While investors this week fretted about the financial strength of Société Générale and BNP Paribas because of their sovereign debt exposures, these French lenders attract an “overweight” stock rating from Morgan Stanley.

These Paris-listed banks – both operating substantial wealth management businesses – have suffered along with many of their peers because of concerns about banks’ high exposure to the government bonds of Greece, Italy, Spain and Portugal.

In a note issued on 13 September, Morgan Stanley said that despite problems, it intends to remain overweight, or bullish, on the shares of these banks.

Yesterday, Moody’s Investors Services cut the debt and deposit ratings of SocGen to Aa3 from Aa2 with a negative outlook. BNP Paribas has a AA long-term credit rating with a negative outlook from Standard & Poor’s, and a Aa2 rating from Moody’s, kept on review for a possible cut.

In the case of Société Générale, Morgan Stanley noted that this bank’s US short-term funding reliance has fallen to €60 billion (around $82.2 billion) and its liquidity “buffers” are stable, having fully achieved its long-term funding for 2011.

However, Morgan Stanley said SocGen needs to show more clarity on what it is doing to dispose of assets; it noted that business disposals could free up about €4 billion of capital. It said that the bank’s business model – with much focus on low-margin, high leverage businesses – is vulnerable to rising funding costs. This will encourage SocGen to increase deleveraging, especially in its wholesale and dollar-reliant businesses. The bank’s important derivatives business also have downside risks.

Turning to BNP Paribas, analysts said that while the bank has been hit by higher funding costs and weaker growth, the French bank has been “quick to react and adapt to this new environment”.

“We are [overweight] BNPP, which remains, in our view, more solid than peers in a period of strong uncertainty, further highlighted by no rating action from Moody’s,” it said. (The note was issued before the latest Moody’s statement).

The bank recently explained its dollar funding needs, which contained the reassuring information that its exposure to US money market funds had fallen by $10 million during the summer, the Morgan Stanley note said.

Earlier in the summer, meanwhile, a survey of European bank lending by the European Central Bank showed a deterioration in expectations for lending in Q3; lending was seen shrinking by 8 per cent in the quarter. In a note at the end of July, Morgan Stanley said: "We think the risk of a credit crunch in Southern Europe is
growing." Its "most preferred list" of financial firms remains skewed to Northern Europe such as Swedbank, DnBNor, HSBC, Henderson, UBS and BNP.