(News Bulletin 247) – The Canadian bank redid its calculations in a sector note published this Tuesday, December 24, and increased its price targets for French establishments. But only BNP Paribas has its favors.

As the end of the year approaches, Royal Bank of Canada (RBC) has scrutinized the banking sector in Europe and redid its calculations.

The research office has stretched its price objectives over the next twelve months, which has led it to revise its targets for establishments, particularly French banks.

RBC increased its price target to 88 euros on BNP Paribas, against 78 euros previously, to 16.5 euros on Crédit Agricole SA, against 16 euros, and to 33 euros on Société Générale, against 29 euros.

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Heavy haircut for European banks

In its note, the Canadian establishment underlines that European banks display a heavy discount both in relation to the entire European market and in relation to American banks. On average, European banks trade at 7.2 times expected profits over the next twelve months, compared to 12.1 times for their American counterparts, a discount of 41%. Compared to all European equity markets, this percentage rises to 46%.

The valuation of the sector may therefore seem attractive. “However, we believe that political/economic/regulatory uncertainty will weigh on the sector and its earnings dynamics, at least in the short term,” points out RBC.

“We continue to prefer banks whose results are less dependent on net interest income (the money the company earns in retail banking on loans, or the difference between interest received and interest paid on deposits , Editor’s note), which are more focused on the United States and which better control their costs,” she continues.

With this in mind, RBC favors Barclays, Deutsche Bank, UBS, OneSaving Bank, Julius Baer and…BNP Paribas.

The bank on rue d’Antin is the only French establishment on which Royal Bank of Canada has an “outperform” rating, equivalent to “buy” in its terminology.

A scissor effect to hold

“We believe that the market is not giving all the necessary credit to BNP’s steady profit growth, its sustainable performance, as well as the potential for upward revision of profit expectations,” underlines the Canadian establishment.

The establishment recalls that the company anticipates an increase in its net profit of 8% per year on average over the period 2022-2025 and growth in its earnings per share of 12% over the same period.

Still over 2022-2025, the company plans to achieve a positive jaws effect (i.e. revenues grow faster than costs) of more than 2%, on average, per year. This objective remains difficult to achieve given the inflationary environment which has extended between 2022 and 2024, notes RBC. BNP Paribas also intends to increase its revenues by more than 2% in 2024 compared to the previous year.

“Achieving a positive jaws effect (in 2024) and achieving the revenue growth target would strengthen the credibility of the company,” concludes RBC. BNP Paribas will publish its annual results on February 4.

RBC is at “market performance”, equivalent to “neutral” on Crédit Agricole SA and Société Générale.

“The combination of a relatively capital-intensive activity and good cost control allows Crédit Agricole SA to generate a return higher than that of most European banks,” notes the Canadian establishment in passing.

For Société Générale, RBC believes that it “will take time” for the market to understand that the objectives of the La Défense bank’s medium-term plan “are excessively cautious”.

On the Paris Stock Exchange, BNP Paribas gained 0.6% this Tuesday, December 24 around 11:30 a.m., while Crédit Agrciole SA gained 0.4% and Société Générale also gained 0.4%.