By Miriam Mukuru

The bonds of France's major banks are expected to remain relatively resilient in the face of political and economic uncertainty in the country, helped by the banks' strong credit ratings and substantial presence internationally, analysts said.

Analysts remain cautious, however. Uncertainty over France's budget and the potential for an increasing deficit would pose risks to banks' profitability, hurting their bonds' performance.

The situation in France remains fragile following a no-confidence vote on the former Prime Minister Michel Barnier last week when he attempted to push through the budget without parliamentary approval. President Emmanuel Macron is expected to name a new prime minister this week.

The cost of French sovereign credit default swaps, which insure against France defaulting, recently hit its highest in more than four years as the political and budget turmoil unfolded.

By contrast, the cost of credit default swaps on the likes of BNP Paribas, Credit Agricole and Societe Generale rose but didn't exceed levels seen earlier this year, S&P Global Market Intelligence data show. French bank credit spreads also widened only modestly.

"Going into this political crisis, major French banks were among the best rated banks in Europe," CreditSights analyst Puja Karia said at a conference on the European credit outlook.

"French banks' exposure to the sovereign debt is generally moderate," she said.

As of June 30, French banks' investments in domestic sovereign bonds made up less than 50% of their total sovereign debt investments, CreditSights said in a note.

"If the French sovereign [credit rating] is downgraded, it is not necessarily the case that banks will follow," the credit research firm said.

Societe Generale's European credit strategist Juan Valencia expects French corporate and financial bond spreads will tighten again, along with the rest of the euro credit market through the remainder of 2024, he said in a note.

If political uncertainty becomes more prolonged and there's no progress on agreeing a budget, then spreads on French bank bonds could start to widen again.

CreditSights says further widening could happen, although it shouldn't be significant. For some investors, this could present an opportunity to buy the bonds at cheaper prices.

"If we see some further spread pressure [on French bank bonds], it is possible entry levels will begin to look appealing," CreditSights analysts said.

Investors might become more discerning when buying French bank bonds, however. Banks with a heavier domestic focus will feel the effects of political and budget uncertainty more than globally-focused banks.

Societe Generale and Credit Agricole generate around 40% to 50% of their revenue in France, leaving them slightly more vulnerable to the country's political and economic backdrop, Barclays analysts said in a note.

BNP Paribas is less exposed, generating around 30% of its revenues in France and the rest from global sources, Barclays said.

Meanwhile, investors won't lose sight of the risk that the political chaos might not be resolved any time soon.

Analysts at Barclays said French banks fundamentals are attractive but the political and macro uncertainty blur their outlook.

Gareth Colesmith, head of global rates and macro research at Insight Investment, said French bonds could deteriorate if international investors who hold them as safe assets reassess their safe status given the political backdrop.

Still, some analysts are more optimistic that France's political situation will be resolved over the coming months.

"While the instability in France is not good for its long-term fiscal health, rolling over the 2024 budget and holding new elections could lead to a more stable outcome, after a few chaotic months." TD Securities analysts said.

Write to Miriam Mukuru at miriam.mukuru@wsj.com

(END) Dow Jones Newswires

December 12, 2024 06:30 ET (11:30 GMT)

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