BNP Paribas, Societe Generale and Credit Agricole could be disproportionately hurt by the direct and indirect effects of a proposed Europe-wide financial transactions tax (FTT), analysts and tax experts on the matter said.
Three credit analysts, an economist and a legal expert on taxation said French banks stand out not only because they operate large investment banking operations whose customers are in the crosshairs of the new tax, but because their investment banking operations are more reliant on Europe than peers’. Moreover, their ownership of domestic life insurance activities brings with it additional exposure to the impact of the tax on final demand.
The tax, which will be imposed on banks’ customers, is likely to come at a time of shrinking demand due to France’s poorly performing economy. One credit analyst said it could speed consolidation of the sector or force the closure of activities that become subject to such a tax.
The FTT, sometimes called the Tobin tax after the US economist James Tobin, received backing from EU finance ministers last month and is set to be introduced as a levy on share, bond, foreign exchange and derivatives transactions in 11 European states, including France, Germany, Italy and Spain. The UK, which already applies a stamp duty of 0.5% on shares and securities held in certificate form, is not currently planning to participate in the new FTT.
Adoption of the FTT has gained momentum on the Continent, most notably in France, where President Francois Hollande and his Socialist-led government have pushed efforts to impose transaction taxes as a way to curtail excessive risk-taking by investment banks, and to lower price volatility due to high-frequency trading.
The tax could also raise tax revenue for European governments by up to EUR 35bn if applied as intended across EU-member states where the financial institution or the client is headquartered. But this revenue, while not coming from the investment banks, comes from their customers, and the higher cost could suppress demand for their products and services in France, which is already serviced by more investment banks than any other country in Europe.
What’s worse, said the first credit analyst, is that all three of the large French investment banks have long been heavy users of derivative products in their portfolio strategies.
Last August, the newly installed French government imposed a 0.2% tax on the purchase of shares in French firms with a market capitalisation above EUR 1bn. This level was also applied to CDS against sovereign debt, while a smaller 0.01% levy was imposed on high-frequency transactions. But there was no FTT applied to derivative transactions, creating a tax loophole for banks and their counterparties that structure ETF products using swaps contracts.
The FTT plan that European lawmakers are considering signing into law by mid-March will no longer allow for that exception. Under the new plan, each side of a securities transaction involving secondary market trading of equities, bonds or currencies would incur a tax rate of 0.1%, while for each side of a derivatives transaction a tax rate of 0.01% will be applied. Primary listings of equities and all trading of government bonds would be exempt from the tax.
The European FTT, like the existing FTT in France, will also target high-frequency traders, and in the process raise costs for brokers, inter-dealer brokers and exchanges, according to the economist. Moreover, because the new tax would be levied across Europe, there would be no easy way to avoid paying it, as occurred in the 1980s when efforts to implement an FTT in Sweden quickly led foreign investors to move trading offshore.
Amid weakening volumes, Societe Generale this week announced it had written down the value of its Newedge 50/50 brokerage joint venture with Credit Agricole. But while brokerage is broadly considered a business in decline, key growth segments of Societe Generale’s investment banking activities are also likely to suffer significantly due to the tax, according to the economist and a second credit analyst.
Lyxor, a fast-growing asset management business at Societe Generale that specializes in the use of derivative-heavy financial engineering tools, exemplifies part of the problem. The economist said that the Tobin tax, when applied to intermediaries “boosts the costs of market making”. When this added cost is passed on to end users, it raises the cost of capital and suppresses demand.
“At a high level, you do create a differential impact” by adding FTT-related costs to the complex and heavily used engineered instruments in Lyxor products, he said. This, in turn, will make them either less competitive versus simpler products.
A banker familiar with the activities of Lyxor agreed that in Europe, at least, it could undermine the business model. Lyxor had assets under management of EUR 75.4bn at the end of 2012 and is Europe’s third-largest ETF provider. Even so, it represents only a small proportion of Societe Generale’s businesses that could be affected by the FTT.
According to dealReporter analytics, EUR 6.189bn of the corporate and investment banking revenue booked by Societe Generale in 2012 could be affected by the tax. That represents 27% of group revenue and 39% of net income from core businesses.
Besides the equity and equity derivative products in which Societe Generale is considered a global leader, the corporate and investment bank’s highly profitable fixed income and currency trading operations are likely to be significantly affected by changes in demand that result from the new tax. The bank’s security services activities could also be affected.
A spokesperson for Societe Generale declined to comment. But a person familiar with the bank’s thinking on the matter said that the top-line impact of an FTT is difficult to quantify for the bank because it affects the client rather than the bank.
At BNP Paribas, the analysis found that EUR 9.715bn of the bank’s corporate and investment banking revenue booked in 2012 could be affected by the tax. That represents 25% of group revenue and 29% of group pre-tax income.
Credit Agricole, which has yet to report full-year results for 2012, had EUR 5.176bn of revenue from its corporate and investment banking business in 2011 that could be affected by the tax. That represents 14.7% of 2011’s revenues.
Spokespersons for both BNP Paribas and Credit Agricole declined to comment on the possible impacts of a Europe-wide FTT.
Beyond the anticipated impact on complex financial products, the economist outlined a “uniform shock” across the financial landscape from a Tobin tax and a cascade of secondary impacts, including reduced re-investment, hedging and savings activity among both corporate and pension funds.
And French banks are exposed to these effects more than most in Europe, according the economist and a second analyst. Credit Agricole, which owns Predica, is the second-largest domestic insurer, and BNP Paribas is the third. Societe Generale is the fourth-largest bancassurer in France.
The second analyst said the impact of the FTT would be mitigated by the fact that insurers do not have a high-portfolio turnover due to their mostly buy-and-hold strategies. But the economist said there could be other, as yet unpredictable consequences for banks that provide insurance services. In an increasingly open European market, the option may soon exist for customers to buy insurance from non-French or non-European suppliers able to avoid the FTT.
By contrast, noted the legal expert, the Tobin tax would have “only a limited effect on Germany, with its banking system much less reliant on investment banking”. A third analyst noted that Germany’s Deutsche Bank [DBK GR] has the advantage of being far more global than any of the French banks, giving it the ability to shift activity more widely to regions where clients may be able to avoid the tax.
By Henry Teitelbaum and analytics by Eoin Mullany
