financial pacific - french banks, funding - fundamentals (third party)

EQUITY RESEARCH 7 September 2011

FRENCH BANKS Funding & fundamentals

Trading at distressed levels: Share prices back near 2008/09 lows, and valuations either side of half tangible book, reflect a range of fears. Observers refer to funding tensions, sovereign marks and possible recapitalizations. Perhaps more likely, markets may be trading probabilities around more binary eurozone scenarios, in which bank shares might be worth 0x or 1x book. In this note we update forecasts after 2Q results, and reduce price targets on BNP Paribas from €66 to €45; on SocGen from €51 to €22; on Credit Agricole from €11 to €5 and KBC from €41 to €24.

Funding market tensions: Various pressures are visible (wider spreads, low issuance, Libor/OIS, $ money markets). Some credit investors seem to have been spooked by recent SocGen disclosures. French bank funding structures appear skewed to short term wholesale, light on longer-term debt, although not off the scale.

Sovereign exposures pricing in worse than bond markets: Marking sovereign exposures to market (GR -50%, PT -40%, IR -25%, IT -6%, SP-5%) would cause relatively limited damage to tangible book values (BNP -7%, CASA -4%, SG -3%). We would need to mark SP & IT by 28-100% and FR & BE by 6-12% to explain share prices.

Operating trends mixed but harmless: Back in the day-to-day businesses, the numbers are pretty well behaved: asset quality is generally improving, margins are a little soft, and costs performances mixed.

Figure 1: Debt & interbank funding mix

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SocG

en

BNP

Parib

as

Cre

dit

Agr

icol

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Cre

dit

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Barc

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HSB

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tsch

eBa

nk

Inte

saSa

npao

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JPM

orga

n

>5yrs

1-5yrs

3m - 1yr

<3m

Source: Company reports and Barclays Capital analysis.

Barclays Capital does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

This research report has been prepared in whole or in part by research analysts based outside the USwho are not registered/qualified as research analysts with FINRA.

PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 21.

SECTOR UPDATE European Banks 2-NEUTRAL Unchanged For a full list of our ratings, price target and earnings changes in this report, please see table on page 2.

European Banks Jeremy Sigee +44 (0)20 3134 3363 [email protected] Barclays Capital, London Kiri Vijayarajah +44 (0)20 3134 5745 [email protected] Barclays Capital, London European Banks Simon Samuels Jeremy Sigee Rohith Chandra-Rajan Kiri Vijayarajah Mike Harrison Antonio Rizzo Carlos Cobo Catena Yulia di Mambro Christoffer Rosquist Nimish Rajkotia All analysts above are employed by Barclays Capital, London

Barclays Capital | French Banks

7 September 2011 2

Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold)

Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E)

Old New 05-Sep-11 Old New %Chg Old New %Chg Old New %Chg

European Banks 2-Neu 2-Neu

BNP Paribas (BNP FP / BNPP.PA) 1-OW 1-OW 31.30 66.00 45.00 -32 7.21 7.12 -1 7.99 7.79 -3

Credit Agricole SA (ACA FP / CAGR.PA) 3-UW 3-UW 5.85 11.00 5.00 -55 1.70 1.25 -26 2.15 1.91 -11

KBC (KBC BB / KBC.BR) 1-OW 1-OW 16.65 41.00 24.00 -41 4.29 3.41 -21 4.67 4.36 -7

Société Générale (GLE FP / SOGN.PA) 2-EW 2-EW 20.25 51.00 22.00 -57 5.16 3.85 -25 6.17 5.23 -15

Source: Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.

FY1(E): Current fiscal year estimates by Barclays Capital. FY2(E): Next fiscal year estimates by Barclays Capital.

Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating Suspended

Sector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative

http://my.barcapint.com/ERG/displayCompany.jsp?ticker=BNPP.PA�

http://my.barcapint.com/ERG/displayCompany.jsp?ticker=CAGR.PA�

http://my.barcapint.com/ERG/displayCompany.jsp?ticker=KBC.BR�

http://my.barcapint.com/ERG/displayCompany.jsp?ticker=SOGN.PA�


7 September 2011 3

FUNDING

In this section we explore some of the pressures in bank funding markets, and try to link them to company disclosures and balance sheet fundamentals. Our particular focus in this note is on the French banks, but in some instances we make comparisons with other European and US banks to see the relative position.

Equity & credit market context Readers will be well aware that the equity share price of SocGen, for example, is back around its 2008/09 lows, as is its price/book multiple (0.3x reported book according to the DataStream series shown in Figure 2, or 0.4x tangible 2011E book on our own numbers). Similarly SocGen’s CDS spreads are as wide as KBC traded in the crisis, and other French and Belgian banks are not far behind either (Figure 3).

In this report we will explore how these stressed equity and credit prices relate to funding market conditions, sovereign exposures and operating trends. But it is worth emphasising up-front that other bigger factors are at play. With many European banks trading around 0.5x tangible book value, we think it less likely that this is a true fair value based on specific adjustments or calculations, and more likely that the shares are being traded on a probability basis between macro scenarios in which banks are worth either 0x or 1x tangible book value. Values are affected by some investors stepping back from single-stock equity or credit investing until greater macro clarity returns, and other investors using bank shares and CDSs to invest/hedge/short as proxies for the macro issues themselves.

Funding market observations Senior bond issuance by European banks has in recent weeks dried up almost entirely (Figure 4). There has been some recent activity in covered bond markets, but at wider spreads (Figure 5).

Figure 2: Société Générale – share price and price/book

Figure 3: French/Belgian banks – CDS spreads

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SocGen price/book multiple (right scale)

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Source: DataStream. Source: DataStream.


7 September 2011 4

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Credit MutuelBanque PopulaireSocGenDexiaCredit AgricoleBNP Paribas

Source: Dealogic. Source: Bloomberg.

USD funding for international (predominantly European) borrowers has fallen back since the spring, and is now at the low end of the range, although no worse than that, and indeed their share of the funding pool remains higher than pre-2009 (Figure 6).

There was a flurry of excitement when a single player accessed the ECB dollar swap facility a couple of weeks back, but that appears to have been an isolated incident, and we’re not even beginning to return to what we saw in 2008/09 (Figure 7).

Indeed it is interesting to note – as a number of European banks have emphasised – that they have become even bigger depositors of dollars at the Federal Reserve (Figure 8), and in a number of cases are net suppliers of dollar liquidity not net takers.

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45%Non-US financial issuers CP outstanding in the US CP market (US$ bn)

Non-US financial issuers CP as pct of total US CP market, right scale

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allotted amount ($bn)

# bidders

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Source: Bloomberg Source: ECB, Barclays Capital

Figure 4: European bank bond issuance (€bn) Figure 5: French bank covered bond spreads

Figure 6: Foreign banks in US$ funding market Figure 7: Usage of the ECB dollar swap facility


7 September 2011 5

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Large domestic banks

Foreign banks

Source: Federal Reserve

SocGen disclosures picked on by credit investors Against the backdrop of many other things going on, and concerns on many fronts, it appears that some investors in the credit markets picked up on some disclosures from SocGen that they found alarming. These were in a presentation to debt investors posted 30th August and dated September 2011.

The first (Figure 9) sought to illustrate “consistency between the Group’s short term liquidity needs and its liquid assets” (in the words of the bullet points that accompanied the chart), ie, “net short-term funding outstanding of €148bn <1year, of which €11bn <3months” compared to “liquid assets of €105bn, of which €60bn are repo-able to central banks, net of haircuts”.

The second (Figure 10) sought to emphasise “well diversified short term funding sources” and to illustrate the group’s ability to adapt to reduced availability of US$ money market funding. “Proactive management of the August pullback of US money market funds: decrease of long position with the Fed; use of €/$ swaps in interbank market; reduction of market activities needs. € funding remained abundant at all times and was increased in August. More structural actions can be implemented if $ funding durably lower, with manageable P&L impact.”

But it seems that the charts were interpreted negatively by some in the jittery credit markets. From the first chart, the short-term funding (€183bn/€148bn/€112bn) is bigger than the liquid assets buffer available to replace it (€105bn). From the second chart, $ money market funding still outstanding is a big number, and if all of it ran off (as the company implies is conceivable) then it would use up pretty much all of the central bank eligible liquid assets identified in the first chart, and then the safety buffer has gone, and any pressure beyond that would need asset sales or other less desirable measures.

This is not necessarily our interpretation, indeed we find the assets and liabilities being compared in the first chart a slightly odd match, but these views and fears seem to have circulated in the credit and funding markets.

Figure 8: Foreign bank deposits at Federal Reserve US$bn


7 September 2011 6

Figure 9: Société Générale – funding chart (1)

Source: Company presentation to debt investors, September 2011

Figure 10: Société Générale – funding chart (2)

Source: Company presentation to debt investors, September 2011


7 September 2011 7

Our own attempt to compare wholesale funding structures This begs the question what should investors think about the funding structure and resilience/vulnerability of SocGen or other banks in the spotlight, so we’ve gone through the maturity disclosures of several relevant European banks (plus JPMorgan) for comparison.

We should post a big warning up front, that there are many other factors at play here, big differences in the asset and liability mixes of the different banks, differences in the depth of their local funding markets, track records, perceived sovereign support, and more besides. Also the data we analyse here is from end-2010 annual reports, and may have changed materially already since then. So this is only one perspective, and we need to interpret with care.

There are a number of relevant observations that offer themselves from the numbers. The French banks in absolute terms have some of the biggest amounts of short-term debt outstanding (Figure 11). Among this peer group they have relatively smaller absolute amounts of long-term debt in place (Figure 12). As a result their wholesale funding mix is more skewed to the short term (Figure 13). The picture remains the same if we compare funding to total assets (adjusted ex derivatives), the French banks look overweight short-term funding sources and underweight long-term funding (Figure 14). Taking this a stage further, and comparing the short-term funding stock to tangible common equity, we see the French banks at the most geared end of the spectrum (Figure 15).

Just to balance these observations, while the French banks are in all of these charts at the more vulnerable end of the spectrum, they are not on a dimensionally different scale, and indeed there are one or two other banks in similar situations on some metrics. And as we said up front this is only one perspective on a complex topic.

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Source: Company reports and Barclays Capital. Source: Company reports and Barclays Capital.

Figure 11: Short term debt & interbank funding (Em) Figure 12: Long-term debt (Em)


7 September 2011 8

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Source: Company reports and Barclays Capital. Source: Company reports and Barclays Capital. Assets here are adjusted ex derivatives PRVs.

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Source: Company reports and Barclays Capital.

Figure 13: Debt & interbank funding mix Figure 14: Debt & interbank funding as % of assets

Figure 15: Debt & interbank funding as % of tangible common equity


7 September 2011 9

SOVEREIGN EXPOSURES AND MARK-TO-MARKETS

The funding concerns on the French banks originated from their apparent large exposures to troubled sovereigns. In this section, we revisit these exposures (see Figure 16) and reconfirm our view that overall, these sovereign exposures remain manageable. In addition to Greece, Ireland, Portugal, Spain and Italy, we also show France and Belgium. In Figure 17 we show the likely write-down implied by current trading prices of these government bonds. In the case of Greece is after the write-downs already taken in 2Q. Pricing on French and Belgian government bonds shows they remain close to par (for now) and so we ascribe no additional write-down. So in aggregate we project the largest incremental write-downs at BNP of €3.8bn, with the other 3 banks all requiring €0.8-0.9bn.

In Figure 18 we show the current discounts to tangible book value in relation to the sovereign exposures. The P/TBV discount at SocGen is widest, and now represents 144% of all the peripheral countries plus French plus Belgian banking book sovereign exposures. The current discounts to book are driven by much broader macro concerns, and attributing all of the discount to a single risk factor (i.e. sovereign) is too simplistic. However, it does give a sense of how severely sovereign risks have been priced into equity valuations.

In Figure 19 and Figure 20, we attempt to link bank equity valuations to sovereign bond valuations. We start with the current discount to tangible book. Then assume some portion of that is driven by a Basel-3 related capital shortfall, leaving a residual equity discount. We then back out the required level of haircuts on the peripheral countries / French/ Belgian sovereign bonds that would explain that residual equity discount.

Overall, we find that the implied haircuts go well beyond what the bond market has currently priced in. So in the case of SocGen, we find the implied write down on Italian and Spanish government bonds is at 100% and on French and Belgian government bonds is 23%. At BNP the respective haircuts are 28% and 6% and at Credit Agricole are 63% and 13%.

In Figure 21 and Figure 22, we add an extra degree of sophistication by applying a “warranted” price-to-book multiple to each of the 4 banks. This is to capture the fact that prior to the sovereign crisis, Credit Agricole was at a perennial discount to TBV, whereas KBC and BNP typically traded at small premiums to trailing TBV. This results in the equity market implied bonds write-downs at BNP to be larger (i.e. and closer to SocGen). For Credit Agricole the equity price implied write-downs are now the least severe of the 3 French banks.

Figure 16: Sovereign banking book exposures (Euro m)

Spain Greece Ireland Italy Portugal France Belgium Other TOTAL

BNP Paribas 3,156 3,552 433 21,835 1,785 16,287 23,723 20,545 91,316

Credit Agricole 1,765 278 144 7,843 658 17,567 2,189 6,071 36,515

SocGen 1,300 1,600 300 2,200 200 5,166 158 22,881 33,805

KBC 2,200 500 400 6,100 300 1,539 15,819 18,879 45,737

Source: Company reports and presentations


7 September 2011 10

Figure 17: Indicative sovereign markdowns, based on current bond prices (Euro m)

Spain Greece Ireland Italy Portugal France Belgium Other TOTAL As % of TBV

BNP Paribas 158 1,544 108 1,310 714 0 0 0 3,834 7%

Credit Agricole 88 81 36 471 263 0 0 0 939 4%

SocGen 65 464 75 132 80 0 0 0 816 3%

KBC 110 145 100 366 120 0 0 0 841 9%

Source: Bloomberg, company presentations and Barclays Capital

Figure 18: Current discounts to tangible book relative to sovereign exposures (Euro m)

Mkt Cap 2Q11 TBVTrailing

P/TBV

Market implied write-down

to book ..as % of GIP..as % of

peripherals*

..as % of peripherals*

+Be+Fr..as % of all

sovereign

BNP Paribas 37,802 54,566 0.7x -16,764 291% 54% 24% 18%

Credit Agricole 14,601 26,407 0.6x -11,806 1093% 110% 39% 32%

SocGen 15,716 31,494 0.5x -15,778 751% 282% 144% 47%

KBC 5,958 9,249 0.6x -3,291 274% 35% 12% 7%

* Greece, Italy, Ireland, Portugal, Spain. GIP refers to Greece Ireland & Portugal Source: Company reports, datastream and Barclays Capital

Figure 19: Market implied write-down to tangible book, relative to 1.0x P/TBV

Euro m

Warranted price to

book"Fair

value"

Discount to current mkt

cap

Less: B3 Capital

"gap"

Mkt implied write down, ex B3

capital gap

BNP Paribas 1.0 54,566 16,764 575 16,188

Credit Agricole 1.0 26,407 11,806 1,442 10,364

SocGen 1.0 31,494 15,778 3,828 11,951

KBC 1.0 9,249 3,291 530 2,761

Source: Barclays Capital

Figure 20: Share price implied write-downs to sovereign exposures, relative to 1.0x P/TBV


BNP Paribas

Exposure 3,156 3,552 433 21,835 1,785 16,287 23,723 20,545 91,316

Implied remaining write-down % 28% 100% 100% 28% 100% 6% 6% 6%

Implied remaining write-down 886 3,552 433 6,131 1,785 915 1,332 1,154 16,188

Credit Agricole

Exposure 1,765 278 144 7,843 658 17,567 2,189 6,071 36,515


Implied remaining write-down 1,109 278 144 4,929 658 2,208 275 763 10,364

SocGen

Exposure 1,300 1,600 300 2,200 200 5,166 158 22,881 33,805


Implied remaining write-down 1,300 1,600 300 2,200 200 1,163 36 5,152 11,951

KBC

Exposure 2,200 500 400 6,100 300 1,539 15,819 18,879 45,737


Implied remaining write-down 221 500 400 612 300 31 318 379 2,761



7 September 2011 11

Figure 21: Market implied write-down to tangible book, relative to warranted P/TBV

Euro m

Warranted price to

book"Fair

value"

Discount to current mkt

cap

Less: B3 Capital

"gap"

Mkt implied write down, ex B3

capital gap

BNP Paribas 1.3 70,936 33,134 575 32,558

Credit Agricole 0.9 23,766 9,166 1,442 7,723

SocGen 1.0 31,494 15,778 3,828 11,951

KBC 1.3 12,024 6,066 530 5,536


Figure 22: Share price implied write-downs to sovereign exposures, relative to warranted P/TBV (Euro m)


BNP Paribas

Exposure 3,156 3,552 433 21,835 1,785 16,287 23,723 20,545 91,316


Implied remaining write-down 2,279 3,552 433 15,765 1,785 2,352 3,426 2,967 32,558

Credit Agricole

Exposure 1,765 278 144 7,843 658 17,567 2,189 6,071 36,515


Implied remaining write-down 794 278 144 3,527 658 1,580 197 546 7,723

SocGen

Exposure 1,300 1,600 300 2,200 200 5,166 158 22,881 33,805


Implied remaining write-down 1,300 1,600 300 2,200 200 1,163 36 5,152 11,951

KBC

Exposure 2,200 500 400 6,100 300 1,539 15,819 18,879 45,737


Implied remaining write-down 614 500 400 1,701 300 86 882 1,053 5,536



7 September 2011 12

LATEST OPERATIONAL TRENDS

Net interest margins sag

Net interest margins in domestic retail banking seem to be weakening. In the case of BNP and SocGen, margins remain above the recent trough of late 2008 – early 2009. However, at Credit Agricole, the net interest margin is more volatile and has most recently dipped below previous lows (see Figure 24). Interestingly, this may be linked to Credit Agricole outpacing peers in domestic retail loan growth (see Figure 26), perhaps suggesting some margin sacrifice to gain market share.

By contrast, Credit Agricole has lagged peers’ deposit growth, although gap started opening before the financial crisis (see Figure 27). The slight advantage that SocGen was building on retail deposit volumes compared to BNP has now closed. Similarly, life insurance volume trends are remarkably homogenous among the 3 banks (see Figure 29). Retail fees & commission have weakened for all 3 players, but post post-crisis Credit Agricole has visibly lagged peers, while this metric is the main success story for SocGen.

Falling mutual fund balances (see Figure 28) have contributed to the weaker fees & commissions, and have now dipped below crisis period lows at SocGen and Credit Agricole. In international retail, BNP remains the clear winner, and Credit Agricole the visible loser (heavily influenced by Emporiki). KBC’s international retail revenues show the strongest bounce from the trough.

Figure 23: Domestic retail revenues rebased, 2002=100

Figure 24: French retail net interest margins

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Soc GenBNP ParibasCredit Agricole S.A.

Credit Agricole outperforms after

Credit Lyonnais

SocGen begins to pull away in 2005-07

BNP outperforms through the crisis

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Source: Company reports and Barclays Capital Source: Company reports


7 September 2011 13

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BNP Paribas SocGen Credit Agricole

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Figure 25: French retail fees & commissions Figure 26: French retail loans

Figure 27: French retail deposits Figure 28: French mutual funds

Figure 29: French life insurance Figure 30: International retail revenues


7 September 2011 14

Cost trends mixed

KBC and Credit Agricole have now posted 2 successive quarters of falling cost income ratios (see Figure 32). At SocGen the cost disappointment in 1Q11 was only marginally remedied in 2Q, and so it remains the highest cost/ income ratio bank among the group of 4, and the worst year-on-year development in FY2011. Investors would hope that some of the discretionary investments that weighed on costs in 1H11 might be delayed/ postponed/ cancelled now that ambitious growth assumptions for 2012 have been abandoned. As a result, there might be scope short-term to partially offset any likely top-line weakness in 2H11.

Taking a longer-term perspective of the cost performance, shows all 4 banks making solid progress on costs through the 2000s (see Figure 31). KBC in particular made substantial efficiency gains in 2005-07, led by the domestic business (see Figure 35). Moreover, KBC saw much less cost/ income volatility through the crisis than French peers. For FY2011, our cost/ income forecasts are most optimistic at KBC and Credit Agricole, and somewhat neutral at BNP.

Figure 31: Group cost/ income ratio, annual

Figure 32: Group cost/ income ratio, quarterly

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7 September 2011 15

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Figure 33: CIB cost/ income ratio, annual Figure 34: CIB cost/ income ratio, quarterly

Figure 35: Domestic cost/ income ratio, annual Figure 36: Domestic cost/ income ratio, quarterly

Figure 37: International cost/ income ratio, annual Figure 38: International cost/ income ratio, quarterly


7 September 2011 16

Loan loss charges impacted by Greek sovereign

Overall, underlying asset quality trends continue to improve (see Figure 39), notwithstanding the Greek sovereign write-downs taken in banking books in 2Q (see Figure 40). Looking at trough levels of loan loss charges in 2005-06 suggests scope for further cyclical declines, although the current macro environment would suggest those very benign levels remain a number of years out.

Short-term, the non-recurrence of the Greek write downs should result in lower loan loss charges in 3Q11 and 4Q11. International retail is the key areas where loan losses remain elevated (see Figure 37), and in the case of KBC and Credit Agricole, this division remains the key area for disappointment in 2H11 (specifically due to Ireland and Greece). By contrast, loan losses in CIB are abnormally low and may partially normalise upwards into 2012 (see Figure 45).

Figure 39: Group loan losses, annual

Figure 40: Group loan losses, quarterly

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7 September 2011 17

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Figure 41: Domestic retail loan losses, annual Figure 42: Domestic retail loan losses, quarterly

Figure 43: International retail loan losses, annual Figure 44: International retail loan losses, quarterly

Figure 45: CIB loan losses, annual Figure 46: CIB loan losses, quarterly


7 September 2011 18

PRICE TARGET & ESTIMATE REVISIONS

We cut our price targets meaningfully across the 4 French & Belgian banks that we cover; on BNP Paribas from €66 to €45; on SocGen from €51 to €22; on Credit Agricole from €11 to €5 and KBC from €41 to €24. We raise our cost of equity assumptions across the group from 12% to 14% to reflect higher equity risk premiums from elevated funding and sovereign fears. We also trim our view of ‘sustainable’ RoEs as we indirectly try to capture some of the operational impacts from the issues discussed in this note, and realign valuations towards current market sentiment. Our sustainable RoE falls from 16% to 13% at BNP, from 13% to 8% at SocGen, from 11% to 7% at Credit Agricole and from 15% to 11% at KBC. We also update estimates as a consequence of the recent 2Q reporting season.

Figure 47: BNP Paribas – Summary of estimate revisions

2011E 2012E 2013E

Old New % Chg Old New % Chg Old New % Chg

Total operating income Euro m 44,041 43,817 -1% 45,505 45,166 -1% 47,242 46,889 -1%

Total operating expenses Euro m -26,322 -26,382 0% -27,162 -27,132 0% -27,679 -27,584 0%

Operating profit pre provisions Euro m 17,719 17,435 -2% 18,342 18,034 -2% 19,563 19,305 -1%

Loan loss provisions Euro m -3,689 -4,089 11% -2,882 -3,357 16% -3,322 -3,797 14%

Profit before Tax Euro m 14,417 13,866 -4% 15,880 15,097 -5% 16,701 15,968 -4%

Net attributable Euro m 9,063 8,957 -1% 10,006 9,776 -2% 10,523 10,340 -2%

EPS - adjusted Euro 7.21 7.12 -1% 7.99 7.79 -3% 8.42 8.26 -2%

DPS Euro 2.38 2.35 -1% 2.64 2.57 -3% 2.78 2.73 -2%


Figure 48: SocGen – Summary of estimate revisions

2011E 2012E 2013E



Total operating expenses Euro m -16,956 -17,168 1% -17,405 -17,558 1% -17,666 -18,031 2%


Loan loss provisions Euro m -3,003 -3,523 17% -2,160 -2,142 -1% -1,901 -1,883 -1%




DPS Euro 1.89 1.44 -24% 2.21 1.90 -14% 2.43 2.06 -15%



7 September 2011 19

Figure 49: Credit Agricole – Summary of estimate revisions

2011E 2012E 2013E



Total operating expenses Euro m -13,234 -13,263 0% -13,598 -13,403 -1% -14,125 -13,921 -1%


Loan loss provisions Euro m -3,107 -3,617 16% -2,055 -2,405 17% -1,643 -1,646 0%




DPS Euro 0.55 0.55 0% 0.65 0.65 0% 0.75 0.75 0%


Figure 50: KBC - Summary of estimate revisions

2011E 2012E 2013E



Total operating expenses Euro m -4,455 -4,418 -1% -4,507 -4,518 +0% -4,732 -4,743 +0%


Loan loss provisions Euro m -910 -997 +10% -794 -838 +5% -742 -781 +5%


Net attributable - adjusted Euro m 1,456 1,159 -20% 1,587 1,481 -7% 1,989 1,893 -5%


DPS Euro 0.75 0.75 +0% 1.00 1.00 +0% 1.00 1.00 +0%



7 September 2011 20

Valuation Methodology and Risks

European Banks

BNP Paribas (BNP FP / BNPP.PA)

Valuation Methodology: We value BNP Paribas shares based on tangible book value, using 13% RoE (our 2012 estimate), 14% cost of equity and 2% growth. We also compare price/earnings multiples with European universal bank peers.

Risks which May Impede the Achievement of the Price Target: Downside risks for BNP Paribas shares include the generic difficulties of administering a large diversified business group, as well as specific. threats to its derivatives business from regulatory reforms (pressure to simplify and shift onto central clearing). Upside risks (reflected in our Overweight rating) include bigger Fortis earnings/synergies, bigger benefits from the multiple home markets, exposure to economic/credit recovery, and further benefit from funding advantages, for a stock on a cheap price/book multiple.

Credit Agricole SA (ACA FP / CAGR.PA)

Valuation Methodology: We value CASA shares based on tangible book value, using 7% normalised RoE, 14% cost of equity and 0% growth. We also compare price/earnings multiples with European universal bank peers.

Risks which May Impede the Achievement of the Price Target: The main risks for CASA shares relate to its unusual capital and ownership structure, with above-average gearing, and the support/influence of the caisses rgionales. There are further downside risks (reflected in our Underweight recommendation) around possible regulatory capital rule changes, and the group's acquisition appetite and mixed track record. Upside risks could include turnaround in Greece and Calyon, funding advantages, and exposure to economic/ credit recovery, for a stock on a low price/book multiple.

KBC (KBC BB / KBC.BR)

Valuation Methodology: We value KBC shares based on tangible book value, using 14% RoE (a haircut on our 16% 2013 estimate), 12% cost of equity and 2% growth. We also compare price/earnings multiples with European universal bank peers.

Risks which May Impede the Achievement of the Price Target: Downside risks for KBC shares include failure to execute the restructuring, disposal and capital repayment plan, restrictions on capital and strategic flexibility from the core shareholder structure, too-big-for-Belgium pressures on leverage and capital ratios, and funding challenges. Upside risks (reflected in our Overweight rating) include the potential to return to a healthy RoE and healthy capital structure, a shift away from wholesale towards strong Belgian/CEE franchise businesses, possible CDO write-backs, and exposure to economic/ credit recovery.

Société Générale (GLE FP / SOGN.PA)

Valuation Methodology: We value Socit Gnrale shares based on tangible book value, using 8% RoE (our 2012 estimate), 14% cost of equity and 2% growth. We also compare price/earnings multiples with European universal bank peers.

Risks which May Impede the Achievement of the Price Target: Downside risks for Socit Gnrale shares include further negative revenue impacts following the reputational and regulatory damage from the Kerviel affair, as well as threats to its derivatives business from regulatory reforms (pressure to simplify and shift onto central clearing). Upside risks include potential franchise and revenue recovery, domestic merger synergies (Crdit du Nord, brokerage), eastern European growth, and exposure to economic/ credit recovery.



7 September 2011 21

ANALYST(S) CERTIFICATION(S)

We, Jeremy Sigee and Kiri Vijayarajah, hereby certify (1) that the views expressed in this research report accurately reflect our personal viewsabout any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer tohttp://publicresearch.barcap.com or call 1-212-526-1072.

The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's totalrevenues, a portion of which is generated by investment banking activities.

Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA.These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSERule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’saccount.

On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investment management businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.

Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in othertypes of research products, whether as a result of differing time horizons, methodologies, or otherwise.

Primary Stocks (Ticker, Date, Price)

BNP Paribas (BNPP.PA, 05-Sep-2011, EUR 31.30), 1-Overweight/2-Neutral

Credit Agricole SA (CAGR.PA, 05-Sep-2011, EUR 5.85), 3-Underweight/2-Neutral

KBC (KBC.BR, 05-Sep-2011, EUR 16.65), 1-Overweight/2-Neutral

Société Générale (SOGN.PA, 05-Sep-2011, EUR 20.25), 2-Equal Weight/2-Neutral

Guide to the Barclays Capital Fundamental Equity Research Rating System:

Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sectorcoverage universe”).

In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investorsshould carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.

Stock Rating

1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable orto comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisorycapacity in a merger or strategic transaction involving the company.

Sector View

1-Positive - sector coverage universe fundamentals/valuations are improving.

2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.

3-Negative - sector coverage universe fundamentals/valuations are deteriorating.

Below is the list of companies that constitute the "sector coverage universe":

European Banks

Allied Irish Banks PLC (ALBK.I) Banca Monte dei Paschi di Siena (BMPS.MI) Banco Bilbao Vizcaya Argentaria S.A. (BBVA.MC)

Banco Popular (POP.MC) Banco Sabadell (SABE.MC) Banco Santander SA (SAN.MC)

Bank of Ireland (BKIR.I) Bankia (BKIA.MC) Bankinter (BKT.MC)

BNP Paribas (BNPP.PA) Commerzbank AG (CBKG.DE) Credit Agricole SA (CAGR.PA)


7 September 2011 22


Credit Suisse Group AG (CSGN.VX) Deutsche Bank AG (DBKGn.DE) Deutsche Postbank AG (DPBGn.DE)

HSBC Holdings PLC (HSBA.L) Intesa Sanpaolo (ISP.MI) Julius Baer (BAER.VX)

KBC (KBC.BR) Lloyds Banking Group PLC (LLOY.L) Royal Bank of Scotland Group PLC (RBS.L)

Skandinaviska Enskilda Banken AB (SEBa.ST) Société Générale (SOGN.PA) Standard Chartered PLC (STAN.L)

Swedbank AB (SWEDa.ST) UBI Banca (UBI.MI) UBS AG (UBSN.VX)

UniCredit (CRDI.MI)

Distribution of Ratings:

Barclays Capital Inc. Equity Research has 1771 companies under coverage.

43% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 59% of companies with this rating are investment banking clients of the Firm.

42% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 52% of companies with this rating are investment banking clients of the Firm.

12% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 34% ofcompanies with this rating are investment banking clients of the Firm.

Guide to the Barclays Capital Price Target:

Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock willtrade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's pricetarget over the same 12-month period.

Barclays Capital offices involved in the production of equity research:

London

Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)

New York

Barclays Capital Inc. (BCI, New York)

Tokyo

Barclays Capital Japan Limited (BCJL, Tokyo)

São Paulo

Banco Barclays S.A. (BBSA, São Paulo)

Hong Kong

Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)

Toronto

Barclays Capital Canada Inc. (BCC, Toronto)

Johannesburg

Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)

Mexico City

Barclays Bank Mexico, S.A. (BBMX, Mexico City)

Taiwan

Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan)

Mumbai

Barclays Capital Securities (India) Private Limited (BSIPL, Mumbai)

Singapore

Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)


7 September 2011 23


BNP Paribas (BNP FP / BNPP.PA) Stock Rating Sector View

EUR 31.30 (05-Sep-2011) 1-OVERWEIGHT 2-NEUTRAL

Rating and Price Target Chart - EUR (as of 05-Sep-2011) Currency=EUR

Date Closing Price Rating Price Target

25-May-2011 52.47 66.00

16-Mar-2011 50.34 67.00

03-Aug-2010 55.79 64.00

27-May-2010 47.33 60.00

18-Mar-2010 57.20 68.00

Closing Price Target Price Rating Change

Jan- 09 Jul- 09 Jan- 10 Jul- 10 Jan- 11 Jul- 11

20

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04-Jan-2010 57.24 1-Overweight 62.00

Link to Barclays Capital Live for interactive charting

Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of BNP Paribas in the previous 12 months.

Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from BNP Paribas in the past 12 months.

Barclays Bank PLC and/or an affiliate trades regularly in the securities of BNP Paribas.

Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from BNP Paribas within the past 12 months.

BNP Paribas is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.

BNP Paribas is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/oran affiliate.

Valuation Methodology: We value BNP Paribas shares based on tangible book value, using 13% RoE (our 2012 estimate), 14% cost of equity and 2% growth. We also compare price/earnings multiples with European universal bank peers.

Risks which May Impede the Achievement of the Price Target: Downside risks for BNP Paribas shares include the generic difficulties of administering a large diversified business group, as well as specific. threats to its derivatives business from regulatory reforms (pressure tosimplify and shift onto central clearing). Upside risks (reflected in our Overweight rating) include bigger Fortis earnings/synergies, bigger benefits from the multiple home markets, exposure to economic/credit recovery, and further benefit from funding advantages, for a stock on a cheapprice/book multiple.

https://live.barcap.com/go/NYF/flex/equity/EquityChart.jsp?ticker=7309681&legend=BNP Paribas&shortlegend=BNPP.PA&currency=EUR&enddate=20110905&begindate=20100905&userId=vijayark&appName=RPS�


7 September 2011 24


Credit Agricole SA (ACA FP / CAGR.PA) Stock Rating Sector View

EUR 5.85 (05-Sep-2011) 3-UNDERWEIGHT 2-NEUTRAL



16-Mar-2011 11.28 11.00

27-May-2010 8.94 9.00

18-Mar-2010 12.22 10.00



4

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10

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04-Jan-2010 12.82 3-Underweight 9.00


Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of Credit Agricole SA in the previous 12 months.

Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Credit Agricole SA in the past 12 months.

Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from Credit Agricole SA within the next 3 months.

Barclays Bank PLC and/or an affiliate trades regularly in the securities of Credit Agricole SA.

Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Credit Agricole SA within the past 12months.

Credit Agricole SA is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.

Credit Agricole SA is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLCand/or an affiliate.

Valuation Methodology: We value CASA shares based on tangible book value, using 7% normalised RoE, 14% cost of equity and 0% growth. We also compare price/earnings multiples with European universal bank peers.

Risks which May Impede the Achievement of the Price Target: The main risks for CASA shares relate to its unusual capital and ownershipstructure, with above-average gearing, and the support/influence of the caisses rgionales. There are further downside risks (reflected in ourUnderweight recommendation) around possible regulatory capital rule changes, and the group's acquisition appetite and mixed track record.Upside risks could include turnaround in Greece and Calyon, funding advantages, and exposure to economic/ credit recovery, for a stock on alow price/book multiple.

https://live.barcap.com/go/NYF/flex/equity/EquityChart.jsp?ticker=7262610&legend=Credit Agricole SA&shortlegend=CAGR.PA&currency=EUR&enddate=20110905&begindate=20100905&userId=vijayark&appName=RPS�


7 September 2011 25


KBC (KBC BB / KBC.BR) Stock Rating Sector View

EUR 16.65 (05-Sep-2011) 1-OVERWEIGHT 2-NEUTRAL



04-Feb-2011 30.20 41.00

06-Aug-2010 34.50 43.00

18-Mar-2010 36.91 42.00



0

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04-Jan-2010 32.00 1-Overweight 36.00


Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of KBC in the previous12 months.

Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from KBC in the past 12 months.

Barclays Bank PLC and/or an affiliate trades regularly in the securities of KBC.

Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from KBC within the past 12 months.

KBC is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.

KBC is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or anaffiliate.

Valuation Methodology: We value KBC shares based on tangible book value, using 14% RoE (a haircut on our 16% 2013 estimate), 12% cost ofequity and 2% growth. We also compare price/earnings multiples with European universal bank peers.

Risks which May Impede the Achievement of the Price Target: Downside risks for KBC shares include failure to execute the restructuring,disposal and capital repayment plan, restrictions on capital and strategic flexibility from the core shareholder structure, too-big-for-Belgium pressures on leverage and capital ratios, and funding challenges. Upside risks (reflected in our Overweight rating) include the potential to returnto a healthy RoE and healthy capital structure, a shift away from wholesale towards strong Belgian/CEE franchise businesses, possible CDO write-backs, and exposure to economic/ credit recovery.

https://live.barcap.com/go/NYF/flex/equity/EquityChart.jsp?ticker=4497749&legend=KBC&shortlegend=KBC.BR&currency=EUR&enddate=20110905&begindate=20100905&userId=vijayark&appName=RPS�


7 September 2011 26


Société Générale (GLE FP / SOGN.PA) Stock Rating Sector View

EUR 20.25 (05-Sep-2011) 2-EQUAL WEIGHT 2-NEUTRAL



25-May-2011 42.10 51.00

16-Mar-2011 44.60 54.00

05-Aug-2010 45.22 44.00

27-May-2010 35.93 42.00

18-Mar-2010 44.66 48.00



15

20

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Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of Société Générale inthe previous 12 months.

Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Société Générale in the past 12 months.

Barclays Bank PLC and/or an affiliate trades regularly in the securities of Société Générale.

Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Société Générale within the past 12months.

Société Générale is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.

Société Générale is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLCand/or an affiliate.

Valuation Methodology: We value Socit Gnrale shares based on tangible book value, using 8% RoE (our 2012 estimate), 14% cost of equity and 2% growth. We also compare price/earnings multiples with European universal bank peers.

Risks which May Impede the Achievement of the Price Target: Downside risks for Socit Gnrale shares include further negative revenue impactsfollowing the reputational and regulatory damage from the Kerviel affair, as well as threats to its derivatives business from regulatory reforms(pressure to simplify and shift onto central clearing). Upside risks include potential franchise and revenue recovery, domestic merger synergies (Crdit du Nord, brokerage), eastern European growth, and exposure to economic/ credit recovery.

https://live.barcap.com/go/NYF/flex/equity/EquityChart.jsp?ticker=5966516&legend=Société Générale&shortlegend=SOGN.PA&currency=EUR&enddate=20110905&begindate=20100905&userId=vijayark&appName=RPS�

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