Bank of France's financial report is facing a major test: the 60 billion US dollar sovereign debt exposure is being examined, and the impact of political turmoil and treasury bond fluctuations is being assessed?

The Zhitong Finance App learned that when the Bank of France announces its third-quarter results this week, it will face stricter scrutiny due to domestic turmoil. Investors will focus on their sovereign debt holdings and the risks posed by a potential economic slowdown. According to the data, BNP Paribas, Société Générale, and Crédit Agricole hold a total of about 60 billion US dollars of French sovereign debt. Most analysts believe that the direct risk of this exposure is limited, but rising yields, political instability, and social unrest may impact its local market economy, and at least one major retailer has lowered its performance guidelines.

France experienced months of political struggle over how to deal with a surge in public debt, which turned into violent riots. There are still six months until the presidential election. Commercial activity contracted unexpectedly in October, and the French bond market experienced historic turmoil last week. Interest spreads on French and German bonds rose to their highest level since 2011, when the Eurozone debt crisis was at its peak.

UBS Group analyst Jason Napier and others stated in the report: “The potential period of political uncertainty is too long, and there are too many European bank options to benefit from higher interest rates,” so it is difficult for the third quarter results to provide much impetus to buy Bank of France shares.

Market research analysts expect that when announcing results on October 28, BNP Paribas will report a 3.5% increase in profit for the third quarter; Société Générale announced the next day, and Crédit Agricole announced on October 30. Both are expected to increase 9% in net profit.

According to the data, these three banks together hold about 54 billion euros (60.5 billion US dollars) of French sovereign debt. If bonds held by the insurance business are included, this amount rises to about 104 billion euros, but most of the additional risk is borne by the policyholders rather than the company itself.

Emmanuelle Assouan, head of the French Prudential Regulation and Disposal Authority (ACPR), said that unlike Italian or Spanish banks at the center of the European sovereign debt crisis, French banks hold significantly less domestic debt, and international investors hold more than half, so even if treasury bond yields soar, there is no risk of stability.

But that doesn't mean that bond fluctuations have no effect. Banks classify bond positions according to whether they are planned to be held until maturity or are likely to be sold (such as managing liquidity or performing market maker functions). Usable or tradable bonds are generally valued at market value, and large price fluctuations during the reporting period may affect profits or regulatory capital.

Senior industry analyst Philip Richards said that even at a time when fiscal and political pressure worsens and interest spreads on French-German bonds are at a 15-year high of about 155 basis points, concerns about the direct domestic sovereign debt risk of France's largest banks seem excessive because amortized cost accounting and potential hedging provide protection.

At the end of the second quarter, BNP Paribas, Société Générale, and Crédit Agricole had core Tier 1 capital adequacy ratios (CET1) of 13.0%, 13.2%, and 11.3% respectively, all comfortably above the minimum regulatory requirements.

Political turmoil and rising borrowing costs may also affect French banks in less direct ways, including falling demand for loans due to corporate delays in investment. Furthermore, the haze that has engulfed France has deterred investors more widely and dragged down stock prices in various industries. Supermarket operator Carrefour plummeted last week after warning that protests and robberies would drag down profits this year.

Christian Sewing, CEO of Deutsche Bank, said last week that France's fiscal and political instability is worrying, and that fluctuations may continue until the presidential election. Recent polls suggest that voting may enter the second round, with far-right frontrunner Marina Le Pen facing off against far-left rival Jean-Luc Mélenchon.

In an interview, Sewing said, “I wouldn't call it a debt crisis right now, but I think it's a wake-up call. Budget discipline is the key to all public financing in particular.”

Bank of France investors will also focus on third-quarter trading performance, after many US rivals reported another jump in stock trading revenue while fixed income trading declined.

Jean-Laurent Bonnafe, CEO of BNP Paribas, may reveal more future strategic clues, which he plans to announce early next year. “We clearly see a path to reducing the cost-to-revenue ratio to around 50%,” he said during an earnings call earlier this year.

Since the end of June, these three French bank stocks have been among the worst performers among European banks. The valuations of French insurance companies, including AXA, have also been hit by investors' concerns about the domestic situation in recent weeks.

Jefferies analysts Philip Kett and Derald Goh said in the report that by the end of June, AXA Group's exposure to French government bonds was 18 billion euros, accounting for 11% of total government bond exposure. The insurance company is thought to be more affected by the wave of protests in France, which have led to many property losses, and recent wildfires have also had an impact.