French banks could face higher funding costs and losses associated with their domestic debt holdings if upcoming parliamentary elections result in a prolonged period of political instability, Moody’s has warned.
Uncertainty over the outcome of the vote, which begins on June 30, pushed the yield on French sovereign bonds to 74 basis points over benchmark German bunds as of June 21, said Moody’s analysts in a research note published on Thursday. It has risen from below 50 basis points at the beginning of the month, the note stated.
“One of the main risks for the banking sector is that a substantial and prolonged drop in the value of French government bonds may result in a capital loss on its domestic sovereign bond portfolios,” the rating agency’s analysts wrote.
“Banks could also face increased refinancing risk as their interconnectedness with the sovereign pushes up their market funding costs.”
France’s five largest banks — BNP Paribas, Crédit Mutuel, Groupe BPCE, Crédit Agricole and Société Générale — had a total combined exposure to the French sovereign of €366bn, equivalent to 95 per cent of their common equity Tier 1 capital, according to European Banking Authority data from June 2023.
Moody’s analysts said, however, that any negative impact of rising sovereign bond spreads on French banks’ regulatory capital, either directly, or through their profit and loss, is likely to be “muted”. Sovereign exposures booked as trading assets or at “fair value” through other comprehensive income or profit and loss, accounted for just 12 per cent of banks’ CET1 capital on average, the agency noted.
French banks have not issued any long-term debt on public markets since parliament was dissolved on June 9, when President Emmanuel Macron called an early election following disappointing results in European parliamentary elections. The vote saw the Rassemblement National party, led by far-right veteran Marine Le Pen, win 32 per cent of the vote, more than double the support secured by the president’s centrist alliance.
The surprise election announcement saw France’s CAC 40 share index fall by 2.4 per cent, with banking stocks among the worst affected. At time of writing the index was trading around 5 per cent lower than ahead of the election announcement.
RN’s prime ministerial candidate, Jordan Bardella, told the Financial Times he would seek to cut France’s budget contributions to the EU by €2bn.
Moody’s said that French banks’ access to markets is likely to “remain disturbed” over the election period, which includes two rounds of voting, one to be held on June 30, and the second on July 7.
The agency expects institutional investors to continue to shy away from the French money market, creating short-term refinancing risk for the banking sector.
“Long-term investors’ appetite for French bank bonds may also diminish,” Moody’s warned, “potentially making it more expensive for banks to refinance maturing medium- to long-term debt.”
As at the end of 2023, debt maturing within one year accounted for just under 30 per cent of the five largest French banks’ total funding on average, Moody’s estimates. A “high proportion” of that debt will need to be refinanced this year, it said.
While refinancing risks and capital losses are still “relatively contained” at this stage, the overall impact on the French banking sector ultimately depends on the duration and severity of the disturbance in the markets, Moody’s said. However, banks’ liquidity buffers should be sufficient, it added, to help them “withstand a period of market turbulence without substantially affecting their operations”.
