French banks among top winners in Basel revamp

PARIS (Reuters) - French banks led a rally in European banking shares on Tuesday as the sector benefited from a scale-back of looming capital reforms and a longer timeframe to implement changes.

French banks surged over 10 percent to 2-1/2 month highs, leading a charge by other lenders including Barclays BARC.L as the news on the Basel III capital reform was added to by better-than-expected profits from UBS UBSN.VX and confidence returning after the completion of stress tests.

“It looks pretty positive, especially for Credit Agricole,” said MF Global analyst Shailesh Raikundlia, citing changes that would exempt the French bank from having to completely deduct its cross-shareholdings with regional banks from Tier 1 capital.

Credit Agricole CAGR.PA shares jumped 10.6 percent by 6:30 a.m. EDT, while larger rival Societe Generale SOGN.PA gained 9 percent, both on heavy volume.

BNP Paribas BNPP.PA, seen as a safer bet than its smaller peers, rose by 6 percent.

By 7:55 EDT the European bank sector .SX7P was up 4.3 percent, turning positive on the year for the first time since April. The index, hammered over the past three months, is now up 1.1 percent in 2010.

Barclays and Italy's Unicredit CRDI.MI both added over 7 percent and UBS, cheered by its results, jumped 10 percent.

The surge came after the Basel committee in charge of deciding on new capital requirements for banks said it would water down proposals, such as excluding minority bank stakes from Tier 1 capital.

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Analysts highlighted French and Nordic banks as the main winners of the proposed changes to Basel III, especially the flexibility on the criteria and implementation dates for the proposed net stable funding ratio.

"Key winners of this revised proposals should be the French, Lloyds LLOY.L, UBS and Unicredit, as well as the Nordic banks," analysts at Credit Suisse said. Among Nordic lenders, Nordea NDA.ST was up 3.1 percent.

The more dovish proposed risk weighting of various assets within the ratio as well as a distant 2018 deadline would benefit Nordic and French banks, Credit Suisse said. A wider definition of Tier 1 would also help Britain’s Lloyds and Italian banks such as Unicredit, it added.

Equally, flexible moves on another proposed ratio of leverage would help investment banks more generally, analysts said, and in particular the more geared French banks.

“As key Basel III ‘losers’, the French banks should benefit from these revisions,” UBS analyst Omar Fall said in a note to clients, adding that positive sentiment in the wake of Europe-wide stress tests would also help.

French bank stocks have traded at a hefty discount relative to peers over the past six months because of fears the Basel proposals would hamstring them due to their reliance on wholesale funding and other sources of equity such as cross-shareholdings and insurance.

Despite Tuesday’s strong rally, Credit Agricole is still down 14 percent year-to-date, SocGen is down 11 percent and BNP Paribas down 2.9 percent.

Credit Agricole’s structure of cross-shareholdings with regional banks, as well as its relatively high exposure to insurance activities, has especially battered its share price and made it the worst performing French bank so far this year.

“The Basel Committee is being a bit more understanding of other business models such as Credit Agricole’s where minority stakes and insurance activities are concerned,” a Paris-based analyst said.

French banks had lobbied hard for exceptions to the Basel III proposals, arguing they nearly all emerged unscathed from the crisis and did not cost one euro cent to the French taxpayer after repaying state aid.

They have also said more onerous capital requirements would hamper their ability to finance the economy.

Additional reporting by Matthieu Protard and Blaise Robinson; Editing by David Holmes