Skip to main content
1300 784 132

Sell SOCGEN Buy BNP

  • Sell SOCGEN 4.875 PERPS (Ba2) – first call Sept 24, coupon reverts to ADSWAP5 + 4.036% = 7.90%
  • Buy BNP 4.5 PERPS (Ba1/BBB-/BBB) – first call Jan 25, coupon reverts to ADSWAP5 + 3.372% = 7.23%

Trade would make sense for investors looking to lock in a profit on their SOCGEN exposure and switching into a lower-risk, similar yielding credit amidst the current economic outlook.

Why?

  • Similar first call date, but SOCGEN/BNP yield differential has tightened significantly even though the risk represents HY/IG respectively. Differential now sits at around 50bps, which is mispriced in our view.
  • BNP is a fundamentally better bank within the French banking sector with higher common equity tier 1 ratios and cushion to the maximum distributable amount (MDA). Given the current economic outlook, it is one of the most defensive names whether Europe enters a recession or not.
  • Exposure to Russia is negligible for BNP. SOCGEN is in the process of selling down its Russia exposure, but not complete yet so execution risk remains.
  • Trade would make sense for investors looking to lock in a profit on their SOCGEN exposure and switching into a lower-risk, similar yielding credit amidst the current economic outlook.
  • SOCGEN is trading at a higher cash price than BNP respectively.

Source: Bloomberg

Credit Fundamentals

  • Profitability is sound, while asset quality has held up well despite the effects of COVID-19 and the war in Ukraine.
  • Cost of risk at the group level was 40bp at 3Q22, which is still very low by industry standards.
  • Capital ratios are sound, especially in the context of its liquid and relatively low-risk balance sheet. Its CET1 ratio at 30 September 2022 stood at 12.1%. The sale of BancWest will boost the ratio to pro-forma 13.8%, or 13.2%, after a planned €4 bn extraordinary distribution. Its leverage ratio of 3.9% will be pro-forma 4.2% after recent AT1 issuance.
  • Its MDA cushion is 235bp and equivalent to €18 bn of capital, which looks comfortable. This cushion should also be boosted by recent AT1 issuance.
  • AT1 issuance by the bank in 2023 is likely to be minimal which should support credit spreads.

Source: Company Reports, CreditSights