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.

• 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

• 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

This report is provided to you or made available subject to and in accordance with the Research Report Disclosure and Disclaimer, please click here for these terms and conditions. If you have any queries please contact IAM.