AXA IM Trims French Bank Stocks With Bond Risk a Lasting Trend

(Bloomberg) -- AXA Investment Managers has cut its exposure to French banking stocks and sees no quick reversal in the recent rise in sovereign yields, according to portfolio manager Gilles Guibout.

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The stock-market reaction to President Emmanuel Macron’s decision to call a snap election may prove excessive, but the rise in the risk premium on French government bonds looks like a lasting trend, he said.

The “main adjustments we’ve made in this context was to trim our exposure to French banks by 10% to 15%, to manage portfolio volatility,” Guibout said. AXA IM had about €850 billion ($912 billion) in assets under management at the end of 2023.

The shares in Societe Generale SA, Credit Agricole SA and BNP Paribas SA all lost over 10% of their value since the surprise decision was announced on June 10, a much deeper drop than the 3% suffered by the European banking sector in the period. French government bonds have seen their yield premium over Germany jump to 79 basis points, the most since 2017, a rise which will penalize French lenders in terms of costs for the foreseeable future, Guibout said.

Banks tend to be particularly vulnerable to concerns about a country’s political future through what analysts have referred to as the sovereign-bank loop. Lenders can have direct exposure to the government through holdings of sovereign debt, or suffer the indirect effect of pushing through costly measures for public finances.

Investors are worried that the nation’s already-stretched public finances will worsen to dangerous levels should Marine Le Pen’s far-right National Rally or a left-wing coalition prevail. On Wednesday, the European Commission reprimanded France for running a budget shortfall of 5.5%, a level that far exceeds the bloc’s 3% limit.

“France’s capacity to keep its deficits in check is weakened in every scenario,” Guibout said, referring to the outcome of the vote, which concludes on July 7.

At the same time, the portfolio manager said he has no plans to reduce his bank holdings further for now, given the level of uncertainty in the market.

“We’re keeping our remaining exposure to French banks on the grounds that they are well capitalized and have no balance sheet problems,” he said.

Shares of SocGen and Credit Agricole were up almost 1.5% on Thursday, while BNP Paribas advanced 2.4%.

(Adds AXA IM’s AUM in third paragraph, bank stock moves in last)

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