French banks, their metamorphosis from battered euro-crisis victims to European outperformers complete, now risk being outgunned as rivals take more radical steps to drive profits and deal with rules on capital, reports Reuters.
Shunned as pariahs two years ago for their exposure to trouble spots such as Greece and Italy, French bank stocks have been the picks of Europe over the past year, outperforming the sector .SX7P by around 30 percent after shedding risky assets and boosting their capital defences.
There may still be some share price upside left, some investors say, as the banks launch fresh plans to cut costs and as the eurozone hauls itself out of recession. But any enthusiasm is tempered by concerns the French banks have yet to carve out a competitive niche that can withstand increased regulation and market jitters linked to higher interest rates.
"The Greek problem has been taken care of (and) exposure to Italian debt has been cut across the board," said Frederic Rozier, a fund manager at Meeschaert Gestion in Paris.
"The French banks have realigned themselves ... But with interest rates on the rise, a potential property correction ahead and mounting regulation, there is still a question mark over the business model to choose."
Over the past 18 months, BNP Paribas, Societe Generale and Credit Agricole have cut a combined 100 billion euros (84.8 billion pounds) in assets from their risk-adjusted balance sheets.
But even as they broadly cut risk, the French - helped by a resilient home market and an accommodating regulator - have avoided radical change of the sort carried out at the likes of Royal Bank of Scotland and UBS, who have exited business lines and adapted to post-crisis conditions under pressure from regulators and investors.
The result is that French banks have stayed conservative on their outlook. While UBS and HSBC are targeting returns on equity of up to 17 percent and 15 percent respectively by 2015, SocGen is eyeing 10 percent within the same timeframe. BNP has declined to even set a profit target until next year.
"The French banks will soon have to start looking for growth levers now that they are on the path to normalization," said Yannick Naud, portfolio manager at Glendevon King in London.
BNP and SocGen are talking up their geographic footprint: the former is seeking to expand in the United States, Germany and Asia, while the latter is trumpeting its exposure to non-euro economies like Russia and eastern Europe.
But some say that despite pockets of strength in equity derivatives and euro bonds, these banks lack a competitive edge.
"We don't think SocGen has a business model that is profitable enough or differentiates itself enough," said Espirito Santo banks analyst Shailesh Raikundlia. "As for BNP, which seems to be focused on growing the business ... I'm not sure the market is looking for banks to expand."
Part of what used to set French lenders apart before the financial crisis was their access to pools of talent from the nation's elite engineering academies, who found they could make more money building complex financial options and structured products than making bridges and trains.
But over the past five years, the "French touch" has become more synonymous with market failures than lucrative equations: Jerome Kerviel's rogue trades at SocGen, Fabrice Tourre's conviction for mortgage fraud at Goldman Sachs and Bruno Iksil's alleged "London Whale" losses at JPMorgan Chase.
French banks themselves have become more risk-averse, shuttering proprietary trading desks and focusing instead on sleepy but cash-rich retail banking to boost profits. While this has helped cushion losses from whipsawing financial markets, retail is now stagnating and branches are being shut.
Read more of this report from Reuters.
See also:
The 'taped confession' of Société Générale trader Jérôme Kerviel: mystery of the missing minutes
How 'Fabulous Fab', French trader for Goldman Sachs, took the rap for Wall Street