- French banks posted weekly losses of 10%+, currently trading at oversold levels of RSI 27
- Depressed valuations vs the SX7E while boasting above average earnings growth expectations for 2025/2026.
- Anticipate the gap in valuation to close once elections concerns are over
Following the significant rise of right-wing populist movements across Europe, banks have become a soft target for populist measures such as windfall taxes and restrictions on dividends and share buybacks with the market already pricing in a worst-case scenario for the sector. The SX7E has posted a -5% weekly drop (Fig. 2) compared to a 1.5% drop in the STOXX 600, with the index now trading at local support of mid-April and at an RSI of 30.
Within the sector, French banks have been the clear underperformers posting weekly losses of 10%+ (Fig. 3 &4) and currently trading at oversold levels of RSI 27, as the market reacts to the possibility of a government led by Marine Le Pen’s far-right movement on the back of the announcement of snap elections in France. French banks are currently trading at depressed valuations vs the SX7E while boasting above average earnings growth expectations for 2025 and 2026 (Fig. 5). Peak uncertainty in the region is also reflected in the OAT BUND spread widening to c80bps, the largest spread since 2017 (Fig. 6). In light of a more moderate tone by Le Pen saying she will seek to work with Macron should she achieve majority, and election woes abating, we see an attractive opportunity to capitalize on the disconnect between valuation and earnings growth.
In terms of volatility, and in line with price action, the 3m ATM IV spread between the SX7E and the SX5E is currently at 2YPc79 and 1YPc99 (Fig. 7) and we look to capitalize on a potential reversal of price action by buying calls in a basket of French banks financed by selling calls in the SX7E as we anticipate the gap in valuation to close once elections woes are over. 3M ATM IV for the French banks also trades at a 2YPc 70-80. We propose buying iso-notional amounts of Aug24 calls on BNP, Société General and Credit Agricole at 111-112% strikes financed by selling Aug24 SX7E 145 calls on the SX7E at a net cost of 39bps.