Capital markets business was affected across the board, afflicted by a high level of volatility and widening credit spreads which combined to depress investor nervousness and reduce liquidity. Demand for equities derivatives fell sharply as investors shied away from more complex products; revenues generated by this business, once a star contributor to SG’s CIB results, have fallen steadily. Loan demand within the CIB departments is buoyant only within specialised niches (commodities, project finance, tailor‐made products), areas in which French banks are well placed. Competition is fierce but the sharp fall in impairment charges is helping to compensate for tight pricing.

SG’s business plan highlights the continued strategic importance of CIB going forward; CIB is expected to remain by far the largest single contributor to overall

Table 8: Major French Banks – Corporate & Investment Banking Details (Ongoing Business Only) – H110 & H109 CA BNPP SG GBPCE CMCEE Change Change Change Change Change H110 H109 (%) H110 H109 (%) H110 H109 (%) H110 H109 (%) H110 H109 (%) Operating income 3,037 3,110 ‐2 6,437 7,579 ‐15 3,847 5,634 ‐32 1,621 1,390 [phone] ‐12 (EURm) Impairment provisions 185 552 ‐66 146 1,541 ‐91 64 587 ‐89 156 1,171 ‐87 ‐58 143 ‐141 (EURm) Operating profit 1,200 1,050 +14 2,947 2,631 +12 1,583 2,966 ‐47 639 ‐614 [phone] +31 (EURm) Pre‐tax profit (EURm) 1,273 1,121 +14 2,975 2,638 +13 1,580 2,965 ‐47 640 ‐600 n.a. 499 380 +31 Source: Bank presentations, adapted by Fitch

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net profits, bringing in around 40% of consolidated net results. While SG’s teams have considerable experience in this business, Fitch believes this is a fairly high risk strategy, especially as the expansion of CIB into some of the group’s international areas (notably Russia) remains as yet untested.

Corporate and Investment Banking (Run‐Off Business) With the exception of BNPP, which continues to manage its portfolio of legacy illiquid securities within its CIB department, all major French banks now manage these assets as a separate unit and results arising from these activities are reported separately.

The massive securities writedowns noted during much of 2008 and 2009 are no longer taking place, and the quality of the legacy assets (mainly the portfolios of illiquid structured securities) retained by the banks appears to be holding up, particularly at BNPP and GBPCE.

At GBPCE, the activities in run‐off mode are now breaking even, with only EUR27m pre‐tax losses in H110 (H109: EUR3.1bn). For CA and SG, “run‐off” activities continue to represent a drain on overall profitability. At CA, these produced a net loss of EUR390m in H110 (H109: EUR881m loss), reflecting the adjustment of some loss estimates for CDOs, ABS and CLOs and including a one‐off EUR135m correlation loss related to CDOs. At SG, the quality of such assets appears to be worse than for its peers. While the impact of valuation adjustments and other charges to its large portfolio of legacy assets (some EUR38.5bn) on the bank’s net profit was acceptable in H110 at only EUR196m, additional losses are likely for the near future.

Specialised Financial Activities While French banks generally group similar activities (consumer finance, leasing, factoring) under this banner, it is difficult to make meaningful comparisons on profitability regarding these activities because of the disequilibrium between all activities. Nevertheless, all banks reported a surge in results for these activities in H110, thanks largely to improving volumes.

For CA, these businesses comprise the group’s sizeable consumer finance unit (where Sofinco and Finaref have merged to form CA Consumer Finance) plus leasing and factoring businesses. Pre‐tax profit in H110 was up 33% to EUR456m on comparable results for 2009 despite a 15% increase in loan impairment charges. Within the consumer finance division, loan impairment charges stabilised at a historical high of 227bp of average loans and credit demand continues to grow (+4.6% in France and +6.2% internationally). Demand for leasing and factoring products remains buoyant.

At BNPP, these activities comprise mainly the large consumer finance business and leasing activities; pre‐tax profits generated by these activities reached EUR597m in H110, a vast improvement on comparable results for 2009 (EUR266m), reflecting improving margins at the consumer business and strong recovery particularly in the auto finance division. Cost of risk in the personal finance division is improving, but nevertheless remains fairly high at 237bp (Q209: 313bp).

For SG, the division, dominated by the consumer finance unit, posted modest results with a EUR86m pre‐tax profit (H109: EUR12m pre‐tax loss). Demand for consumer finance loans varies considerably from country to country (contraction in Italy and Poland but growth in Russia, Germany and France) and overall such loans were up by an annual 3.7% compared with end‐June 2009. The cost of risk, at 234bp, is fairly stable.

This division’s pre‐tax profit is also small at GBPCE (EUR107m in H110) but is growing as cross‐selling between Natixis and the group’s regional banks is developing.

Major French Banks SemiúAnnual Review and Outlook October 2010

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Non‐Operating Results As stated above, Fitch reclassifies certain items, reported as part of operating profit by banks, into the non‐operating category. As a consequence, non‐operating items presented in Fitch’s spreadsheets differ from those published by the banks. In H110, the difference was only EUR0.7bn (mostly on SG and BNPP), compared with EUR1.2bn in H109 (mostly on GBPCE).

Changes in the fair value of the banks’ own debt continue to affect, positively or negatively, overall results. In H110, only BNPP, SG and CA reported these amounts (all positive; EUR355m for SG, EUR235m for BNPP and EUR55m for CA).

Other significant items in H110 are EUR304m gains on disposals for BNPP, negative charges of EUR604m for CA made up of a EUR445m goodwill writedown on Emporiki and EUR159m capital loss on the sale of the group’s small stake (0.8%) in Banca Intesa Sanpaolo, and EUR108m losses for GBPCE, of which a EUR80m goodwill impairment charge recognised on SMC as part of its sale to SG.

Asset Quality Trends Although disclosure regarding asset quality trends at interim stages published by BNPP is poor, asset quality trends, while patchy, are clearly on an improving trend for all leading French banks. Traditionally safe portfolios, notably the domestic retail housing loan books, are holding up extremely well; delinquency rates within the consumer finance books, while inevitably rising, do not appear alarming and management indicate that they believe the peak has been reached.

Within international retail banking, only highly troubled countries such as Greece, Ukraine and, to a lesser extent, Russia, appear to be suffering, although BNPP reports a worsening of asset quality at BNL. There has been an extraordinary reduction in impairment charges among the CIB units compared with those posted in 2009, and management reports a generally robust quality of their wholesale lending portfolios. SG’s asset quality ratios have suffered significantly since 2009 due to the difficult situation in CEE/Russia and Greece and do not compare favourably with peers’ (see Table 9).

Table 9: Asset Quality Indicators for Large French Banks – End‐June 2010 (%) CA BNPP SG GBPCE CMCEE Impaired loans/gross loans 3.00 n.a. 6.50 3.99 4.93 Reserves for impaired loans/impaired loans 88.0 n.a. 55.5 54.6 63.6 Loan impairment charges/av. gross loans 0.65 0.69 0.96 0.34 0.57 Source: bank data, adapted by Fitch

As can be seen in Table 10, legacy assets from the crisis had a very limited impact on French banks’ operating performance in H110, with the exception of CA. Nevertheless, legacy assets remain large compared with equity at SG and GBPCE.

According to Fitch, risks mostly lie with the large volumes of hedged assets and with monoline insurers’ and credit derivative product companies’ (CDPCs) ability to meet their obligations if the hedged assets were to lose significant value.

While the book value of SG’s legacy assets held in the banking book was about EUR1.5bn higher than their fair value at end‐March 2010, it was about EUR1.5bn lower than the value estimated by the external company BlackRock; this external valuation highlighted a EUR1.1bn shortfall of provisions against RMBS CDOs.

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Table 10: Legacy Assets at End‐June 2010

Legacy assets considering Legacy assets considering notional amounts of net exposure to hedge hedged assets (EURbn) counterparties (EURbn) Bank (A) (B) SG 38.5 22.0 GBPCE 41.0 16.2 BNPP 25.6 23.7 CA 15.9 7.7 Source: Bank presentations, adapted by Fitch

Fitch eligible capital (EURbn) A/FEC (FEC) (%) 31.5 122 32.5 126 59.1 43 40.3 39

Banks

B/FEC (%) 70 50 40 19

Impact on H110 operating profit (EURm) ‐289 ‐27 n.a. ‐571

Exposure to Portugal, Ireland, Italy, Greece and Spain Sovereigns The four French banks included in the stress tests conducted by the Committee of European Banking Supervisors whose results were published on 23 July 2010 all disclosed their exposure to wide range of sovereigns, including Portugal, Ireland, Italy, Greece and Spain (PIIGS). This information is available on the French regulator’s website (Autorité de Controle Prudentiel). On a net basis, the most exposed banks to the Greek sovereign are SG (9.6% of reported equity) and BNPP (6/7%). No information has been publicly disclosed regarding large French banks’ specific private exposures to PIIGS countries.

Funding and Liquidity All large French banks are dependent, to a certain extent, on the wholesale markets for funding. Loans/deposits ratios at H110 range from a low of 115% for BNPP to a high 150% for GBPCE. Many European banks faced harsher funding markets in H110, reflecting risk aversion, volatile sentiment amidst nervousness surrounding Greek sovereign concerns and liquidity regulation changes related to US money market funds, among other concerns, but all leading French banks report that their 2010 funding programmes are ahead of schedule. There has been strong bond issuance in H210, public, private or secured.

Fitch has discussed liquidity stress testing exercises undertaken by the large French banks and the agency has no undue concerns regarding short‐term liquidity stresses. Regulatory liquidity requirements are fairly strong in France and large French banks do not have concerns on the short‐term liquidity ratio (the liquidity coverage ratio) proposed by the Basel Committee. On the other hand, given the strong transformation activity, the proposed long‐term liquidity regulation (the net stable fund ratio) is likely to force banks to issue longer‐term debt.

Capital Adequacy The four French banks included in the July 2010 stress tests all passed the tests comfortably. Under the harshest test (the “adverse shock + sovereign shock scenario”), the outcome for the banks’ Tier 1 capital ratios ranged from 8.5% (GBPCE) to 10% (Société Générale). For further information relating to these stress tests, see Fitch’s report dated 26 July 2010 “EU Bank Stress Tests: Still A Question of Funding” http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=544165).

GBPCE is the only French bank that has not fully repaid the capital support received from the state in 2008/2009. Of the EUR7.05bn capital received from the state since end‐2008, EUR3.55bn has already been repaid. The group will repay another EUR0.6bn in October 2010 and intends to repay the balance (EUR2.9bn) by 2013 from retained earnings. Fitch considers the group’s eligible capital/risk‐weighted assets ratio of 7.6% at end‐June 2010 as weak given the stock of risky assets still held on GBPCE’s balance sheet (around EUR16bn, equivalent to 50% of Fitch eligible capital) and the high proportion of hybrid instruments (these will account for around 27% of eligible capital after the H210 repayments to the state).

Large French banks are quite highly leveraged, as evidenced by their low equity/assets ratios; the very large securities and derivatives portfolios held on

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Banks

Table 11: Major French Banks – Capital Adequacy Ratios H110 Reported Tier 1 Fitch core Exceeds the 4.5% minimum Approaches or exceeds the 7% equity Equity/ Prudential capital/weighted common equity target ratio set by minimum common equity target ratio Bank (EURbn) assets (%) capital ratio (%) risks (%) the Basel committee for 2015 set by the Basel committee for 2019 a CA 76.4 4.02 10.1 5.54 Yes No BNPP 73.2 3.27 10.6 7.89 Yes Yes GBPCE 50.5 4.07 9.6 5.01 Yes No SG 41.5 3.66 10.7 7.34 Yes Yes a CMCEE 22.8 5.11 10.0 7.06 Yes Yes a At end‐2009 Source: Bank presentations, adapted by Fitch

balance sheet (in excess of 50% of assets at BNPP and SG and around 40% of assets at CA) partly explain this. Given uncertainties related to the financial sector globally, plus new regulatory requirements (see Table 11), investors are likely to demand higher capital ratios for leading banks globally. Fitch has no concerns about French banks’ ability to meet the 2015 capital ratio requirements. While requirements for 2019 are higher, French banks aim to meet this demand by retaining earning rather than by raising additional equity.

Fitch believes that requirements for computing an incremental risk charge to cover trading book risk, effective from 2011, are likely to prove onerous globally for banks with large investment banking activities, notably SG and BNPP in France. Therefore, Fitch would welcome additional capital buffers at these banks.

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