French Banks 1999 Romani

See page 66 for Analyst Certification and Important Disclosures
Industry Report
E Q U I T Y
R E S E A R C H :
E U R O P E
Banks
29 September 2004
Europe
Ronit Ghose
1999 And All That

+44-20-7986-4028
ronit.ghose@citigroup.com
London
French Banks — BNP Paribas and Société

Albert Coll
+44-20-7986-3965 Générale
albert.coll@citigroup.com
London ➤ French banks have managed to withstand the
de-rating inflicted on European peers over the past
five years because they convinced the market they
had changed
➤ This conversion was achieved by successfully

European Banking Team
executing a clear strategy to boost their
Albert Coll
Ronit Ghose profitability and reduce volatility — the reallocation
Azzurra Guelfi of capital from wholesale to retail banking
Simon Nellis
Tom Rayner
Philip Richards ➤ Five years on, French banks, with their continuity
Riccardo Rovere of management and ideas, seem to have become
Simon Samuels
Jeremy Sigee victims of their own success . . .
Kiri Vijayarajah
➤ . . . however, a trip to Paris may still be of value for
investors interested in well managed franchises,
We thank Gilles Delcroix for his progressively improving efficiency ratios, mid-
contribution in this report. teens underlying ROEs and low valuation multiples.
➤ In this report, we initiate coverage on BNP Paribas

with a Buy rating and Societe Generale with a Hold
rating
Smith Barney is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its
research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision.
1999 And All That – 29 September 2004
Table of Contents
Investment Summary 3
Stock Summaries ................................................................................................................................... 5
Investment Overview ............................................................................................................................. 7
Retail Banking — Home and Away ...................................................................................................... 18
Wholesale Banking ................................................................................................................................ 35
Financial Forecasts and Investment Thesis — By Bank 47

BNP Paribas........................................................................................................................................... 48
Societe Generale .................................................................................................................................... 55
Appendix: IAS/IFRS accounting changes ............................................................................................. 62
2
Modern French banking began in 1999. A three-way bid battle
Investment Summary
engulfed most of the quoted French bank sector. Michel Pebereau
and colleagues at BNP broke up the agreed SG Paribas
combination and in the process helped crystallise a strategic shift
from wholesale to retail banking. Over the next five years, French
banks fell over themselves to appear more retail-oriented than
their peers. Fast forward to today and the ‘big idea’ that has
captivated French banking over the past five years or more no
longer seems that exciting. In fact, BNP Paribas and Societe
Generale, with their continuity of management and ideas, have
become victims of their own success. More interesting change
stories can today be found elsewhere in Europe. However, a trip to
Paris may still be of value for investors content with well managed
franchises, progressively improving efficiency ratios, mid-teens
underlying ROEs and low valuation multiples. In this report, we
initiate coverage on BNP Paribas with a Buy rating and Societe
Generale with a Hold rating.
French bank move from periphery to centre
The map of the European bank sector has changed considerably between 1999
and 2004. Five years ago, the French bank sub-sector was one of the smaller
ones in Europe. Accounting for 8% percent of the European bank market
capitalisation in mid 1999, only the Nordics and a collection of assorted
peripheral countries (eg Austria, Ireland) were smaller. Today the French banks
account for 11% of the European bank market capitalisation, with only the UK
bank sector now larger. Over the past five years or so, French bank market
capitalisation has increased approximately 80% and its weight in the European
bank sector has increased by almost 50%.
The disappearing French discount

Five years ago, the leading French banks used to trade at a substantial discount
to the European bank sector. Over the past five years, this French discount has
disappeared. In absolute terms, the forward PE ratings of BNP Paribas and SG
are today about 90% of their 1999 levels. By contrast, the PE ratings attached
to the earnings of banks in other large European countries — Germany, Italy,
Spain and the UK — are currently between 50% and 60% of their mid-1999
levels. French banks have managed to withstand the de-rating inflicted on peers
largely because they convinced the market they had changed. A conversion
achieved by successfully executing a clear strategy to boost their profitability
and reduce volatility — the reallocation of capital from wholesale to retail
banking.
3
Investment Summary Where’s the next ‘big idea’ in French banking?

Having successfully executed the strategic shift set out in 1999, BNP Paribas
and SG are now victims of their own success. There does not seem to be any
new strategic developments that quite match up to the big bang of 1999. True,
these two banks have plenty of plans for growth, be it growing their overseas
retail networks (in the western USA and emerging Europe) or expanding in
specialised financial services (across Europe and overseas), but none are likely
to catch investors attention in the way French banks did five years ago. Thus, it
is interesting to note that much of the relative re-rating of French banks took
place between 1999 and 2002. After that date, there has not been a further
sustained re-rating. Since 2002, BNP Paribas has traded at a forward PE
multiple of 90%-100% of the European sector average, and SG at between
90%-105%.
Well managed franchises, attractive niches, inexpensive prices

While we admit that investors looking for a substantial transformation or
material re-rating opportunity will probably not find it at BNP Paribas or SG
today, these shares should be of interest to those tempted by well managed
franchises, solid domestic operations and attractive niche operations overseas,
progressively improving efficiency ratios and sustainable mid-teens ROEs. In
addition, with both BNP Paribas and SG trading at 1.5x-1.6x 2004E book value
per share, both shares look attractive from a value perspective.
Initiate coverage with a Buy rating on BNP Paribas

BNP Paribas is displaying good momentum in its French retail and
international corporate banking franchise, we like the management team’s
ability to be strategically bold (demonstrated several times in the past, such as
with the SBP proposal in 1998) while also being sensibly boring when needed
(as with current buy backs), and the shares appear undervalued on both a
ROE/price-to-book basis and on a relative PE basis compared to other
European banks. We initiate coverage with a Buy/ Medium Risk (1M) rating
and €60 target price.
Initiate coverage with a Hold rating on Societe Generale

We rate Societe Generale a Hold/ Medium Risk (2M) with a €78 target price.
We find the shares reasonably valued, with upside potential, but we do not see
any obvious near-term catalysts or change of direction in its already well
performing core retail and wholesale businesses. Historically, a more geared
play on equity markets and credit quality compared to BNP Paribas, we would
prefer to seek our equity ‘plays’ elsewhere, such as with Swiss banks, and also
loan losses are now so low that they are unlikely to provide positive earnings or
valuation surprises in the near term.
4
Stock Summaries
BNP Paribas — Buy rating, €60 target price

We rate BNP Paribas a Buy/ Medium Risk (1M) with a €60 target price. We believe
the bank has an attractive franchise with momentum in both its retail and corporate
franchises; we believe the management have been strategically bold in the past and
also more recently sensible in capital management; finally, we find the shares
undervalued based on both a ROE/price-to-book approach or on a relative PE basis.
The bank’s domestic French retail network — focused on urban, affluent clients —
has historically been a lower return and slower growing business compared to SG.
However, the profitability gap has narrowed due to a shift in business mix (more
households/less SMEs) and adjusting for reporting differences is now insignificant.
In addition, recent results indicate faster growth in certain segments, such as
household lending.
In wholesale banking, the financing unit delivered a strong 1H04 result (revenues up
16%, year-on-year), assisted by its strong franchise in the global commodities sector.
In addition, large corporate credit losses remain at very low levels and we do not see
this changing any time soon. We have not included a pickup in loan losses in our
forecasts, but it should be noted that we use a ‘normalised’ loan loss level (group
loan loss ratio of c55bp) in deriving our valuation.
The combination of the good signs of growth in both retail and corporate banking,
combined with the continuing execution of the €2 billion buy back programme
announced in mid-2003 (now over three-quarters achieved), should also help dispel
fears over surplus capital and acquisition risk which had previously resulted in a
discount attached to the stock.
Finally, as we discuss in greater detail in the valuation section (see page 49), we find
the shares attractively valued. Using a normalised ROE of 15.3% — our 2005E ROE
adjusted for one-off items and 55bp loan loss ratio — we believe a target price-to-
book multiple of 1.7 times justifiable. This supports our €60 target price.
We are forecasting cash EPS at BNP Paribas to increase from €5.5 in 2004E to €6.0,
which places the shares at 9.4x 2004E cash EPS and 8.7x 2005E. Since 2002, BNP
Paribas shares have tended to trade at between 90% and 100% of the sector average
P/E multiple. Thus, on our estimates, the shares are currently trading at the lower end
of that recent historical range.
5
Societe Generale — Hold rating, €78 target price

We rate Societe Generale a Hold/Medium Risk (2M) with a €78 target price. We find
the shares reasonably valued, but we do not see any obvious catalysts or change of
direction in its already well performing core businesses. Historically, a more geared
play on equity markets and credit quality compared to BNP Paribas, we would prefer
to seek our equity ‘plays’ elsewhere, and loan losses are now so low that they are
unlikely to provide positive surprises in the near term.
has historically been a higher return and faster growing business compared to BNP
Paribas, but the current momentum appears to be with its cross-town rival. The latter
has eroded the previous star status that SG had in French retail banking, at least as
measured by profitability.
In capital markets, SG has a leading global equity derivatives franchise and in
general has greater exposure to the equity markets than its French peers. SG shares
typically outperform BNP Paribas when equity markets/bank shares are rising, due to
perceived greater equity exposure and also willingness to ‘buy risk’ in rising
markets.
Investors seeking to ‘play’ a bullish call on equity markets may prefer SG to BNP
Paribas. However, it should be remembered that SG also has reasonable gearing to
fixed income markets and commercial banking, not to mention retail banking, and is
thus far from being the best ‘play’ on equity markets. This might be better achieved
by buying the shares of say UBS or one of its US peers.
In addition to greater gearing to equity risk, SG also offers greater gearing to credit
risk, given its historically greater loan loss volatility and also greater earnings
sensitivity to this factor given its higher cost/income ratio. However, large corporate
credit losses are already at very low levels and thus unlikely to provide a further
positive earnings (or capital) boost from here.
Finally, as we discuss in greater detail in the valuation section (see page 56), we find
the shares reasonably valued. Using a normalised ROE of 15.6% — our 2005E ROE
adjusted for one-off items and 55bp loan loss ratio — we believe a target price-to-
book multiple of 1.7 times justifiable. This supports our €78 target price.
We are forecasting cash EPS at SG to increase from €7.3 in 2004E to €7.9, which
places the shares at 9.8x 2004E cash EPS and 9.1x 2005E. Since 2002, SG shares
have tended to trade at between 90% and 105% of the sector average P/E multiple.
Thus, on our estimates, the shares are currently trading at the lower end of that recent
historical range.
6
Investment Overview
➤ French banks relative sector weight has increased by almost
50 percent over the past five years
➤ 1999 bid battle crystallised the “Big Idea” of reallocating capital from
wholesale to retail banking, boosting profitability in the process
➤ We forecast c15-16% sustainable ROEs for BNP Paribas and Societe

Generale
French banks move from periphery to centre

The map of the European bank sector has changed considerably between 1999 and
2004. Five years ago, the French bank sub-sector was one of the smaller ones in
Europe. Accounting for 8% percent of the European bank market capitalisation in
mid 1999, only the Nordics and a collection of assorted peripheral countries
(eg Austria, Ireland) were smaller.
Fast forward to today, and the French banks account for 11% of the European bank
market capitalisation, with only the UK bank sector now larger. Over the past five
years or so, French bank market capitalisation has increased approximately 80% and
its weight in the European bank sector has increased by almost 50%. Figure 1 and
Figure 2 set out the changing map of the European bank sector over the past five
years.
Figure 1. European Banks — Sector Weighted by Market Figure 2. European Banks — Sector Weighted by Market
Capitalisation, 30 June 1999 Capitalisation, 24 September 2004
Other
Nordics 9% Other
4% Germany 10%
UK
5% UK
38%
France Nordics 39%
8% 7%
Italy Italy
9% 8%
Spain
9% Switzlerland
10%
Germany Switzerland Spain France
11% 12% 10% 11%
Sources: Datastream and Smith Barney analysis.

French and Nordic banks lead, while the Germans and Swiss lag
Only the Nordic region has matched the increasing importance of the French bank
sector over the past five years, with both experiencing market capitalisation growth
substantially ahead of their European peers (see Figure 3). By contrast, German
banks are at the other extreme, experiencing a 50% relative decline in their sector
weighting, while the Swiss (-16%) and the Italians (-5%) have also experienced a
relative decline. The heavy weight UK bank sector has remained largely unchanged
in its high relative importance.
7
Figure 3. European Banks — Change in Market Capitalisation, Absolute and Relative, 30 June 1999-24
September 2004 (Percentages)
Absolute Mkt Cap Change Relative Mkt Cap Change
Nordics 82% 47%
France 79% 45%
Spain 32% 7%
UK 26% 2%
European Banks Total 24% 0%
Italy 18% -5%
Switzerland 4% -16%
Germany -39% -50%
So why did the French banks increase in importance?

A variety of factors account for the increased importance of French banks over the
past five years, including successful consolidation, retail focused strategies, a
relatively resilient domestic economy and net new issuance of bank stock.
Successful domestic consolidation
In 1999, the three largest French banks (BNP, Paribas and Societe Generale) competed
over the creation of a domestic champion, a fight eventually resulting in the creation of
BNP Paribas. The 1999 bid battle led to a refocusing of strategies that were
successfully executed, and stood the French banks in good stead as discussed below.
Interestingly, the re-rated Nordics have also experienced a wave of consolidation,
much of which has been a success (eg Danske Bank/Real Danmark in 2000 or
DnB/Gjensidige NOR, 2003). By contrast, the Swiss and German banks have
embarked upon failed transactions (eg Credit Suisse/DLJ, 2000 or Hypo/Vereinsbank,
1998), or transactions that have failed to materialise (think of any hypothetical
domestic German combination in recent years).
Retail focused strategies and a resilient economy
The 1999 bid battle in France crystallised retail-focused strategies that were followed
by both the ‘winner’ (BNP Paribas) and the ‘loser’ (Societe Generale). In fact, as
1999 evolved, the competing business plans proposed by the different French bank
managements looked increasingly similar — reallocate capital away from wholesale
to retail banking. This strategy was successfully executed with capital employed in
wholesale banking declining in relative terms by c20% at BNP Paribas, 1999-2003,
and c35% at Societe Generale. This refocusing enabled the French banks to better
withstand the 2000-02 downturn in financial markets and the corporate credit cycle
than they may otherwise have managed. In addition, the refocusing was accompanied
by a relatively resilient domestic economy compared to Germany or Italy.
Net new bank stock issuance
The relative importance of French banks has also been boosted by the addition of
Credit Agricole (CASA) to the quoted sector (total market capitalisation of US$33
billion). However, if we adjust for the listing of CASA and the acquisitions of CCF
and Credit Lyonnais, the underlying increase in French bank market capitalisation
would be unchanged at close to 80 percent. If we exclude Dexia, thus focusing on
BNP Paribas and SG, the increase in market capitalisation is about 60 percent.
8
Surviving a sector de-rating

French banks have certainly helped themselves over the past five years, as noted
above. However, the increased importance of French banks in a European context
has as much to do with disappointments elsewhere as it has to with self-help by the
French banks.
Thus, forecast forward earnings at BNP Paribas and SG have increased in-line with
the European bank sector, but their market capital capitalisation has increased by
60% between mid-1999 and September 2004 compared to only about 25% for the
European bank sector. The rest of Europe de-rated, Spanish and German ratings
collapsed, and amidst the ‘carnage’ the French banks’ rating stood relatively still.
The European bank sector rating, as measured by the two-year forward PE multiple,
has deflated from mid-teens in mid-1999 to barely a whisker above 10 times for
much of 2004. In fact, the European bank sector’s rating has halved as it moved from
bull market valuations in 1999 to bear market trough valuations in 3Q02 and 1Q03
(see Figure 4).
In this process of rating compression, the French banks have on a relative basis
prospered. Thus, the forward PE rating of BNP Paribas and SG today is close to 90%
of what it was in mid-1999. By contrast, the PE ratings attached to the earnings of
banks in the other large European countries — Germany, Italy, Spain and the UK —
are currently between 50% and 60% of their mid-1999 levels (see Figure 5).
Figure 4. European Bank Sector — 2-year forward P/E Multiple, Figure 5. European Bank Sector — 2-year P/E Multiple,
1999-2004 September 2004E versus 1999E (Percentages)
18.0x
European Bank Sector P/E +2yr 90%
16.0x 80%
14.0x 70%
60%
12.0x
50%
10.0x
40%
8.0x Spain Germany UK Italy European Bank Switzerland BNPP & SG
Sector
May-99
Aug-99
Nov-99
May-00
Aug-00
Nov-00
May-01
Aug-01
Nov-01
May-02
Aug-02
Nov-02
May-03
Aug-03
Nov-03
May-04
Sep-04
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Sources: Datastream and Smith Barney analysis. Sources: Datastream and Smith Barney analysis.
From a 70% rating to a sector multiple

Five years ago, the leading French banks used to trade at a substantial discount to the
European bank sector. At the start of September 1999, both BNP Paribas and Societe
Generale traded on a P/E multiple below 11 times our 2000 earnings forecast. By
contrast, the European bank sector was trading at a two-year forward P/E of 15.1
times, leaving the two French banks trading at about 70% of the sector multiple.
In the twelve months after September 1999, both BNP and SG traded at a shade
below 80% of the sector multiple (see Figure 9). Over the following year, SG began
a re-rating phase that continued during 2001-02. The re-rating at BNP Paribas arrived
at a slower pace, but it too benefited from a narrowing valuation discount.
9
Since the events of 1999, SG shares have typically traded at a premium to BNP
Paribas. For most of the period from 2Q00 to 3Q04, SG shares have traded at a
two-year forward P/E multiple between 100% and 110% of the BNP Paribas multiple
(see Figure 7).
We estimate that SG shares have traded at an average 5% premium to BNP Paribas
over the past five years, similar to the current valuation and that recorded over the
past twelve months. While the valuation differential between SG and BNP is of
interest, an average 5% valuation premium it is not as noteworthy as the evolution of
both French banks from a 25% discount to a near sector multiple.
Figure 6. BNP Paribas and Societe Generale — P/E +2 YRS Figure 7. BNP Paribas and Societe Generale — Comparison of P/E
Relative to the European Bank Sector, Sep 1999-Sep 2004 +2 YRS Relative to the European Bank Sector, June 1999-Sep 2004
105% 130%
SG P/E vs BNPP P/E 5-year average

100%
120%
95%
90%
110%
85%
80%
100%
75%
70%
1999-2000 2000-01 2001-02 2002-03 2003-04 Sep-04 90%
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
BNPP PE rel SG PE rel
Source: Datastream and Smith Barney analysis. Source: Datastream and Smith Barney analysis.
Why did the French banks re-rate?

The French banks stock market rating held up over the past five years, while banks in
other large European markets suffered multiple compression, because five years ago
they announced and then subsequently implemented a clear strategy to boost their
profitability and reduce their volatility. The “big idea” in French banking was to
reallocate capital to retail banking and away from wholesale banking. French bankers
became zealous about retail banking in the late 1990s for a variety of reasons.
Firstly, the shocks of the Asian and Russian financial crises in 1997-1998 highlighted
their large capital commitment to international wholesale businesses that operated
across a range of products and geographies, often with only limited competitive
advantage. Secondly, the French banks had the benefit of a large and attractive
domestic retail market on their doorstep, where competition was tough, but often
focused on quality rather than pricing, and the non-quoted sector not as bloody
minded as in Germany. Thirdly, retail was in fashion in general in the bank sector,
with institutions such as Lloyds TSB blazing the trail in the mid-1990s with its
domestic, retail-focused consolidation.
In 1998, the three larger quoted French banks made a 3% pre-tax ROE in wholesale
banking, compared to a 20% pre-tax ROE in retail banking. However, it took the
events of 1999 to sharpen the focus on retail banking.
10
The 1999 French bank battle

1999 was a seminal year in modern French banking. A three-way bid battle engulfed
much of the quoted French bank sector. At the start of February, Societe Generale and
Paribas announced their intention to merge. This combination, dubbed SG Paribas,
would have created a quoted bank twice the size of its next largest rival, BNP.
However, barely had the felicitations been paid to Andre Levy-Lang and Daniel
Bouton, heads of Paribas and Societe Generale respectively, than their SG Paribas
merger proposal faced a counter-challenge. On 9 March, BNP, left in the cold by the
proposed SG Paribas combination, counter-attacked.
The rapier sharp Michel Pebereau led the BNP counter-proposal, ably supported by
the energetic Baudoin Prot and colleagues. BNP's counter move was a three-way
combination of the largest quoted French banks, a ‘mastodon’ dubbed SBP. After
many twists and turns, summarised in Figure 8, BNP succeeded in acquiring Paribas,
but SG eluded their grasp.
The three-way bid battle was an adrenalin shot for the French bank sector. In fact, it was
such a departure from the normal rhythms of French banking life that it even clashed
with the traditional summer holiday season, as BNP won control of Paribas in mid
August, while the regulators blocked the proposed SBP combination in late August.
Figure 8. French Bid Battle —1999 Chronology of Key Events
Feb-01 Announcement of SG-Paribas

Mar-09 BNP launches the SBP counter-offer
Aug-06 Deadline for tender Paribas and SG shares to BNP
Aug-14 Announcement that BNP takes control of Paribas
Aug-27 "negotiations" with the Bank of France on SG shares held by BNP
Aug-28 The execution of SBP is not allowed by the CECEI
Sep-01 Integration Committee of BNP Paribas is formed
Sep-20 Synergies and development objectives are set
Source: Company reports.
The retail banking holy grail

As well as making leading French bankers postpone their trips to the beach, the 1999
bid battle helped crystallise strategic shifts already underway in French banking. The
mantra of all senior management at French banks was “more capital for retail, less
for wholesale, higher ROEs” (see Figure 9 to Figure 11).
There were variations on this theme, but they were no more than variations. Thus, the
SG Paribas plan, as revised in March 1999, and the SBP plan that triggered the three-
way bid battle, both envisaged close to a 50% increase in capital allocated to retail
banking within a period of three-to-four years.
The SG Paribas merger plan, as originally proposed in February 1999, envisaged
total retail and specialised financial services allocated capital increasing from 32 pct
pro forma in 1998 to 36 pct in 2001E of the group total, with wholesale banking
capital allocated declining from 46 pct to 40 pct. These were relatively modest
changes.
11
The capital allocation plans became bolder as the bid battle unfolded. The SG
Paribas plan was subsequently revised, in March 1999, so that the capital to be
allocated to retail increased to 45 pct, while wholesale declined to 32 pct. The
catalyst for the increased retail focus was the SBP counter-proposal.
Under the SBP plan, released in March 1999, capital allocated to retail would
increase from 42 pct (1998 pro forma) to 53 pct (2002), while wholesale would
decline from 55 pct to 42 pct. The growth in retail capital allocation under the SBP
Plan was primarily focused on retail banking outside France and specialised financial
services.
Figure 9. SG Paribas — Equity Allocation and Post-tax Return on Equity, 1998 and 2001E (Euros in Billions and Percentages)
1998 Pro forma 2001 Forecast (Feb 1999) 2001 Forecast (March 1999)
Allocated Allocated Allocated

equity % of Total ROE % Equity % of Total ROE % Equity % of Total ROE %
Total Retail 5.8 32% 16% 6.7 36% 16% 8.5 45% 17%
Retail Banking 3.9 21% 15% 4.5 24% 16% 5.3 28% 16%
Financial Services 1.9 10% 17% 2.2 12% 18% 3.2 17% 18%
Asset Management 1.3 7% 28% 1.9 10% 33% 2.4 13% 28%
Investment & Corporate Banking 8.3 46% 0% 7.3 40% 13% 6.1 32% 16%
Investment Banking 2.7 15% NM 2.1 11% 15% 2.2 12% 22%
Corporate Banking 5.6 31% NM 5.2 28% 12% 3.9 21% 13%
Portfolio 2.8 15% 41% 2.5 14% 24% 1.8 10% 23%
Proprietary Investment 2.1 12% 53% 1.9 10% 28% 1.6 9% 25%
Real Estate 0.7 4% 7% 0.6 3% 11% 0.2 1% 11%
TOTAL 18.2 11% 18.4 18% 18.8 18%
Figure 10. SBP — Equity Allocation and Pre-tax Return on Equity, 1998 and 2001E (Euros in Billions and Percentages)
1998 Pro forma 2002 Forecast (March 1999)
Allocated Equity % of Total Pre-tax ROE Allocated Equity % of Total Pre-tax ROE
Total Retail 10.9 42% 24% 15.9 53% 34%

Retail Banking (France) 7.5 29% 21% 9.2 31% 28%
Retail Banking (Outside France) 0.8 3% 30% 2.9 10% 53%
Specialized Banking Services 2.6 10% 29% 3.8 13% 33%
Corporate and Investment Banking 14.2 55% 3% 12.5 42% 19%
Private Banking and Asset Management 1.0 4% 56% 1.7 6% 60%
TOTAL 26.0 14% 30.1 29%
Figure 11. BNP Paribas — Equity Allocation and Pre-tax Return on Equity, 1998 and 2001E (Euros in Billions and Percentages)
1998 Pro forma 2002 Forecast (March 1999)
Allocated Equity % of Total Pre-tax ROE Allocated Equity % of Total Pre-tax ROE
Total Retail 6.6 33% 20% 9.7 44% 27%

Domestic Retail 3.7 18% 16% 4.5 20% 23%
International Retail 0.9 4% 28% 2.1 9% 35%
Specialized Financial Services 2.0 10% 23% 3.1 14% 27%
Corporate & Investment 9.2 45% 4% 8.1 36% 21%
Asset Mgt, Priv Banking & Insur + Real Estate 2.3 11% 20% 3.1 14% 29%
Paribas Capital 2.2 11% 35% 1.4 6% 25%
TOTAL 20.3 100% 14% 22.2 100% 25%
12
Continuity of management and ideas

Of course, as we know with hindsight, the retail focused vision and management
competence of the BNP team won greater investor support in 1999, but the SBP plan
failed to get off the ground. In an ironic twist, the eventual BNP Paribas combination
looked an awful lot more similar to the revised SG Paribas business plan, at least in
capital allocation terms, than to the SBP proposal.
SBP lost . . . and then won

But the strategy of “grow retail, shrink wholesale” was firmly embedded as a
strategic shibboleth of French banking. The evolution of French banks' capital
allocation decisions during 1999-2004 followed the route map laid out in the
business plans of 1999. Retail capital allocation increased — at BNP Paribas, from
33 percent pro forma in 1998 to 50 percent in 2002 (of capital allocated to divisions)
compared to the original BNP Paribas business plan of 44 percent retail capital
allocation and the SBP plan of 53% retail, as set out in Figure 12 to Figure 15.
Thus, even though the SBP proposal was not implemented as envisaged by Michel
Pebereau and his colleagues, in practice the ideas behind the SBP business plan came
to fruition as the capital allocation at BNP Paribas looked closer to the original SBP
rather than BNPP plan. In fact, the capital reduction achieved at BNP Paribas
between 1998 and 2002 (-28% in absolute terms, pro forma) were more than twice as
aggressive as targeted in the original SBP and BNPP plans.
Figure 12. BNP Paribas — Capital Allocation, 1998 Figure 13. BNP Paribas — Capital Allocation, 2002
Other Other
22% 15%
Retail
33%
Retail
50%
CIB
35%
CIB
45%
Source: Company reports and Smith Barney estimates. Source: Company reports and Smith Barney estimates.
Figure 14. SBP — Divisional Capital Allocation Target for 2002, Figure 15. BNP Paribas — Divisional Capital Allocation Target for
(Percentages) 2002, (Percentages)
Other Other
6% 20%
Retail
44%
CIB Retail
42% 52%
CIB
36%
13
What’s the next big idea?

The big idea that drove the French bank sector after 1999 was the reallocation of
capital from wholesale to retail banking. However, the success of the managements
at pursuing this goal meant that the process of capital reallocation was largely
complete by 2002. In fact, the relative share of retail and wholesale banking capital
allocated at BNP Paribas has been largely stable since 2002, excluding capital not
allocated to divisions, while the process of capital reallocation to retail from
wholesale has slowed considerably at SG.
BNP Paribas and SG are now victims of their own success, as having delivered on
their “big idea” of five years ago, they do not seem to have a new one at hand. True,
they have a lot of plans for growth, be it growing in international retail networks or
specialised finance, or continuing to strive to improve cross-sells and productivity in
domestic retail. However, none of this amounts to anywhere near as revolutionary as
the “big idea” in French banking in 1999 and subsequent years.
In fact, at the most recent investor day held by SG in Paris on 27 September, the
senior management of SG repeated the mantra of reallocating capital from wholesale
to retail, in particular specialised financial services. While the investor day included
interesting material on the bank’s activities in securities services, structured product
asset management (Lyxor) and equity derivatives, the underlying vision appeared to
remain the same. Unfortunately, what was new and exciting in 1999, looks less so
five years later.
In a European context, French banks’ management and strategies, particularly at
BNP Paribas and SG appear very stable. The same senior executives run these banks
today as five years ago, with only a few changes, such as Michel Pebereau’s
elevation to a Chairman role. By contrast, if we look at other retail-focused banks in
Europe, such as in the UK, Spain and the Nordic region, there has been considerable
change of senior management. For instance, all the large UK and Spanish banks have
different CEOs today compared to 1999, as do several of the Nordics.
Attractive for value investors

While investors looking for a ‘big idea’ may be disappointed, those happy with well
managed franchises, progressively improving efficiency ratios, low credit losses and
mid-teens underlying ROEs should find plenty to interest them in the French banks.
With both BNP Paribas and SG trading at 1.5-1.6x 2004E book value per share, both
banks look attractive from a value perspective. Given the similarity in profitability
outlook, we find the valuation at BNP Paribas slightly more attractive than SG.
Both BNP Paribas and SG have experienced a similar evolution in profitability over
the past decade, from single-digit underlying ROEs in the second half of the 1990s,
rising to double-digits only in 1999 and beyond. Since the recent trough year of
2002, when the banks’ results were burdened by high credit losses and weak
revenues, underlying ROEs have marched up from about 12% to a forecast 16% in
2004E-05E (see Figure 16). Over this period, which has included periods of external
turbulence, both banks have successfully managed to improve their cost income
ratios, with only one year of deteriorating cost/income ratios —2001 for SG, 2002
for BNP Paribas — which we believe is a considerable achievement.
14
Figure 16. BNP Paribas and SG — Underlying ROEs, 1997-2005E Figure 17. BNP Paribas and SG — Cost/Income, 1997-2005E
18% 78%
16% 74%
14% 70%
12% 66%
10% 62%
8% 58%
BNPP SG 6%
BNPP SG 54%
4% 50%
1997 1998 1999 2000 2001 2002 2003 2004E 2005E 1997 1998 1999 2000 2001 2002 2003 2004E 2005E
Valuing BNP Paribas and SG

Our forecast underlying ROEs for BNP Paribas and SG are a key driver of our
valuation for these shares. We use a normalised ROE that makes two modifications
to our forecasts — firstly, we exclude items such as capital gains and goodwill;
secondly, we adjust current levels of loan losses, using the average loss ratio over
2000-04E (loss ratio of c55bp for both banks).
Using the more conservative possible assumptions, we can justify a valuation of
€60 per share for BNP Paribas and €78 for SG.
Figure 18. BNP Paribas — Sustainable ROEs and Key Valuation Inputs
As Forecast As Forecast Static Model Growth-Adjusted Model

2005E 2005E 2005E 2005E
ROE 16.3% 16.3% 15.3% 15.3%
COE 9.0% 9.0% 9.0% 9.0%
G 0.0% 2.5% 0.0% 2.5%
BVPS 04E 34.8 34.8 34.8 34.8
Target BVPS Multiple 1.81 2.13 1.70 1.97
Target Price 2004 63.1 74.0 59.2 68.5
Target Price 2005 69.6 81.6 65.2 75.6
Source: Smith Barney analysis
Figure 19. SG — Sustainable ROEs and Key Valuation Inputs

2005E 2005E 2005E 2005E
ROE 16.9% 16.6% 15.5% 15.5%
COE 9.0% 9.0% 9.0% 9.0%
G 0.0% 2.5% 0.0% 2.5%
BVPS 04E 45.3 45.3 45.3 45.3
Target BVPS Multiple 1.87 2.17 1.72 2.00
Target Price 2004 84.9 98.2 78.0 90.6
Target Price 2005 92.9 107.5 85.4 99.2
Source: Smith Barney analysis
15
Differing perceptions of risk

In many respects, as we discuss in the rest of this report, BNP Paribas and Societe
Generale are quite similar banks, and this has been recognised in their relatively
similar re-rating compared to the sector since mid-1999. A re-rating that was
accorded as they both successfully refocused their strategies towards retail banking
since the late 1990s and away from wholesale banking.
Other similarities include financial — consensus estimates forecast 19% 2004E ROE
for both banks — and franchise — both their domestic French retail banking
franchises are focused on typically upscale and urban clients, and they both have
international retail and corporate networks.
However, differences also exist. BNP Paribas has chosen to develop its international
retail banking franchise in the United States, primarily in the western states. By
contrast, SG has expanded in emerging Europe and the Mediterranean region. In
wholesale banking, BNP Paribas has greater exposure to fixed income and
commercial banking, whereas SG has a bias towards equity derivatives.
SG a riskier stock compared to the old BNP

The stock market generalisation has been to consider BNP Paribas a more ‘defensive’
bank stock compared to SG, as reflected in the evolution of their shares (see Figure
20). This was particularly true before the combination of BNP and Paribas in 1999,
which in our view reduced the risk differential between BNP and SG.
➤ In the recovery phase from the early 1990s economic downturn, SG shares
outperformed BNP by 50% between March 1995 and August 1996
➤ By contrast, as the Asian and Russian financial crises sent shock waves around
the world, SG shares underperformed BNP by 35% over the year following
October 1997
➤ The relative performance of SG vs BNP reached a trough in early March 1999,
due to a relative negative investor reaction to the proposed SG Paribas
combination, and then rebounded when BNP counter-bid for SG and Paribas
Figure 20. SG share price versus BNP Paribas share price, 1994-2004 (1994 Indexed to 100)
150%
140%
130%
120%
110%
100%
90%
80%
70%
60%
14/09/94 14/09/95 14/09/96 14/09/97 14/09/98 14/09/99 14/09/00 14/09/01 14/09/02 14/09/03 14/09/04
16
SG shares remain riskier though relative volatility has declined

There was greater variance between the performance of SG and (old) BNP shares in
the five years between 1994 and 1999 compared to the last five years up to
September 2004, as set out in Figure 20 above.
The trough-to-peak relative out-performance of SG shares versus BNP was 50%
from March 1995 to August 1996. This was followed by a relative under-
performance by SG versus BNP of about 45% from October 1997 to March 1999,
due to the shocks from the Asian and Russian financial crises and the negative
investor reaction to the proposed SG Paribas combination.
By contrast, since the announcement in August 1999, that BNP was taking control of
Paribas, the share prices of SG and BNP Paribas have traded in a range of about 30
percent. However, even if the scale of relative performance volatility has narrowed,
SG shares continue to typically outperform in a bullish environment for bank stocks
and vice-versa.
As set out in Figure 21, the European bank sector rallies in both 2000 and 2003 were
both accompanied by SG shares outperforming BNP Paribas, while the reverse
occurred during the sector decline during 2001 to mid 2002. This relationship has
only been disrupted by acquisition event risk, as in late 2002 when BNP Paribas
shares were dragged down by fears of a bid for Credit Lyonnais.
Figure 21. SG versus BNP Paribas share price and European Bank Sector, 1999-2004 (1999 Indexed to 100)
160%
140%
120%
100%
80%
SG vs BNPP
60%
European Bank Sector
40%
06/01/1999 06/01/2000 06/01/2001 06/01/2002 06/01/2003 06/01/2004
An interesting timing variation of this theme of SG performance correlation to

broader sector (and market) performance is the evidence in both 2000 and 2001 of a
time lag of a month between the sector starting to outperform/underperform and SG
shares outperforming/underperfoming BNP Paribas.
In 2003, the time lag between the sector rallying and SG outperforming was a longer
three months, but this may have been distorted by the unwinding of the material
acquisition risk discount priced into BNP Paribas shares.
17
Retail Banking — Home and Away

➤ French retail banking is an attractive market, but it has cash cow
rather than growth characteristics
➤ SG has historically been more profitable and a faster grower, but

BNP Paribas has now closed the gap
➤ BNP Paribas has a more focused international retail network and

specialised finance operation
Retail banking overview

Retail banking is the largest business area for both BNP Paribas and SG, with the
latter more heavily weighted in this area, as set out in Figure 22 and Figure 23. We
expect retail banking to account for over 40% of 2004E group pre-tax profits at BNP
Paribas, compared to about 30% of corporate and investment banking. By contrast,
retail banking is expected to account for close to 60% of 2004E group pre-tax profits
at SG. If we focus on the French retail networks alone, SG is considerably more
exposed (31% of 2004E profits) compared to BNP Paribas (19%, 2004E). The asset
management divisions of both banks are expected to contribute another 12-13% of
group revenues.
Figure 22. BNP Paribas — Retail Banking as a % of total profits, Figure 23. SG — Retail Banking as a % of total profits, 2004E
2004E (Percentages) (Percentages)
French Retail
19% Other French Retail
31% 31%
Other
46%
International
Retail & International
Financial Asset Retail &
Asset Services Management Financial
Management 22% 12% Services
13% 26%
Sources: Company reports and Smith Barney estimates. Sources: Company reports and Smith Barney estimates.
Attractive features of retail banking in France . . .

BNP Paribas and SG have similar franchises in French retail banking. Both banks are
focused on urban, affluent clients and are overweight in the Paris region. French
retail banking is also relatively profitable, with BNP Paribas and SG in the upper half
of their continental European peer group for retail banking profitability.
For much of the past several years, SG has had a higher revenue-to-RWAs ratio
compared to BNP Paribas, but this has been narrowing, while the SG advantage in
profits-to-RWAs has almost disappeared. Part of this convergence in profitability
reflects a convergence in business mix, as BNP Paribas has shifted away from its
previously higher weighting in SME versus household clients. In addition, the most
recent reported results (2Q04) indicate several segments, such as mortgage lending,
where BNP Paribas is now growing faster, and its SME shrinkage has now reversed.
18
The non-quoted sector is an important participant in French retail banking,

particularly for customer deposits and household loans. While their customer profile
is less attractive, with typically less affluent clients outside the larger cities, they are
successful retail networks boasting some of the highest cross-selling ratios in Europe.
As both quoted and non-quoted banks have managed to developed multiple-product
relationships, single product pricing or offers appears not be a primary driver, as
expensively discovered by Egg.
. . . but with limited revenue growth potential

While the French retail banking market has many attractive features, it is also a
relatively mature product. When both BNP Paribas and SG have claimed to sell more
than seven products per average customer, it is hard to argue that there is that much
more cross-selling to be achieved. With interest rates low, household borrowing is
growing at a double-digit rate (+19%, BNP Paribas, 2Q04 versus 2Q03; +15%, SG).
However, French retail banks typically earn two-third of their net interest income on
the liability side, due to zero-cost current accounts and relatively narrow mortgage
spreads.
Over the long term, French retail banking revenues should be expected to track
nominal GDP evolution, and thus revenue growth much beyond the 4% year-on-year
increases reported by both BNP Paribas and SG in 2Q04 is unrealistic. In a rising
rate environment over the next few years, some of the pressure of currently low
interest rates may ease, but the French banks’ medium-term ALM strategies typically
smooth the full impact of rate fluctuations and thus a material pickup in margins is
unlikely.
Chasing retail growth overseas and in specialised finance

If the retail networks in France increasingly assume cash cow characteristics, the
strategy of the French banks is to focus on retail banking overseas and specialised
finance as the growth drivers. Within its retail franchise, BNP Paribas has a greater
exposure to overseas networks and specialised finance than to French retail banking,
while the reverse is true for SG.
The international retail network at BNP Paribas appears to have greater focus, with
about BancWest accounting for about 80% of these operations. BancWest operates in
the western states of the US. BNP Paribas also has a smaller exposure to other
overseas and emerging markets. Similarly, BNP Paribas also has a large consumer
credit operation in Cetelem, a market leader in France and several other European
countries.
By contrast, the SG overseas retail presence is much more fragmentary. SG’s
international retail network includes a strong presence in the Czech and Slovak
markets (about 40 percent of its overseas retail activities), as well as Romania,
Bulgaria, Greece, North Africa and the overseas French territories. Similarly, the
specialised finance operations at SG are also spread over a greater number of
operating subsidiaries, and their presence in consumer credit appears smaller.
However, SG has been investing more than BNP Paribas, and we expect the capital it
allocates to these businesses by end 2004 to be more than double the level of 1999
and its profits to have increased almost three times. By contrast, we expect a ‘mere’
doubling in similar profits at BNP Paribas.
19
Overview of French Banking Market

Market segmentation by product type
The French banking market is split between commercial banks and mutual and
co-operative banks. The relative weight of the different sub-sectors varies by type of
business, as set out from Figure 24 to Figure 27.
Thus, the commercial banks (BNP Paribas, Societe Generale, Credit Lyonnais)
accounted for close to 60% of total sector assets, 45% of customer loans and near
40% of customer deposits, but only 32% of home loans.
By contrast, the mutual and co-operative banks account for close to 60% of the
market in deposits and mortgages, but a much lower share of total assets and loans,
reflecting their broader presence in the retail market.
Figure 24. Total Assets — by Legal Category of Bank, 2003 Figure 25. Customer Deposits — by Legal Category of Bank, 2003
Mutual and
Specialised financial cooperative banks
Finance companies institutions (Credit Agricole,
14.54% 1.33% Credit Mutuel)
57.50%
Mutual and
cooperative banks Commercial Banks
(Credit Agricole, Commercial Banks (SG, BNPP, CL)
Credit Mutuel) (SG, BNPP, CL) Finance companies
41.31%
26.40% 57.68% 1.08%
Figure 26. Customer Loans — by Legal Category of Bank, 2003 Figure 27. Home Loans — by Legal Category of Bank, 2003
Commercial Banks Mutual and Mutual and

(SG, BNPP, CL) cooperative banks Cooperative banks
45.23% (CASA, Credit Mutuel) (CASA, Credit Mutuel)
40.93% 56.10%
Specialised financial
institutions Finance companies Commercial Banks
2.02% 11.70% (SG, BNPP, CL) Specialised financial Finance companies
32.14% institutions 10.64%
1.10%
Sources: European Bank Health Barometer and Smith Barney.
Market segmentation by demographic and regional characteristics

There are some unsurprising features when we compare the retail client franchises of
the quoted versus non-quoted banks in France — the former institutions are
overweight among professionals and have a strong presence in the Paris region,
where as the opposite applies to the latter institutions (see Figure 34 and Figure 35).
In addition, SG data indicates a younger client base (see Figure 30)
However, it would be incorrect to assume that the commercial banks are savvy
retailers whereas the mutual and co-operative banks are dull plodders. In fact, as we
discuss below, some of the latter have successful retail operations as highlighted by
their impressive cross-sell ratios.
20
Figure 28. Socioeconomic Profile of Customer Base

100
90 27
31 30 30 30
80 35 38 33
44
70 Non-workers
60 15 19 Workers, farmers
15 29 27 31
16 30
50 17 Employees, craftsmen
40 24 14 17
17 17 14 Middle executives
30 17 15
23 16 16 Executives, managers
15 13
20 14 17 12 14 12
10 16 13 17 16 13 11 11 11 8
0
d'Épargne
Crédit Mutuel
Générale
Lyonnais
Populaires
CIC
La Poste
Agricole
BNP Paribas
Société
Banques
Crédit
Crédit
Caisse
Note: May not add to 100% due to rounding.
Figure 29. Geographic Profile of Customer Base (Percent of Total for Each Bank)
Banques BNP Caisse Crédit Crédit Crédit Société
Populaires Paribas D'Épargne CIC Agricole Lyonnais Mutuel La Poste Générale
Region Parisienne 14 37 15 24 11 40 5 19 35
Nord 2 4 9 15 4 5 12 6 4
Est 12 5 9 11 8 3 23 7 6
Bassin Parisien Est 9 7 7 14 11 7 5 7 6
Bassin Parisien Ouest 10 8 10 8 11 9 6 11 12
Ouest 9 8 11 11 16 9 34 11 6
Sud-Ouest 17 11 15 2 13 6 5 13 8
Sud-Est 14 8 12 12 16 9 6 13 7
Mediterranee 13 12 13 5 11 13 4 14 16
Note: May not add to 100% due to rounding. SG has disclosed a c15% market share in the Paris region vs c10% nationally.
Figure 30. SG — French Retail Banking Client Age Pyramid (Percentages)
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
18-20 21-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 >80
SG French Bank average
Sources: SG 2002 Investor Day and Smith Barney estimates.
21
Profitable retail banking franchises

The quoted French banks have profitable retail banking franchises. Societe Generale
leads the way, as measured by revenues and pre-tax profits relative to risk-weighted
assets or allocated capital.
Both SG and BNP Paribas are among the more profitable retail banks in Continental
Europe, with the usual caveat of the vagaries of comparing segmental accounts (see
Figure 31 and Figure 32).
Figure 31. European Banks — Revenues/RWAs, 2004E Figure 32. European Banks — Pre-tax Profits/RWAs, 2004E
12.0% 4.0%
3.5%
10.0%
3.0%
8.0%
2.5%
6.0% 2.0%
1.5%
4.0%
1.0%
2.0%
0.5%
0.0% 0.0%
B
PP
DB
i to
S
VA
SG
PP
o
S
SG
A
DB
a
s
es
an
PO
HV
UB
dit
SA
an
iss
es
PO
UB
HV
V
SA
uis
ed
BN
BB
BN
BB
Int
zb
Int
zb
re
Su
icr
it S
er
ic
er
Un
it
Un
m
m
ed
ed
m
m
Cr
Cr
Co
Co
Source: Smith Barney estimates. Source: Smith Barney estimates.
BNP Paribas closing the gap with SG on French retail profitability

Over the five years between 1999 and 2003, BNP Paribas has narrowed the revenue
and profit gap to SG, as measured relative to RWAs (see Figure 33 and Figure 34).
In 2000-01, SG had a revenue/RWA ratio more than two percentage points higher
than BNP Paribas, which narrowed to one percentage point by 2003-04E.
The profits gap between was at its widest in 2001, when SG had a pre-tax
profit/RWA ratio of 60 basis points higher than BNP Paribas. This gap narrowed to
20 basis points in 2003, and should narrow further in 2004E.
Figure 33. BNP Paribas and Societe Generale — Revenues to Figure 34 BNP Paribas and Societe Generale — Pre-tax Profits to
RWAs, 1999-2004E (Percentages) RWAs, 1999-2004E (Percentages)
8.0% 2.0%
7.5% 1.8%
1.6%
7.0%
1.4%
6.5% 1.2%
6.0% 1.0%
5.5% 0.8%
0.6%
5.0%
0.4%
4.5% 0.2%
4.0% 0.0%
1999 2000 2001 2002 2003 2004E 1999 2000 2001 2002 2003 2004E
BNPP Revenues/RWAs SG Revenues/RWAs BNPP Pre-Tax Profits/RWAs SG Pre-tax Profits/RWAs
22
SG has a higher return in French retail, but is it still the star?

SG and BNP Paribas have broadly similar franchises in French retail banking —
nationwide networks overweight in urban and more affluent segments — and they
have more in common with each other and Credit Lyonnais than say compared to the
retail networks of the Caisse Regionales at Credit Agricole or the rest of the mutual
or co-operative sector. So given the franchise similarities, why does SG have higher
revenue and profit returns in its French retail division compared to BNP Paribas?
Faster long-term revenue growth at SG, but profit growth catches up at BNP Paribas
Partisans of SG would argue that the bank’s higher return in French retail banking
reflects a more dynamic network, and this has been an oft-mentioned comment and
justified by the fact that SG’s French retail revenues have increased faster than BNP
Paribas since 1999. Between 1999 and 2004E, we estimate that revenue growth in
the SG French retail network will be almost 50% faster (see Figure 35).
However, we would note that despite SG’s revenue out-performance, profit growth
has been similar at both banks, with actually BNP Paribas running ahead since 2001.
The growth in profits at BNP Paribas, combined with its reallocation of capital away
from French retail banking in the past few years, associated with a deliberate
decision to reduce its SME exposure, has led to a substantial improvement in its
revenue and profit ratios. By contrast, SG’s higher revenues and profit ratios have
failed to increase since 2001.
Figure 35. BNP Paribas and SG French Retail Banking — Changes in Revenues, Profits, Capital and
Revenues/Equity and Pre-tax ROE, 1999-2004E (Percentages)
2004E vs 1999 2004E vs 2001
BNPP SG BNPP SG
Revenues 21% 30% 11% 13%

Pre-tax Profits 60% 59% 19% 14%
Capital Allocated 7% 29% -8% 17%
Revenues/Equity (% Chg) 21% 1% 11% -3%
Pretax ROE (% Chg) 50% 24% 29% -2%
Sources: Company reports and Smith Barney analysis.
BNP Paribas grew faster in last reported quarter in household lending, SME now picking up
The story of BNP Paribas playing catch up with SG in French retail banking appears
to have flipped over into BNP Paribas running ahead in certain segments in the most
recent quarterly result (see Figure 36). For example, total lending to individuals
(+16% year-on-year) and mortgage lending (+19%) were both faster at BNP Paribas
than at SG.
Total new individual current and deposit accounts at BNP Paribas increased by close
to 64,000 during 1H04, whereas the disclosed current account growth at SG was
49,000. Definitions on customers and accounts may vary, but the faster mortgage
lending growth at BNP Paribas is likely to translate into improved current account
growth given the inter-linkage in these products.
In addition, while corporate volumes declined year-on-year in the French retail
network of BNP Paribas, this process of shrinkage appears to have reached a trough
in 1Q04 with SME lending volumes increasing close to 3% during 2Q04.
23
Figure 36. BNP Paribas and SG French Retail Banking — Balances and Changes in Customer Volumes,
2Q04 versus 2Q03 (Euros in Billions and Percentages)
BNPP SG
Balance, end 2Q04 (E Bn) YoY change Balance, end 2Q04 (E Bn) YoY change
Total Lending, Individuals 36.4 16.3% 46.9 12.7%
Mortgage Lending 30.0 19.2% 38.3 14.5%
Corporates 35.3 -3.1% 43.0 1.4%
Deposits, Savings 73.6 7.3% 75.7 5.0%
Life Insurance 38.2 11.9% 43.8 16.9%
Mutual Funds 59.1 4.5% 43.5 5.9%
New Clients, 1H04 63,800 49,000
Differences in reporting and business mix in French retail — (1) SMEs vs Households
SG has historically had a greater weighting of household clients in its French retail
network compared to BNP Paribas, with the latter typically overweight in the SME
segment. Note that the French retail networks also include some large corporate
clients that require local servicing by the branch networks. A proxy for measuring
this relative difference and also the increasing convergence in client mix is to analyse
trends in their respective loan portfolios.
At end 2Q04, the French retail network loan portfolio at BNP Paribas was split
51%:49% between household and corporate clients, compared to a 46%:54% split
the year earlier (see Figure 37). Thus, there has been a substantial portfolio shift, and
the higher returns available in French individual banking compared to SME banking
has helped support the recent improvement in revenue and profit ratios.
Figure 37. BNP Paribas and SG — Composition and Change in French Retail Loan Portfolios, 2Q03-2Q04
(Euros in Billions and Percentages)
BNPP SG
Balances (E Bn) % of Total Balances (E Bn) % of Total
2Q04
Households 36.4 51% 46.9 52%
Corporates 35.3 49% 43.0 48%
Households vs Corporates 1.1 2% 3.9 4%
2Q03
Households 31.3 46% 41.6 50%
Corporates 36.4 54% 42.4 50%
Households vs Corporates -5.1 -8% -0.8 -1%
Differences in reporting and business mix in French retail — (2) Credit du Nord
Another reporting difference in the French retail networks is the effect of the Credit
du Nord network (80% owned by SG). The French retail division of SG includes
100% of the Credit du Nord revenues and pre-tax profits, but the equity calculation is
after the deduction of minority interests. We estimate that adjusting for this
consolidation effect would reduce by one percentage point the differential in the
2003 French retail pre-tax ROE between SG (31%) and BNP Paribas (28%). The
remaining two percentage-point differential can probably be accounted for by the
greater difference in business mix in 2003 between the banks. Thus, it is hard to
argue that one bank is currently intrinsically more profitable than the other.
24
High cross-sell levels in French retail banking

French retail banks have high cross-sell levels and this helps support their relatively
high revenue and profit levels. The French banks report cross-sell numbers of 7-8
products per customer in their domestic retail networks, which appear at first glance
to be very high (see Figure 38 and Figure 39).
BNP Paribas discloses that its total average number of products per current account
increased from 6.1 in 1998 to 7.3 in 2002. However, there has been no subsequent
disclosure of this metric, and we assume a side-ways trend between 2002 and 2004 is
likely to have occurred.
SG has disclosed a longer time series for its French retail network (excluding Credit
du Nord), with products per current account increasing from 5.2 in 1995 to 6.0 in
1998 and 7.3 in 2002. The evolution of production penetration at the SG network is
very similar to that at BNP Paribas during 1998-2002.
Figure 38. BNP Paribas — French Retail Network Product Figure 39. Societe Generale — SG French Retail Product
Penetration, 1998-2002 Penetration, 1998-2003
7.1 7.3 7.3 7.6

6.9
6.7 6.6 6.6 1.0
6.3 1.0
6.1 6.0 1.0
5.5 5.7 1.0 1.0
5.2 1.0 1.0
1.0 1.0
1.0 1.0
1.0 1.0 1.0 1.5
1.0 1.0 0.9 1.4
0.9 0.9 0.9 0.9 1.4
0.8 1.3 0.7
0.8 1.2 1.2 1.3 0.7
1.3
1.2 1.2 1.2 1.3 0.7 0.7
1.2 1.1 0.6
0.6
0.6 0.6
0.7 2.8 3
2.6 2.8 2.2 2.4
2.2 2.1 1.8 2.0
1.8 1.4 1.6
1.3
0.4 0.4 0.4 0.4 0.4 0.3 0.4 0.3 0.4 0.4 0.4 0.4 0.4 0.4
1998 2000 2000 2001 2002 1995 1996 1997 1998 1999 2000 2001 2002 2003
Half-Year Half-Year Half-Year
Loans Banking Services
Loans Banking Services Life Insurance Management Special Savings Accounts
Individual cheque and deposit accounts Bank Cards Bank Cards Current Accounts
Total average number of products per current account Total average number of products per current account
Competing on banking services

Over the past five years, the growth in French retail product penetration at BNP
Paribas and SG has been largely driven by growth in “banking services” which
increased at both banks from 1.8 to 2.9 during 1998 to 2002. At SG, “banking
services” is defined as including overdraft facilities, bank card insurance and direct
banking channels.
The French banks appear to have had a remarkable success in selling “services” to
their customers, and they clearly must be delivering some value for money for these
penetration rates to continue to increase. The importance of competing on service
quality is an important feature in French retail banking and prevents some of the
more aggressive restructuring seen elsewhere in Europe. In fact, 3% cost growth
appears to be a mean for this segment (see Figure 40).
Figure 40. BNP Paribas and Societe Generale — French Retail Cost Growth, 2000-04E (Percentages)
2000 2001 2002 2003 2004E 2Q04 vs 2Q03
BNP Paribas 1% 1% 3% 3% 3% 3%
SG 5% 4% 3% 3% 4% 4%
Sources: Company reports and Smith Barney estimates.
25
French retail banking cross-selling in a European context

While the data provided by the French banks on retail cross sales and product
penetration levels is interesting, the problem with data supplied by banks is that they
are typically not calculated on a consistent basis. This is particularly true on a cross-
border basis. Therefore, it may be useful to refer to the pan-European retail banking
survey conducted by Taylor Nelson Soffres in 2002, whose results were included in
our previous published research1.
The TNS study was done on a standardised basis across the key European markets
and used simplified product categories that may differ from those used by the
individual banks in their internal analysis. However, the conclusions on cross selling
in French retail banking derived from this study partly reinforce the general points
made by the data disclosed by BNP Paribas and SG.
As set out in Figure 41, French banks are among the most successful quoted banks at
cross selling in the European sector. With an average of 3.3 products per customer
compared to a European average of 2.6, and French banks have only the Nordic and
Belgians for company. A shared feature of the French, Belgian and Nordic markets
are banks that have made a strategic priority of retail banking in the past several
years, and also specifically have expanded relatively successfully into bancassurance.
Banks with lower cross-sell levels are typically to be found in markets that have been
historically been fragmented between silo-based providers of financial services
products (such as the UK) or fragmented between different ownership and financial
models (such as in Germany).
Figure 41. Actual and Potential Cross-Selling — TNS Survey, 2002
1.4
1.2 Dexia
Number of Potential Products per Customer
1.0 KBC
0.8
Fortis
0.6
HypoVereinsbank
0.4 Commerzbank Den norske Bank BNP Paribas
HSBC Allied Irish Banks
Barclays Bank of Ireland Societe Generale Credit Agricole
RBOS HBOS Nordea
ForeningsSparbanken
Abbey National ING Group Danske Bank
Deutsche Bank Credit Lyonnais
SCH Lloyds TSB SEB Handelsbanken
0.2 Sanpaolo IMI BNL
BBVA ABN AMRO
Banca di Roma Unicredito
Monte dei Paschi di Siena
Intesa BCI
0.0
2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8
Number of Actual Products per Customer
1
The findings of this survey are included in our report, The Hunt for Revenue Growth, September 2002.
26
Mutual and co-operative banks are no push-overs

As noted previously, the commercial banks (BNP Paribas, Societe Generale and
Credit Lyonnais) have a dominant presence in the more attractive market segments,
such as among the managerial and professional classes and in the Paris region.
However, the mutual and co-operative institutions, despite less attractive customer
demographics, run successful retail operations, particularly as measured by their high
product penetration within their customer base (see Figure 42 and Figure 43).
In fact, in the survey conducted by TNS, the leading institutions for cross sales in
French retail banking were the likes of Credit Mutuel and Banques Populaires. By
contrast, the commercial banks, BNP Paribas, Societe Generale and Credit Lyonnais,
were merely in-line with the French sector average, while not surprisingly La Poste
brought up the rear.
It is worth highlighting that Credit Mutuel and Banques Populaires are among the
most successful banks in Europe in retail cross selling. Furthermore, it is interesting
to note that the mutual and co-operative institutions appear to be as successful as the
commercial banks in selling sophisticated products such as mortgages and long-term
savings.
Of course, some institutional specific factors are evident, such as the unsurprisingly
high deposit cross-sell ratio of Caisse d’Epargne, and also the low product
penetration of La Poste, though this may change depending on the outcome of
current product extension proposals that may take effect in 2005 and beyond.
Figure 42. French Retail Banking Product Cross-Sell, Actual — TNS Survey, 2002
Current Consumer Long-Term Direct
Account Deposit Mortgage Credit Card Loan Savings Investments Protection None Don't Know Average
Credit Mutuel 100% 70% 24% 70% 14% 48% 16% 29% 4% 1% 3.7
Banques Populaires 100% 58% 25% 72% 18% 49% 26% 11% 8% 0% 3.6
CIC 100% 61% 20% 74% 18% 42% 21% 14% 8% 0% 3.5
Caisse d’Epargne 100% 87% 19% 56% 9% 46% 15% 11% 3% 0% 3.4
Credit Agricole 100% 53% 25% 65% 10% 51% 20% 17% 10% 1% 3.4
BNP Paribas 100% 57% 18% 66% 11% 52% 24% 12% 7% 2% 3.4
Credit Lyonnais 100% 51% 14% 74% 13% 49% 27% 9% 9% 1% 3.4
France Average 100% 63% 19% 62% 10% 46% 19% 13% 9% 1% 3.3
Societe Generale 100% 55% 18% 65% 12% 42% 22% 8% 15% 2% 3.2
La Poste 100% 67% 9% 45% 3% 34% 15% 6% 12% 1% 2.8
Figure 43. French Retail Banking Product Cross-Sell, Potential — TNS Survey, 2002
Current Consumer Long-Term Direct
Account Deposit Mortgage Credit Card Loan Savings Investments Protection None Don't know Average
Credit Mutuel 0% 4% 8% 5% 5% 10% 3% 9% 55% 16% 0.4
BNP Paribas 0% 3% 8% 2% 2% 12% 7% 3% 54% 23% 0.4
CIC 0% 2% 5% 5% 6% 12% 2% 5% 48% 21% 0.4
Banques Populaires 0% 5% 9% 3% 8% 8% 2% 1% 60% 17% 0.4
Credit Agricole 0% 4% 9% 3% 3% 10% 3% 4% 58% 19% 0.4
Societe Generale 0% 4% 7% 2% 3% 13% 4% 3% 57% 17% 0.4
Caisse d’Epargne 0% 2% 9% 3% 5% 11% 2% 3% 58% 17% 0.4
France Average 0% 3% 8% 3% 3% 10% 3% 4% 59% 18% 0.3
La Poste 0% 3% 6% 5% 1% 10% 2% 2% 65% 17% 0.3
Credit Lyonnais 0% 3% 7% 2% 0% 9% 3% 2% 62% 15% 0.3
27
Chasing retail growth — overseas and specialised

International retail banking and specialised financial services are the segments within
which BNP Paribas and Societe Generale have focused their retail-oriented growth
initiatives. These collection of businesses, which are a portfolio that range from
partially linked to completely different, primarily consist of the following segments
— international retail networks, consumer credit and business finance and (for SG)
life insurance2.
BNP Paribas is bigger, but growing slower

BNP Paribas has a greater exposure than SG to the international retail and specialised
financial services business areas, but its operations are growing slower (see Figure
44). For instance, international retail and specialised finance accounts for about 50%
of the revenues in total retail banking at BNP Paribas, compared to nearer 40% for
SG. However, revenues at BNP Paribas have grown at a much slower rate, due to a
variety of factors, including negative currency translation and margin pressure (for
its US network), and perhaps greater maturity in its consumer credit operations.
It should be noted that some of this slower growth will reverse following the recent
US acquisitions by BNP Paribas, such as Community First announced in March
2004, and the earnings synergies that can be generated. Also, some of the negative
currency translation/margin issues in the US may ease going forward given greater
use of currency hedging and a currently benign interest rate environment.
Figure 44. BNP Paribas and SG — International Retail and Financial Services as a % of Total Retail Banking, 1999-2004E (Euros in
Millions and Percentages)
2004E vs 2004E vs 2004E vs
1999 2000 2001 2002 2003 2004E 1999 2002 2003
BNP Paribas
Retail Banking 7,245 7,995 8,714 9,466 9,636 9,987 38% 6% 4%
o/w French Retail Banking 4,072 4,257 4,433 4,588 4,733 4,916 21% 7% 4%
o/w International Retail & Financial Services 3,173 3,738 4,281 4,878 4,903 5,071 60% 4% 3%
as a % of Retail Banking
French Retail Banking 56% 53% 51% 48% 49% 49%
International Retail & Financial Services 44% 47% 49% 52% 51% 51%
SG
Retail Banking 5,849 6,744 7,810 8,447 8,980 9,702 66% 15% 8%
o/w French Retail Banking 4,504 4,887 5,203 5,414 5,645 5,875 30% 9% 4%
o/w International Retail & Financial Services 1,345 1,857 2,607 3,033 3,335 3,827 185% 26% 15%
as a % of Retail Banking
French Retail Banking 77% 72% 67% 64% 63% 61%
International Retail & Financial Services 23% 28% 33% 36% 37% 39%
2
Previously, investor services for corporates, financial institutions and individual clients, and securities and employee savings
services for businesses, were included in the Financial Services unit of SG. Going forward, these will be included in the Asset
Management business area as part of SG GSSI (Global Securities Services for Investors).
28
Higher profit margins in international retail and specialised finance

Both BNP Paribas and SG benefit from higher profit margins in their international
retail and specialised finance operations compared to their domestic French retail
networks (see Figure 45). This reflects the higher profit margins available in retail
banking markets outside France, be it in emerging Europe or the United States, and
in specialised products such as consumer finance.
Thus, BNP Paribas generates a ten percentage point higher revenue-to-equity ratio in
its domestic French network (112% versus 99%, 2004E), but its pre-tax ROE is
expected to be the same in its domestic network and in its overseas and specialised
operations (about 30%, 2004E). Similarly, SG is expected to deliver an almost
identical revenue-to-equity ratio in both its domestic and overseas/specialised
operations, but should generate considerably higher profits in the latter.
Figure 45. BNP Paribas and SG — Retail Banking Profitability, 1999-2004E (Euros in Millions and Percentages)
2004E vs 2004E vs 2004E vs
1999 2000 2001 2002 2003 2004E 1999 2002 2003
Revenues/Equity
BNPP
Retail Banking 94% 95% 95% 99% 103% 102% 8% 3% -1%
o/w French Retail Banking 93% 97% 101% 104% 108% 112% 21% 7% 4%
o/w International Retail & Financial Services 96% 97% 104% 100% 100% 99% 3% 0% -1%
SG
Retail Banking 112% 126% 118% 124% 122% 121% 8% -3% -1%
o/w French Retail Banking 120% 128% 125% 126% 124% 121% 1% -4% -2%
o/w International Retail & Financial Services 93% 122% 125% 120% 118% 120% 29% 0% 1%
Pretax ROE
BNPP
Retail Banking 21% 24% 25% 26% 28% 29% 39% 13% 4%
o/w French Retail Banking 19% 22% 22% 26% 28% 29% 50% 11% 4%
SG
Retail Banking 26% 32% 30% 31% 32% 34% 29% 7% 5%
o/w French Retail Banking 25% 31% 31% 31% 31% 31% 24% -1% -1%
Retail networks overseas — greater focus at BNP Paribas

In the case of BNP Paribas, the international retail network is primarily in the
western region of the United States, whereas for SG the exposure is mainly in
emerging Europe; in addition, both banks have franchises in overseas French
territories or countries with a historical connection to France such a parts of Africa.
BNP Paribas’ international network is more focused, with about four-fifths of the
revenues derived from the US network. SG’s international retail network is much
more dispersed.
The US retail network (BancWest) accounted for about 35% of BNP Paribas’
International Retail Banking and Financial Services 2Q04 revenues; including the
other overseas retail networks this increases to about 45%. Similarly, the
international retail networks accounted for 53% of SG’s 2Q04 revenues and pre-tax
profits in international retail and specialised finance.
29
We forecast pre-tax profits of €619 million in 2004E for BancWest, and including
the overseas networks would increase BNP Paribas international retail pre-tax profits
to close to €800 million in 2004E. By contrast, we expect SG’s international retail
network to generate a pre-tax profit of very similar to BancWest’s (€614 million),
but it should be remembered that minorities account for approximately 40% of
pre-minority net income at SG’s overseas networks.
Specialised financing — consumer and business finance

Specialised financing, typically consumer and business finance, accounts for the bulk
of the remainder of this business area. The consumer credit franchise at BNP Paribas
is larger than at SG. BNP Paribas’ consumer credit activities are conducted by
Cetelem and generated a top-line of €428 million in 2Q04. Cetelem is an
internationally diversified franchise, with half of its loan production now generated
outside France. As well as its leading position in France, Cetelem is a market leader
in Italy and Hungary and a top three player in Spain and the Czech Republic.
By contrast, consumer credit accounted for only 41% of SG’s 2Q04 revenues in
specialised financing, which we estimate is equivalent to €140 million, or one-third
the size of Cetelem. Consumer credit at SG is focused on France and Italy, and is
being rolled out in several emerging European markets. The remainder of SG’s
specialised financing business is focused on business finance and services. SG
generates 70% of its business finance revenues outside of France, and is a European
leader in vendor finance, IT leasing and fleet management.
We set out the different operating entities of SG and BNP Paribas in the field of
specialised financial services.
Figure 46. French Banks — Specialised Financial Services operations
Specialised Financial Services
SOCIETE GENERALE BNP PARIBAS
Business Finance and Services Legal Entities Business Finance and Services Legal Entities
IT asset leasing ECS Group Contract Hire and Fleet Management Arval PHH, Arius
Equipment Finance and Vendor Finance Société Générale Vendor Services Real Estate Financing UCB, UCI
Operational Leasing and Fleet ALD Automotive and Hertz Lease Lease Financing BNP Paribas Lease Group
Management
Consumer Credit Consumer Credit
Consumer Loans Franfinance Consumer Credit Cetelem including:
Domofinance, Credit Universel, Facet
and Caisse d’Epargne Financement
Consumer Credit Cards and Leisure CGI
Financing
Insurance
Bancassurance and Life Insurance Sogécap
Diversified Insurance Sogessur
Banking Services
Cash Management Progéliance Net, Sogecash & Sogecash
Net International
Custody Services SG, SGF securities custody and Generali
Custody
Services for Issuers SG
30
BNP Paribas Goes West . . .

BNP Paribas has two parts to its international retail banking networks. The larger part is
BancWest in the US, which generated a pre-tax operating profit of €372 million in 1H04,
equivalent to 25% of the total retail business area profits and 11% of group profits. The
smaller part of the international network is “Overseas and Emerging Markets” (OEM)
which operates in territories part of France or with a historical connection to it. 1n 1H04,
OEM was about a quarter of the size of BancWest in terms of revenues and profits.
Western USA franchise

BancWest is focused on the western states of the US, and consists of Bank of the West in
California and First Hawaiian Bank. BNP Paribas has fully owned BancWest since
December 2001 and has a successful track record of in-fill and adjacent market
acquisitions. In 2002, it acquired UCB, which reinforced its position in California. Bank
of the West now has almost 300 branches and is the fifth largest retail bank in California.
First Hawaiian Bank has over 60 branches and is the largest bank in Hawaii.
The acquisition announced in March 2004 of Community First for US$1.2bn
(16x 03’PE) extends the franchise into the Western states near California and takes
the network up towards the Mid-West shores of the Great Lakes. Community First is
a relatively new bank, established in 1997 and headquartered in Fargo, North Dakota.
Community First had 155 branches at end February 2004, of which 44 were in
Colorado, 26 in Wyoming, 22 in Minnesota — all markets where it has a top ten
position. The pro-forma new BancWest group is set out in Figure 47 below.
Figure 47. BancWest — Acquisition of Community First
BancWest Community First Pro forma CFBX as a % of BW
Total Assets 38.4 5.5 43.9 14%

Deposits 26.4 4.4 30.8 17%
Net Loans 25.4 3.3 28.7 13%
Net Income (USD Millions, US GAAP) 436.5 75 511.5 17%
Branches 357 155 512 43%
Number of Accounts 2.4 1.0 3.4 42%
Employees 7,461 2,162 9,623 29%
The growth of BancWest in recent years has been boosted by mergers (such as in
2002) and also organic growth, but despite the solid progress in local currency terms,
the contribution to BNP’s group has decreased since 2002, mostly due to US$/€
exchange rate-related impact (see Figure 48).
The financial characteristics of the franchise are good, with continuing improvements
in cost efficiency and asset quality (see Figure 49). We view this franchise as a solid
platform for further expansion by BNP Paribas in the western and mid-western states
of the USA, and we expect further bolt-on acquisitions in the future.
31
Figure 48. Bank West — Net Income and ROE, 1999-1H04 (US$ in Figure 49. Bank West — Cost Income and NPL Ratios, 1999-1H04
Millions and Percentage) (US$ in Millions and Percentage)
500 14.0% 1.20%
450 60%
12.0%
2004E assuming 1H04

1.00%
400
running rate
350 10.0%
55% 0.80%
300
8.0%
250 0.60%
50%
6.0%
200
0.40%
150 4.0%
45%
100
0.20%
2.0%
50
0 0.0% 40% 0.00%

1999 2000 2001 2002 2003 1H04 (FY04E) 1999 2000 2001 2002 2003 1H04
Net Income (US$m) % of BNP group earnings Cost Income Ratio NPL Ratio
Sources: Company reports and Smith Barney analysis. Sources: Company reports and Smith Barney analysis.
SG Going East . . .
SG’s international retail banking generated 12% of the group’s revenues in 2Q04,
with an ROE of 31%. Within this franchise, about c65% percent is accounted for by
the emerging European franchise, of which the largest part is the Czech Republic.
The following comments on Komercni3, owned by SG, has been provided by our
CEE banks analyst, Simon Nellis.
Komercni Banka — An introduction

Komercni Banka is the Czech Republic’s third largest bank, serving over 1.3 million
retail, corporate, and investment banking customers through 335 points of sale,
39 business centres, and a range of electronic distribution channels (telephone
banking, internet banking, ATMs, and GSM banking).
While historically the bank’s strategic focus was on servicing corporate customers,
the bank managed to build a successful retail banking franchise in the early to mid
1990’s, capturing a higher net worth segment of the population by providing
innovative products (at the time) and better customer service than the main
competitors.
Following the acquisition of a majority stake (60%) via the privatisation of the bank
in October of 2001, Societe Generale (SG) has been shifting the bank’s strategic
focus towards the provision of retail banking services. Notably the Bank changed its
approach to clients, with each client now being appointed a dedicated relationship
manager, launched many new products for clients in all segments and presented a
new corporate identity.
3
Buy/Low Risk (1L), target price CZK 3,145, current price CZK 2,737.
32
Retail banking at Komercni

On the retail-banking front, the Bank offers clients deposit products, loans and
payment services. Besides standard banking products, clients can also draw on life
insurance services, supplementary pension plans, building savings, leases, or unit
trust investment services provided by Komercni’s subsidiaries.
On the asset side, the bank is focusing its efforts on capitalising on very low loan
penetration of the retail client base: Just 2.3% of clients having a mortgage loan and
less than 10% of clients having a consumer loan with the bank.
Figure 50. Komercni Banca — Retail Lending, 2001-1H04 (Czech Koruna in Millions)
45,000 50%
Continued strong retail lending,
40,000 particularly mortgages. 45%
35,000 40%
35%
30,000
30%
25,000
25%
20,000
20%
15,000
15%
10,000 10%
5,000 5%
0 0%
2001A 3M02A 6M02A 9M02A 2002A 3M03A 6M03A 9M03A 2003A 3M04A 6M04A
Mortgages Consumer Loans
Mortgages Growth Y-o-Y (RHS) Consumer Loans Growth Y-o-Y (RHS)
Total Retail Lending Growth Y-o-Y (RHS)
Efforts to increase retail lending have been successful with the bank posting c 40%
year-on-year in mortgages and c 17% year-on-year growth in consumer lending.
Retail lending now accounts for over 27% of the bank’s loan book, up from less than
14% in 2001.
SG has implemented new customer segmentation and has been targeting its efforts
on selling retail product packages with the aim of increasing the cross-sell ratio. As
of end June 2004 over 58% of Komercni’s retail clients and 30% of small business
clients now use product packages.
Corporate banking at Komercni

In corporate banking, SG has been shifting the focus away from large corporates
where spreads are low and volume growth is weak towards SME, medium
enterprises and municipalities (MEM).
As of end 1H 2004 small business loans increased by 47% year-on-year and loans to
MEMs increased by 22% over the same time period. Loans to these two segments
accounted for 31% of total loans and 42% of corporate loans at end June 2004.
33
Figure 51. Komercni Banca — Loan Book, 1H03-1H04 Figure 52. Komercni Banca — Loan Book, 1H03-1H04 (Czech
(Percentages) Koruna in Millions)
60,000
Work-out Portfolio 50,000

2% Mortgage
21%
40,000
Large Corporate 30,000

38% Consumer
7%
20,000
10,000
0
MEM
SME Mortgage Consumer MEM SME Large Corporate Work-out
25%
7% Portfolio
1H 2003 1H 2004
Outlook for the Czech market

The outlook for the Czech market and Komercni Banka remains favourable in our
view. Low interest rates and solid macro-economic growth lead us to expect
continued strong growth in retail and small business lending and a gradual pick-up in
corporate lending. Additionally, we expect municipal lending to accelerate as a result
of EU structural funding and cohesions projects.
While the Czech Republic is roughly half way through an interest tightening cycle,
we see little negative impact to the banking sector. Indeed, loan volumes are
expected to remain robust and we anticipate some widening of spreads, particularly
on liabilities, as a result of rate hikes.
Additionally, we would expect a gradual improvement in the net interest margin at
Komercni Banka as the bank leverages its balance sheet. Currently over 50% of
Komercni Banka’s assets are in low yielding money market instruments, largely
two-week repos with the Czech National Bank. As it shifts from these low yield
assets to higher yielding lending, we would expect some moderate margin accretion.
Figure 53. Czech Republic — Sector Corporate Loans, 1999-2004 Figure 54. Czech Republic— Sector Mortgage Loans, 2001-04
1,000 5% 100 80%

Corporate lending finally Strong retail lending driven by
900 in positive territory 0% 90 strong growth in mortgage lending
70%
800 -5% 80
60%
700 70
-10%
600 60 50%
-15%
500 50 40%
-20%
400 40 30%
-25%
300 30
20%
200 -30% 20
-35% 10%
100 10
0 -40% 0 0%
Mar-01
May-01
Mar-02
May-02
Mar-03
May-03
Mar-04
May-04
Jan-01
Jul-01
Sep-01
Nov-01
Jan-02
Jul-02
Sep-02
Nov-02
Jan-03
Jul-03
Sep-03
Nov-03
Jan-04
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Jan-99
Mar-99
Jul-99
Nov-99
Jan-00
Mar-00
Jul-00
Nov-00
Jan-01
Mar-01
Jul-01
Nov-01
Jan-02
Mar-02
Jul-02
Nov-02
Jan-03
Mar-03
Jan-04
Jul-03
Nov-03
Mar-04
May-99
May-00
May-01
May-02
May-03
May-04
Household Mortgages (CZKbn) Growth (RHS)

Loans to Non-Financial Corporates (CZKbn) Growth (RHS)
34
Wholesale Banking
➤ Wholesale banking has been the Cinderella of French banking, with a
relative decline in allocated capital since 1999
➤ ROEs continues to rise, helped by business refocusing and a benign

credit environment
➤ Stability of earnings has improved and trading risks have not grown
Wholesale banking Cinderella

Wholesale banking has been a bit of a Cinderella left at home while the retail
step-sisters partied at the French banking ball. The explicit strategy of all the quoted
French banks since the late 1990s has been to reduce exposure to corporate and
investment banking. Given that they barely made any profits in this business area at
the time, it is not surprising that these activities were increasingly de-emphasised
during the bid battle of 1999 and thereafter.
Due to the successful restructuring of their wholesale networks, with increasing
focus on particular products such as equity derivatives or euro-zone fixed income
rather than providing an across-the-board offer, the returns in wholesale banking
have increased. We expect, wholesale banking to deliver higher pre-tax ROEs in
2004E than retail banking for BNP Paribas and SG.
While admittedly these returns are flattered by a benign large corporate credit
environment, the returns in wholesale at both a revenue and a profit level suggest that
it may be time to re-think the previous “grow retail, shrink wholesale” mantra.
Figure 55. BNP Paribas — Returns in Corporate and Investment Banking, 1999-2004E (Percentages)
1999 2000 2001 2002 2003 2004E
Revenues/Equity
Retail Banking 94% 95% 95% 99% 103% 102%
Corporate and Investment Banking 73% 82% 90% 78% 89% 79%
Total 72% 75% 71% 64% 63% 64%
Pre-tax Profits/Equity
Retail Banking 21% 24% 25% 26% 28% 29%
Total 26% 29% 25% 18% 20% 25%
Sources: Company reports and Smith Barney estimates
Figure 56. SG — Returns in Corporate and Investment Banking, 1999-2004E (Percentages)

1999 2000 2001 2002 2003 2004E
Revenues/Equity
Retail Banking 112% 126% 118% 124% 122% 121%
Total 96% 101% 88% 93% 93% 87%
Pre-tax Profits/Equity
Retail Banking 26% 32% 30% 31% 32% 34%
Total 27% 31% 20% 16% 25% 26%
Sources: Company reports and Smith Barney estimates
35
Similar wholesale exposure, different market gearing

Corporate and investment banking accounts for one-third of the 2004E forecast
group pre-tax profits at BNP Paribas and SG, as set out in Figure 57 and Figure 58,
once again highlighting some of the similarities between these two French banks.
However, bank specific differences also exist, with BNP Paribas displaying greater
stability in its wholesale activities compared to SG, as well as a greater exposure to
fixed income and corporate banking compared to the latter’s higher equity weighting.
The results at BNP Paribas in this business area have been more stable compared to
SG. We expect both revenues and capital allocated to this segment at BNP Paribas in
2004E to be at a similar absolute level as 1999. By contrast, we expect SG wholesale
revenues to be about 10 percent lower in 2004E compared to 1999, and allocated
capital to have declined by close to 20 percent. The greatest contrast is to be found
by comparing the evolution in pre-tax ROEs — BNP Paribas has delivered between
23-28% pre-tax ROEs during 1999-2003, while SG has reported between 15% (in
2002) and 43% (in 2000).
Figure 57. BNP Paribas — Corporate and Investment Banking pre- Figure 58. SG — Corporate and Investment Banking pre-tax
tax profits as a % of total pre-tax profits, 2004E profits as a % of total pre-tax profits, 2004E
Corporate Corporate
and and
Investment Investment
Banking Banking
32% 33%
Other Other
68% 67%
Improving risk profile compared to global firms

While the contribution of wholesale banking to French bank revenues has been
declining since the late 1990s, the evolution in absolute revenues has been relatively
stable. In recent quarters in particular, the revenue volatility at the leading French
wholesale banks has been lower than at their global peers. Part of the explanation for
this is that many of the global firms, such as UBS, Deutsche Bank and the US firms,
have materially increased their trading risks. Thus, the reported value-at-risk
numbers at Deutsche and UBS have almost doubled over the past two years, while
they have declined at BNP Paribas and SG.
“Second tier” wholesale banks have often been viewed as lower quality than their
global peers. In businesses that often benefit from scale benefits, the biggest players
can derive they greatest economies. In addition, larger firms are expected to have
greater (product and client) diversification benefits to protect them from external
shocks. However, the evolution of recent results, suggests that the French banks may
be less risky than their global peers, and are able to successfully carve out niches of
competitiveness. While we are not about to start arguing for a premium-rating to be
applied to the French banks’ wholesale franchises, the oft-mentioned discount may
no longer be as appropriate today as it used to be in the past.
36
French wholesale versus peers — declining or stable?

The CIB divisions of the three large French banks currently represent about 30% of
the group revenues at present. The contribution of the CIB divisions has been
declining over the last few years. Back in 2001, BNPP’s CIB revenues contributed
38% to the group revenues, while SG was 42%. The decline since then has been
steady as Figure 59 and Figure 60 show below.
The decline of the contribution of CIB revenues to about 30% of group revenues in
2004 from 40% in 2001 has not been matched at the larger European investment
banks. For instance, UBS earned almost 45% of its group revenues in 2Q04 from
CIB revenues compared a similar percentage proportion in 2Q01 (see Figure 62).
This is the same at larger wholesale banks such as Deutsche Bank.
Figure 59. SocGen — CIB Revenue Evolution, 1Q01-4Q04E (€ m) Figure 60. BNPP — CIB Revenue Evolution, 1Q01-4Q04E (€ m)
1,600 45.0% 1,800 40.0%
1,600 38.0%
1,400
40.0% 1,400 36.0%
1,200
34.0%
1,200
1,000
35.0% 32.0%
1,000
800 30.0%
800
30.0% 28.0%
600
600
26.0%
400
25.0% 400 24.0%
200 200 22.0%
0 20.0% 0 20.0%
1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04E 4Q04E 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04E 4Q04E
CIB Total Revenues (Euros in millions) % of Total Group Revenues CIB Total Revenues (Euros in millions) % of Total Group Revenues
Figure 61. DB CIB — Revenue Evolution, 1Q01-4Q04E (€ m) Figure 62. UBS — CIB Revenue Evolution, 1Q01-4Q04E (SFr m)
5,000 50.0%
4,500 65.0%
4,500
4,000 60.0%
45.0%
4,000
3,500 55.0%
3,500
3,000 50.0% 40.0%
3,000
2,500 45.0%
2,500 35.0%
2,000 40.0%
2,000
1,500 35.0% 30.0%
1,500
1,000 30.0% 1,000
25.0%
500 25.0% 500
0 20.0% 0 20.0%
1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04E 4Q04E 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04E 4Q04E
CIB Total Revenues (Euros in millions) % of Total Group Revenues CIB Total Revenues (SFm) % of Total Group Revenues
However, an interesting point to note is that while French bank CIB divisions have
declined as a proportion of total group revenue, the absolute amount of revenues
generated by BNP Paribas and SG in CIB activities was similar in 2Q04 to 2Q01.
Thus, the declining relative weight of CIB revenues at French banks is due to growth
in other non-CIB activities. By contrast, CIB revenues at UBS and larger peers are a
similar proportion to total group revenues three years ago. However, the absolute
amount of CIB revenue is also similar to three years ago (UBS) or even lower
(Deutsche Bank). Thus, in absolute terms, French CIB revenues today indexed to
2001 are similar to larger peers such as UBS. Further more, the evolution has also
been more stable.
37
Revenue volatility and questions of franchise quality

Figure 63 to Figure 66 below show the quarterly CIB revenue increase/decrease in
percentage terms since 2001 for the French banks and again we use UBS as a proxy
for larger investment banks.
Over this period, BNP Paribas had slightly lower CIB revenue volatility than SG,
while both were lower than the revenue volatility at UBS. This standalone CIB
revenue volatility also needs to be seen in conjunction with the weight that the CIB
division represents in the total group (see previous section).
Figure 63. SG CIB Revenue Volatility, 2001-04E Figure 64. BNP CIB Revenue Volatility, 2001-04E
30% 30%
20% 20%
(Std Dev: 22%)
10% 10%
0% 0%
-10% -10%
-20% -20%
(Std Dev: 28%)
-30% -30%
-40% -40%
E
E
01
01
01
02
02
02
02
03
03
03
03
04
04
01
01
01
02
02
02
02
03
03
03
03
04
04
04
04
04
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
3Q
4Q
Sources: Company reports and Smith Barney analysis. Sources: Company reports and Smith Barney analysis.
Figure 65. DB CIB Revenue Volatility, 2001-04 Figure 66. UBS CIB Revenue Volatility, 2001-04
40% 50%
30% 40%
(Std Dev: 33%) (Std Dev: 40%)
30%
20%
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 -30%
2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04

Recent French revenue resilience a new development

During 1H04, CIB revenues have been more stable at the French banks compared to
their larger peers. Both UBS and Deutsche Bank display a much more pronounced
1Q04 seasonality and they also suffered a greater 2Q04 revenue decline. However,
the greater revenue resilience of 1H04 is a relatively new development.
For instance, the quarter-on-quarter revenues declines during 2H03 were similar at the
French banks and their larger peers. Similarly, looking back over the period from
2Q01-2Q04, we find the revenue fluctuations at SG similar to Deutsche Bank or UBS.
Figure 67 below sets out a comparison of the quarter-on-quarter revenue and
earnings change for the CIB divisions at the French banks and at two larger
European wholesale banks, UBS and Deutsche Bank.
38
Figure 67. French Banks and Major European CIB Banks — Revenue and Earnings Quarterly Volatility, 1Q01-2Q04 (Percentages)
Major
2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Changes
Revenue Change QoQ
BNP Paribas -14% 3% 0% 2% -28% 11% 3% 22% -1% -10% -5% 13% -3% 1
SG -16% 6% -15% 7% 8% -30% 19% 4% 25% -11% -13% 10% -6% 2
CASA na na na na na na na na 14% -5% -14% 9% -8% NM
Deutsche Bank -10% -16% 5% -6% -2% -19% -1% 26% 6% -15% -7% 34% -18% 2
UBS -5% -16% -9% 14% -10% -15% -10% 27% 18% -10% 4% 38% -20% 2
Pre-tax Profit Change QoQ
BNP Paribas -31% -2% -14% 31% -54% -7% 0% >100% -2% -14% 4% 44% 1% 2
SG -50% 23% -95% >100% 24% -91% 0% >100% 74% -14% -3% 26% 9% 5
CASA na na na na -20% -75% >100% 2% 66% -36% 3% -1% -100% 2
Deutsche Bank 15% -22% -13% -12% -73% >-100% >-100% >100% -5% -28% -27% >100% -31% 5
UBS -13% -23% 6% -35% -12% -30% -39% >100% 26% -11% 32% 39% -29% 1
Note: “Major Changes” defined as quarter-on-quarter revenue changes of 25% or above and profit changes of 50% or above.
Risk and “second tier” firms

Given the French banks’ lower revenue volatility in CIB activities compared to
larger European peers, it may be necessary to revisit the often repeated commented
of “lower quality” of second-tier CIB franchises which thus deserve lower P/E
multiples.
The lower quality argument is predicated on expectations of greater revenue and
earnings volatility due to either concentration risk from lower client and product
diversification, or event risk from lower clients flows/higher trading income or
weaker management or controls. However, the evidence on recent revenue evolution
noted above, and the track record on earnings, included above Figure 67, suggests
that in the case of BNP and SG, smaller CIB franchises do not translate into lower
quality franchises.
This may be due to their successful focusing of their CIB franchises since the late
1990s, due to the combined effect of the Russian and Asian financial crises and also
the systematic reallocation of capital to retail activities from wholesale, and also the
improvement in the corporate credit cycle in recent quarters.
French banks have not increased trading risks

One explanation for the recent divergence in revenue volatility between the larger
European wholesale banks and the French banks may be the increasing trading risks
assumed by many of the global bulge bracket. This has led to a divergence in market
risk profiles best captured in the change in VAR numbers.
For instance, the larger banks such as Deutsche Bank and UBS have almost doubled
their VAR over the past two years, whereas these numbers have declined for BNP
Paribas and SG (see Figure 68). Over the past couple of years, interest rate risk
taking has increased substantially at the larger banks (see Figure 69).
39
Figure 68. French Banks and Major European CIB Banks — VAR, 1H02-1H04, start period indexed to
100 (Percentages)
1H04/1H03 1H04/1H02
BNP Paribas 74% 88%
SG 110% 71%
Deutsche Bank 153% 169%
UBS 122% 171%
Figure 69. French Banks and Major European CIB Banks — Change in Fixed Income and Equity VAR,
1H02-1H04, start period indexed to 100 (Percentages)
1H04/1H03 1H04/1H02
Fixed Income VAR
BNP Paribas 56% 92%
SG 166% 109%
UBS 130% 199%
Equity VAR
BNP Paribas 150% 69%
SG 105% 56%
UBS 91% 101%
Figure 70. Societe Generale — VAR, 1Q02-2Q04 (Euros in Millions)
VaR Societe Generale
3.8
1.5
3.2 2.3
1 3.6 1.8
1.1 1.8
21.1 1.6
3.1 2.9 2.9 11.8
16.8 2.2 1.5 3.4 1.1
17.7 1.5 13.6 Netting effect
3.8
12.4 14.1 1.1 Commodities
15.1
11.2 14.7 Foreign exchange
Equities
31.1 31.8 34.6
27.9 29.8 Fixed Income
25.3 24.6 23.1
20.9 20.4
-12.8 -15.6
-18.5 -17.5 -16.7 -17.9 -19.6
-24.8 -22.2
-26.9
Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03 Q3 03 Q4 03 Q1 04 Q2 04
40
Figure 71. BNP Paribas — VAR, 1Q02-2Q04 (Euros in Millions)
BNP VaR
1
3
1
3
1 1 3
4 2 1
9 1 3 12
36 3 13
8
2 2
1
1 3 2 14 3
3 2
4 26 24 3
58 2 Credit
31 25 43 2
28 23 24 Commodities
35 26
23
18 Change and others
33 Interest rates
26 27 Equities
21 18
14 15 17 17 14
10 12 13 Netting effect
7
-13
-17 -17 -19 -19 -21 -23
-25 -28 -28 -25
-33 -31
-35
Q1 01 Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03 Q3 03 Q4 03 Q1 04 Q2 04
Estimating wholesale banking business mix

Disclosure of information in the CIB division of French banks is at face value rather
limited, though some reading between-the-lines sheds some more light on business
mix. What follows below is a combination of as reported data and our estimates
made to enable like-for-like comparison.
Reported CIB business mix — different definitions

In 2Q04, both Credit Agricole and BNP Paribas derived similar amount of revenues
from corporate banking (40%) and investment banking (60%). Societe Generale
reported 54% of its revenues from corporate banking and 46% from equities and
advisory. However, SG reports its fixed income business combined with corporate
banking, unlike the other two French banks.
When we adjust for differences in sub-division definitions, we find that SG has a
greater bias towards equities (particularly derivatives) compared to its French peers.
While SG had an a particularly strong 2Q04 in equity derivatives, its 1H04 equity
revenue exposure of about 40% of CIB revenues is double the run-rate at Credit
Agricole over the same period (see Figure 72).
BNP Paribas does not disclose on a consistent basis its CIB revenue mix beyond the
split between corporate and investment banking, but it has at investor events
provided further granularity (see Figure 73). We believe that the equity revenue
exposure at BNP Paribas CIB is closer to Credit Agricole than SG, though its
profitability is closer to the latter than the former.
41
Figure 72. Credit Agricole — CIB Revenue Split, 1H04 Figure 73. BNP Paribas — CIB Operating Profit Split, 9M 2001
(in Percentage) (in Percentage)
Private Equity /
Other Fixed Income
3% 31%
Corporate Banking
Structured 17%
Equity and
Finance
Advisory
24%
18%
Structure + Export
Financing
13%
Commercial
Banking
Fixed Income 20% Equity + Corporate
34% Finance
Energy & Commodities 24%
15%
Other
1%

BNP Paribas fixed income and corporate banking geared

Two-thirds fixed income, one-third equities
In 9M 2001, BNP Paribas generated 31% of its CIB pre-provision profit from fixed
income and 24% from equities and corporate finance. Assuming BNP Paribas
followed industry trends, the former is likely to have increased and the latter
declined. For instance, fixed income at UBS increased from 42% of its investment
banking and securities revenues in 2001 to a 53% in 2003.
Fast forward to 2004, and looking at revenues, we believe that BNP Paribas’ fixed
income revenues as a proportion of total CIB revenues is probably higher than
CASA’s 34% in 1H04. The investment banking sub-division revenues probably split
two-thirds to fixed income and the rest to equities, particularly equity derivatives,
and the investment banking sub-division accounts for about two-thirds of CIB.
Measuring fixed income strength

An indication of the BNP Paribas’ fixed income strength is provided in Figure 74.
The bank has consistently increased its competitive position in the European bond
market in recent years. If we focus more narrowly on euro-denominated debt, BNP
Paribas ranked second in 2003 for corporate bond issuance and third for all
investment grade bonds.
42
Figure 74. European Investment Grade Bond Issuance — Rankings, Market Shares and Volumes, 2000-04E (US$ in Millions)
Rank Share Value Value Change
2Q04 1Q04 2003 2002 2001 2000 2Q04 1Q04 2003 2002 2001 2000 2Q04 1Q04 %
Credit Suisse First Boston 1 5 6 9 6 12 8% 6% 5% 5% 5% 4% 17,493 18,253 -4%
Barclays Capital 2 2 3 3 3 6 8% 7% 6% 6% 7% 5% 16,815 21,328 -21%
JP Morgan 3 7 8 5 1 9 7% 5% 5% 6% 7% 4% 15,521 16,083 -3%
Citigroup 4 3 2 2 4 5 6% 7% 7% 7% 7% 6% 12,887 21,032 -39%
BNP Paribas SA 5 8 10 11 10 13 6% 5% 4% 4% 5% 3% 12,703 15,513 -18%
Deutsche Bank AG 6 1 1 1 2 1 5% 7% 7% 8% 7% 10% 11,320 21,813 -48%
Morgan Stanley 7 14 9 15 5 2 5% 4% 5% 4% 6% 7% 11,159 11,623 -4%
ABN AMRO 8 4 7 7 12 10 4% 6% 5% 5% 4% 4% 9,930 20,564 -52%
HSBC Holdings PLC 9 6 5 4 13 14 4% 5% 5% 6% 3% 3% 9,108 17,349 -48%
Societe Generale 10 12 12 10 18 19 4% 4% 4% 4% 2% 2% 9,070 12,484 -27%
Caisse des Depots et Consign. 11 17 16 17 17 18 3% 2% 3% 3% 2% 2% 7,353 6,959 +6%
Goldman Sachs & Co 12 19 22 14 11 8 3% 2% 2% 4% 4% 4% 7,267 6,823 +7%
Royal Bank of Scotland Group 13 11 13 19 23 NR 3% 4% 4% 2% 1% NR 6,815 13,396 -49%
Dresdner Kleinwort Wasserstein 14 9 4 6 8 4 3% 5% 6% 5% 5% 6% 6,463 14,794 -56%
Calyon (Credit Agricole) 15 21 NR NR NR NR 3% 2% NR NR NR NR 6,288 5,025 +25%
UBS 16 13 11 8 9 3 3% 4% 4% 5% 5% 6% 6,228 12,314 -49%
Lehman Brothers 17 10 14 13 19 17 3% 5% 3% 4% 2% 2% 6,031 14,312 -58%
HypoVereinsbank AG 18 15 18 16 15 15 2% 3% 2% 3% 2% 3% 4,112 9,460 -57%
Unicredito Italiano 19 24 23 24 25 NR 2% 1% 1% 1% 1% NR 4,077 3,337 +22%
DZ Bank 20 20 21 NR 21 16 2% 2% 2% NR 1% 3% 3,884 5,268 -26%
Total Top 20 Firms - - - - - - - - - - - - 184,526 267,729 -31%
Sources: SDC and Smith Barney analysis.
Within BNP Paribas’ fixed income, based on a 2003 investor presentation detailing
2002 revenue splits, we understand that the key products are mainly interest rate and
credit market products (c45% and 30% of revenues respectively) and also foreign
exchange (25%). From a geographical perspective, again using the 2002 data, this
division is mainly focused in Europe, where it generates c50% of its revenues, but
also America (c25%) and Japan (c15%).
Lower volatility, more capital intensive

Due to business mix, BNP Paribas’ CIB activities seem to have a lower risk profile
than Societe Generale. However, from the capital perspective BNP Paribas’s
business is more capital-intensive than SG. This has resulted in SG’s CIB activities
delivering a revenue-to-equity ratio about 50% higher than BNP Paribas in recent
quarters (see Figure 75).
However, BNP Paribas has made some headway in narrowing the relatively higher
revenue margins at SG, as the latter’s revenue-to-equity ratio was typically double
the former in 2002. However, as noted earlier, BNP Paribas’ CIB division delivered
pre-tax ROEs in-line with SG, and in the most recent trough year (2002), BNP
Paribas CIB had a higher pre-tax ROE (18%) compared to SG (15%).
Figure 75. Large French Banks — CIB Division Revenues to Allocated Equity, 2002-04 (in Percentage)
1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04
BNPP 78% 54% 62% 64% 88% 88% 79% 77% 92% 84%
SocGen 137% 148% 106% 121% 129% 159% 142% 128% 142% 132%
CA na na na na 51% 67% 54% 59% 50% 49%
43
Societe Generale is a balanced portfolio

At BNP Paribas, cash equities are now included in associate income following the
Exane joint venture set up primarily in an effort to staunch the losses previously
incurred. We estimate that the bank’s equity derivatives and advisory revenues
account for only one-fifth of CIB revenues. By contrast, at SG, equities (primarily
derivatives but also cash) and advisory account for double the share of reported 2003
and forecast 2004 revenues.
While the equity gearing at SG CIB is clearly higher than at BNP Paribas and CASA,
it is important to remember that corporate banking and fixed income has accounted
for about sixty percent of CIB revenues at SG in recent years. Thus, the group is
much more of a three-legged stool in CIB, rather than a pure play on primarily
equities or derivatives.
For an illustration of this, it is worth looking at SG in the context of Deutsche Bank
and UBS. Thus, while SG has a greater equity and advisory exposure compared to
Deutsche Bank, it is not as geared as UBS, which regularly earns about half its
overall CIB earnings from equity and advisory activities (see Figure 76).
Figure 76. SG versus European Bulge Bracket — Equity and Advisory as a % of total CIB revenues
2002 2003 2004E
Deutsche 30% 35% 33%
SG 36% 39% 41%
UBS 54% 47% 51%
Business description
Socgen’s CIB business offers a complete range of investment banking products, but
its specialises on:
➤ European capital markets, where it offers bonds, syndicated loans,
securitizations, convertible and exchangeable bonds and equities
➤ Derivatives, where it offers equity and index, interest rate, credit, forex and
commodities-related products, and
➤ Structured Finance, where it offers export, project, asset, commodities,
acquisition and leverage and Media and Telecoms finance.
A leader in equity derivatives

SG is the leading French bank in equity derivatives, as based on the equity-related
revenues that in nominal terms is likely to be as much as fifty percent greater than at
BNP Paribas. Given the French leadership in this segment, this effectively makes SG
one of the leading banks globally in this area. Its market share in equity derivatives
has been estimated at about 20% globally.
SG defines its equity derivatives offer as a ‘client focused business’ with a full
product range and worldwide coverage (we estimate c85% of the total business is
generated outside France). We set out in Figure 77 below examples of the derivative
products offered by SG.
44
Figure 77. Societe Generale —Derivative Product Type Examples

Type of Indexation Underlying Wrapper
Calls, Puts Index OTC Contract
Call Spreads Share Swap
Barrier Options Basket of Shares Bond
Asian Options Fund EMTN
Multi-asset Options Basket of Funds Fund ; Life Insurance Policy
Best of, Worst of Managed Accounts Warrant
On 90% of the world’s market capitalisation

An entry to structured products

Equity derivatives have also provided SG with a link between its CIB activities and
asset management. In a recent investor day4, senior executives discussed in greater
detail Lyxor Asset Management. Lyxor is one of the world’s largest structured
product asset management operations. It has grown rapidly in terms of assets under
management and revenues, as set out in Figure 78 and Figure 79.
Figure 78. Lyxor AM — Assets under Management, 99-Jun04 Figure 79. Lyxor AM — Derivatives Revenue Contribution 99-
(Euros in Bn) Jun04 (base100=1999)
45.0
40.0
x12.3
35.0
19.1
30.0
25.0
10.6
x8.4
20.0
x7.0
15.0 6.3
17
x6.2
10.0 13.2
3.5
9.7
5.0 5.6
0.5 1.9 5.0 x2.9
0.0 0.2 0.2 1.9 2.1 3.5
0.0 1.2
1999 2000 2001 2002 2003 Jun-04
100
1999 2000 2001 2002 2003 Dec-04*
Index Products Structured Products Alternative Products
Source: Company reports. Sources: Company reports. Dec04 data based on 1H04 annualised.
Since 1999, Lyxor has increased its contribution 12x while its assets under
management have increased 58x to €41bn, with 66% of these assets being in Europe
(35% France), 17% in the US and 16% in Asia.
The split of these assets is 46% related to alternative products while 41% are related
to structured products. The remaining 13% is related to indexation products:
➤ Alternative products are mainly indexed on a basket of hedge funds external to
SG – Lyxor being currently top 10 globally in this segment.
➤ For structured products, Lyxor provides the wrapper for certain products as well
as ‘white label products’ that are sold through other bank’s networks worldwide.
➤ On index tracking, Lyxor currently holds a 24% market share in this segment in
Europe.
4
SocGen investor day in Paris on 27th September 2004.
45
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46
Financial Forecasts and

Investment Thesis
— By Bank
47
BNP Paribas
➤ Rating: Buy/Medium Risk (1M)
➤ Target price: €60 (current price: €52)
➤ BNPP.PA
P/E Rating
Figure 80. BNP Paribas — PE+2yrs, relative to bank sector, 1999-2004 (Percentages)
110%
BNP Paribas PE as % of sector PE

100%
90%
80%
70%
60%
May-99
May-00
May-01
May-02
May-03
May-04
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Aug-99
Aug-00
Aug-01
Aug-02
Aug-03
Sep-04
Figure 81. BNP Paribas — PE+2yrs, absolute, 1999-2004 (Percentages)
13.0x
BNP Paribas PE +2yr
12.0x
11.0x
10.0x
9.0x
8.0x
7.0x
6.0x
May-99
May-00
May-01
May-02
May-03
May-04
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Aug-99
Aug-00
Aug-01
Aug-02
Aug-03
Sep-04
48
Investment Thesis
We rate BNP Paribas a Buy/Medium Risk (1M) with a €60 target price. We believe
the bank has an attractive franchise with evidence of an upturn in both its retail and
corporate franchises; we believe the management have been strategically bold and
also sensible in capital management; finally, we find the shares undervalued based on
both a ROE/price-to-book or a relative PE basis.
has historically been a lower return and slower growing business compared to SG.
However, the profitability gap has narrowed due to a shift in business mix (more
households/less SMEs) and adjusting for reporting differences is now insignificant.
In addition, recent results indicate faster growth in certain segments, such as
household lending. In wholesale banking, the financing unit delivered a strong 1H04
result (revenues up 16%, year-on-year), assisted by its strong franchise in the global
commodities sector. In addition, large corporate credit losses remain at very low
levels and we do not see this changing any time soon. We have not included a pickup
in loan losses in our forecasts, but it should be noted that we use a ‘normalised’ loan
loss level (group loan loss ratio of c55bp) in deriving our valuation.
The combination of the good signs of growth in both retail and corporate banking,
combined with the continuing execution of the €2 billion buy back programme
announced in mid-2003 (now over three-quarters achieved), should also help dispel
fears over surplus capital and acquisition risk which had previously resulted in a
discount attached to the stock. Finally, as we discuss in greater detail in the valuation
section below, we find the shares attractively valued. Using a normalised ROE of
15.3% — our 2005E ROE adjusted for one-off items and 55bp loan loss ratio — we
believe a target price-to-book multiple of 1.7 times justifiable. This supports our €60
target price. We are forecasting cash EPS at BNP Paribas to increase from €5.5 in
2004E to €6.0, which places the shares at 9.4x 2004E cash EPS and 8.7x 2005E. By
comparison, the European bank sector trades at 10.2x 2005E cash EPS. Since 2002,
BNP Paribas shares have tended to trade at between 90% and 100% of the sector
average P/E multiple. Thus, on our estimates, the shares are currently trading at the
lower end of that recent historical range.
Valuation
Sustainable ROE and Price-to-book
We use a ROE/Price-to-book approach as a primary valuation guide for the French
banks, similar to the other European banks we follow (target P/B = (ROE-G)/(COE-G).
Our forecast underlying ROEs are a key driver of our valuation for these shares. We use
a normalised ROE that makes two modifications to our forecasts — firstly, we exclude
items such as capital gains and goodwill; secondly, we adjust current levels of loan
losses, using the average loss ratio over 2000-04E (loss ratio of c55bp for both banks).
Using the bottom end of our valuation range, we can justify a valuation of €60 per
share for BNP Paribas. At its closing price of €52 on 28 September, we derive 15%
upside for the shares. In addition, if 2004E dividends grow in in-line with earnings,
the shares offer a 4% dividend yield, for an estimated total return of c19%.
49
Figure 82. BNP Paribas — Sustainable ROE and Valuation

2005E 2005E 2005E 2005E
ROE 16.3% 16.3% 15.3% 15.3%
COE 9.0% 9.0% 9.0% 9.0%
G 0.0% 2.5% 0.0% 2.5%
BVPS 04E 34.8 34.8 34.8 34.8
BVPS 05E 38.4 38.4 38.4 38.4
Target P/B Multiple 1.81 2.13 1.70 1.97
Price Target 2004 63.1 74.0 59.2 68.5
Price Target 2005 69.6 81.6 65.2 75.6
Cash EPS 04 5.53 5.53 5.53 5.53
Cash EPS 05 5.97 5.97 5.97 5.97
Source: Smith Barney analysis.
Earnings and P/E multiple comparison

We are forecasting cash EPS at BNP Paribas to increase from €5.5 in 2004E to €6.0.
At its closing price of €52 on 28 September, the shares are trading at 9.4x 2004E
cash EPS and 8.7x 2005E. By comparison, the European bank sector trades at 10.2x
2005E cash EPS. Since 2002, BNP Paribas shares have tended to trade at between
90% and 100% of the sector average P/E multiple. Thus, on our estimates, the shares
are currently trading at the lower end of that recent historical range.
We are forecasting 8% cash EPS growth in 2005E. We expect cash EPS to increase
close to 40% in 2004E versus 2003. However operating profit growth (pre-provisions
and excluding capital gains and one-off items) is expected to be 10% in 2004E,
driven by 4% revenue growth and 0% cost growth. Operating profit pre-provision
growth increased 14% in 2003, with revenue growth of 7% and cost growth of 3%.
Net profit in 2004E is boosted by currently low loan losses — 2004E loss ratio of
39 basis points (average customer loans) versus c55 basis point average over 2000-
04E. However, we would note that we expect the average sector loan loss ratio to be
46bp in 2004E compared to 58bp in 2003, so the earnings of BNP Paribas are not
unduly flattered versus peers.
Risks
We rate BNP Paribas Medium Risk. The rating on the stock is derived after
consideration of a number of specific factors. These factors include an assessment of
industry-specific risks, financial risk and management risk. In addition, we consider
historical share price volatility, based upon the input of the Smith Barney
quantitative research team, as a possible indicator of future stock-specific risk. We
believe a Medium Risk rating is appropriate given the bank’s earnings gearing to the
French economy and the global corporate credit cycle.
The following risks may impede the shares from achieving our target price.
50
Credit risk and earnings sensitivity — one of the most significant financial
risks faced by a broadly based commercial bank is sensitivity to loan losses. The
weakest financial result in recent years for BNP Paribas was 2002 (reported ROE
12.9%, underlying ROE 11.6%), when its loan loss provisions as a percentage of
customer loans increased to 65 basis points. Following the improvement in the global
corporate credit cycle, we expect the bank’s loan loss ratio to be below 40 basis
points in both 2004E and 2005E. An increase in loan losses would obviously reduce
reported earnings. However, even if we assume a re-run of 1998, when the old BNP
booked a loan loss ratio of 82 basis points, our 2005E underlying ROE would only
decline to 13.7% from our forecast 16.3%. Note that a 13.7% underlying ROE would
be a better performance than that achieved in either 2002 or 2003, or in the latter half
of the 1990s, highlighting the significant improvement achieved in underlying
earnings power at BNP Paribas.
Acquisition risk and surplus capital — BNP Paribas is the product of the
failed attempt by BNP to acquire its two largest rivals, Paribas and Societe Generale,
in 1999. More recently, the bank’s actions suggested that they also considered
buying Credit Lyonnais. It has also acquired several smaller banks overseas,
including a couple of bolt-on transactions in the United States during 2004.
Improving profitability also boosted its Tier 1 ratio to 9.4% at end 2003, resulting in
questions over deployment of surplus capital. However, we would note that the Tier
1 ratio had declined to 8.4% by end 2Q04, due to a resumption in organic growth —
RWA growth of 12% during 1H04 alone, following a 4% RWA reduction during
2003 — and share buy backs. Acquisitions announced already and due to close
during 2H04 will further reduce the Tier 1 ratio by 60 basis points, so the over-
capitalisation is not as great as it was at the start of 2004. In addition, we believe that
the recovery in the domestic retail franchise, corporate banking and bolt-on
acquisition opportunities (on the model of the Community First), will continue to
consume capital and reduce fears of acquisitions.
Capital market risks — Wholesale banking accounts for approximately one-
third of the revenues and capital of BNP Paribas, and the bank may be exposed to
downturns in its several of its key market segments, such as the euro-zone fixed
income market or the global commodity sector. BNP Paribas is one of the leading
fixed income players in the euro-zone market and recent history includes many
examples of trading risk and losses at large capital markets players. We would,
however, note that the French banks have in recent years tended to reduce trading
risk, as measured by VAR, a marked contrast to many of the global firms. In
addition, BNP Paribas has delivered wholesale banking results in recent years with a
lower revenue and earnings volatility than many of its peers.
Derivative accounting — The 2005 switch to IAS accounting will result in
restatements and changes in accounting presentation for European banks, French
banks have been particularly hostile to various parts of the proposed IAS regime, and
we have stock specific examples (such as the transition to US GAAP by Deutsche
Bank and Credit Suisse) of the stock price uncertainty caused by accounting changes.
However, the most contentious changes — IAS 32 and 39 which affect financial
instruments, including derivative hedging — have not been endorsed by the EU.
51
Financial Forecasts
Figure 83. BNP Paribas — Group Profit and Loss Account, Key Rations and Selected Other Items, 1999-06E (Euros in Millions)
1999 2000 2001 2002 2003 % Chg 2004E % Chg 2005E % Chg 2006E % Chg
GROUP P&L (SB Format)
Net Interest Income 3,785 3,956 3,976 5,384 6,511 +21% 5,937 -9% 6,174 +4% 6,421 +4%
Net Fee & Commission Income 3,198 4,446 4,384 4,178 4,293 +3% 4,628 +8% 4,975 +8% 5,224 +5%
Net Trading Income 2,532 5,540 6,519 4,826 4,597 -5% 5,405 +18% 5,297 -2% 5,509 +4%
Net Insurance Income 562 1,245 1,308 1,440 1,658 +15% 1,772 +7% 1,896 +7% 1,991 +5%
Other Income 129 1,076 1,263 965 876 -9% 846 -3% 906 +7% 942 +4%
Total Operating Income 10,206 16,263 17,450 16,793 17,935 +7% 18,587 +4% 19,249 +4% 20,086 +4%
Personnel Expenses -4,040 -6,250 -6,467 -6,445 -6,763 +5% -6,793 +0% -6,928 +2% -7,136 +3%
General & Administrative Expenses -2,277 -3,660 -3,889 -3,892 -3,764 -3% -3,744 -1% -3,819 +2% -3,933 +3%
Depreciation of Property & Equipment -425 -528 -577 -618 -758 +23% -751 -1% -752 +0% -778 +4%
Total Operating Expenses -6,742 -10,438 -10,933 -10,955 -11,285 +3% -11,288 +0% -11,499 +2% -11,848 +3%
Operating Profit pre Provisions 3,464 5,825 6,517 5,838 6,650 +14% 7,300 +10% 7,750 +6% 8,238 +6%
Credit Loss Expense -702 -1,142 -1,312 -1,470 -1,361 -7% -965 -29% -964 -0% -1,005 +4%
Profit Before Tax 2,762 4,683 5,205 4,368 5,289 +21% 6,335 +20% 6,786 +7% 7,233 +7%
Gains on Long-term Invest & Changes in Prov 911 1,709 1,125 903 912 +1% 944 +4% 280 -70% 280 +0%
Associate Income 19 317 228 80 131 +64% 233 +78% 245 +5% 254 +4%
Net Non-recurring Expense -156 -385 -165 -174 -494 +184% -57 -88% -43 -25% -45 +5%
Tax -1,201 -1,632 -1,817 -1,175 -1,481 +26% -1,734 +17% -1,690 -3% -1,796 +6%
Amortisation of Goodwill & Intangibles -111 -144 -188 -366 -399 +9% -384 -4% -413 +8% -434 +5%
Change in General Banking Risk Reserve 18 4 27 2 147 NM 45 -69% 0 NM 0 NM
Minorities -163 -428 -397 -343 -344 +0% -366 +6% -392 +7% -418 +7%
Net Profit (Attributable) 2,079 4,124 4,018 3,295 3,761 +14% 5,016 +33% 4,772 -5% 5,075 +6%
SB Attributable Profit 1,588 3,000 3,401 2,963 3,479 +17% 4,675 +34% 4,970 +6% 5,293 +7%
PER SHARE FIGURES
EPS - Basic, as Reported 3.90 4.70 4.64 3.78 4.31 +14% 5.93 +38% 5.73 -3% 6.10 +6%
EPS - Basic, SB 2.98 3.41 3.93 3.40 3.99 +17% 5.53 +39% 5.97 +8% 6.36 +7%
Dividend per Share 0.88 1.13 1.20 1.20 1.45 +21% 2.01 +39% 2.17 +8% 2.31 +7%
Payout Ratio 22% 24% 26% 32% 34% nm 34% nm 38% nm 38% nm
Book Value per Share 23.0 25.1 28.3 30.5 33.0 +8% 34.8 +6% 38.4 +10% 42.2 +10%
OPERATING RATIOS
Net Interest Margin 0.57% 0.52% 0.70% 0.87% 0.70% 0.65% 0.65%
Non-interest Income as % of Total 76% 77% 68% 64% 68% 68% 68%
Compensation Ratio 38% 37% 38% 38% 37% 36% 36%
Cost / Income Ratio 64% 63% 65% 63% 61% 60% 59%
Operating Profit / Avg RWAs 1.99% 2.22% 1.99% 2.38% 2.48% 2.41% 2.44%
Provision Charge / Customer Loans 0.49% 0.56% 0.65% 0.61% 0.39% 0.37% 0.36%
Effective Tax Rate (Ex Goodwill, etc) 26% 28% 23% 25% 23% 23% 23%
Return on Avg RWAs 1.41% 1.37% 1.13% 1.35% 1.71% 1.48% 1.50%
Return on Equity (as Reported) 19.9% 17.4% 12.9% 13.7% 17.5% 15.7% 15.1%
Return on Equity (SB) 14.5% 14.7% 11.6% 12.7% 16.3% 16.3% 15.8%
CAPITAL RATIOS
BIS Tier 1 Ratio 6.6% 7.1% 7.3% 8.1% 9.4% 7.8% 8.3% 8.8%
BIS Total Capital Ratio 9.6% 10.1% 10.6% 10.9% 12.9% 10.8% 11.2% 11.6%
Equity / RWAs 6.6% 7.6% 8.2% 9.3% 10.3% 9.2% 9.7% 10.1%
Loans / Deposits 143% 134% 109% 115% 105% 106% 106% 106%
SHARES OUTSTANDING
Basic (Period End, m) 533 862 869 867 858 -1% 833 -3% 833 +0% 833
Basic (Period Avg, m) 533 881 866 872 872 +0% 845 -3% 833 -2% 833
Note: 1999 results include Paribas only for one quarter.
52
Figure 84. BNP Paribas — Divisional Profit and Loss Account, 1999-06E (Euros in Millions)
TOTAL RETAIL BANKING
Total Operating Expenses -5,021 -5,392 -5,676 -6,036 -6,011 -0% -6,216 +3% -6,493 +4% -6,706 +3%
Operating Profit Pre Provisions 2,224 2,603 3,038 3,430 3,625 +6% 3,771 +4% 4,086 +8% 4,332 +6%
Provisions -590 -564 -680 -720 -754 +5% -746 -1% -747 +0% -780 +4%
Operating Pre-tax Profit 1,634 2,039 2,358 2,710 2,871 +6% 3,025 +5% 3,339 +10% 3,552 +6%
Non Operating Items -7 -29 -39 -219 -223 +2% -159 -29% -187 +18% -197 +5%
Pre-tax Profit 1,627 2,010 2,319 2,491 2,648 +6% 2,866 +8% 3,152 +10% 3,356 +6%
Cost/Income Ratio 69% 67% 65% 64% 62% -2% 62% -0% 61% -1% 61% -1%
FRENCH RETAIL BANKING
Total Operating Income 4,072 4,257 4,433 4,588 4,733 +3% 4,916 +4% 5,112 4% 5,317 4%
Total Operating Expenses -3,053 -3,076 -3,105 -3,183 -3,266 +3% -3,350 +3% -3,451 3% -3,554 3%
Provisions -203 -157 -189 -198 -225 +14% -228 +1% -194 -15% -199 3%
Operating Pre-tax Profit 816 1,024 1,139 1,207 1,242 +3% 1,346 +8% 1,468 +9% 1,563 +6%
Non Operating Items 23 -11 -8 0 -2 NM -3 +52% -2 -34% -2 +0%
Pre-tax Profit 839 1,013 1,131 1,207 1,240 +3% 1,343 +8% 1,465 +9% 1,560 +6%
INTERNATIONAL RETAIL BANKING & FINANCIAL SERVICES
Total Operating Expenses -1,968 -2316 -2,571 -2,853 -2,745 -4% -2,866 +4% -3,042 +6% -3,152 +4%
Provisions -387 -407 -491 -522 -529 +1% -519 -2% -553 +7% -581 +5%
Operating Pre-tax Profit 818 1,015 1,219 1,503 1,629 +8% 1,687 +4% 1,871 +11% 1,989 +6%
Non Operating Items -30 -18 -31 -219 -221 +1% -156 -30% -185 +19% -195 +5%
Pre-tax Profit 788 997 1,188 1,284 1,408 +10% 1,531 +9% 1,692 +11% 1,800 +6%
Cost/Income Ratio 62% 62% 60% 58% 56% -4% 57% +1% 56% -2% 55% -1%
ASSET MANAGEMENT AND SERVICES
Operating Profit pre Provisions 628 943 968 792 803 +1% 1,048 +31% 1,140 +9% 1,238 +9%
Provisions -27 -37 -83 -8 -16 +100% -24 +50% -25 +5% -26 +5%
Operating Pre-tax Profit 601 906 885 784 787 +0% 1,024 +30% 1,115 +9% 1,212 +9%
Non Operating Items -46 -5 -6 3 -64 -2233% -66 +3% -69 +5% -73 +5%
Pre-tax Profit 555 901 879 787 723 -8% 958 +33% 1,045 +9% 1,139 +9%
Cost/Income Ratio 64% 57% 58% 65% 68% +3% 63% -7% 62% -2% 61% -2%
CORPORATE AND INVESTMENT BANKING
Total Operating Income 5,391 6,094 6,178 5,146 5,818 +13% 5,586 -4% 5,481 -2% 5,733 +5%
Total Operating Expenses -3,148 -3,523 -3,663 -3,271 -3,384 +3% -3,193 -6% -3,101 -3% -3,215 +4%
Operating Profit Pre Provisions 2,243 2,571 2,515 1,875 2,434 +30% 2,392 -2% 2,380 -1% 2,518 +6%
Provisions -420 -514 -582 -715 -633 -11% -134 NM -141 +5% -154 +10%
Operating Pre-tax Profit 1,823 2,057 1,933 1,160 1,801 +55% 2,258 +25% 2,240 -1% 2,363 +6%
Non Operating Items -26 88 -71 26 78 +200% 45 -42% 45 +0% 45 +0%
Pre-tax Profit 1,797 2,145 1,862 1,186 1,879 +58% 2,303 +23% 2,285 -1% 2,408 +5%
BNP PARIBAS CAPITAL
Total Operating Income 27 122 248 -21 -34 +62% 35 -202% 36 +4% 37 +3%
Total Operating Expenses -53 -69 -68 -44 -39 -11% -27 -30% -28 +2% -28 +2%
Operating Profit Pre Provisions -26 53 180 -65 -73 +12% 7 -110% 8 +13% 9 +8%
Provisions 7 -4 5 -5 -3 -40% 2 -167% 2 -15% 1 -15%
Operating Pre-tax Profit -19 49 185 -70 -76 NM 9 -112% 10 +7% 10 +4%
Non Operating Items 817 977 532 681 572 -16% 920 +61% 280 -70% 280 +0%
Pre-tax Profit 798 1,026 717 611 496 -19% 929 +87% 290 -69% 290 +0%
Cost/Income Ratio 196% 57% 27% -210% -115% 18% 79% -15% 77% -2% 76% -1%
OTHER ACTITIVES
Pre-tax Profit 460 102 455 -262 -160 -39% 59 -137% 33 -45% 45 +36%
53
Figure 85. BNP Paribas — Sub-divisional Profit and Loss Account, 2002-06E (Euros in Millions)
2002 2003 2004E % Chg 2005E % Chg 2006E % Chg
CETELEM
Total Operating Income 1,565 1,656 6% 1,739 +5% 1,826 +5%
Total Operating Expenses -811 -880 9% -916 +4% -952 +4%
Operating Profit Pre Provisions 754 776 3% 824 +6% 874 +6%
Provisions -361 -402 11% -422 +5% -443 +5%
Operating Pre-tax Profit 393 374 -5% 401 +7% 431 +7%
Pre-tax Profit 427 428 0% 459 +7% 493 +7%
Cost/income Ratio 52% 53% 53% -1% 52% -1%
BANCWEST
Total Operating Income 1,527 1,592 1,603 1% 1,843 +15% 1,935 +5%
Total Operating Expenses -818 -764 -779 2% -884 +14% -919 +4%
Operating Profit Pre Provisions 708 828 824 -1% 959 +16% 1,016 +6%
Provisions -95 -75 -58 -23% -69 +20% -73 +5%
Operating Pre-tax Profit 613 753 766 2% 890 +16% 943 +6%
Pre-tax Profit 595 599 619 3% 718 +16% 762 +6%
Cost/income Ratio 54% 48% 49% 48% -1% 48% -1%
WEALTH AND ASSET MANAGEMENT
Total Operating Income 1,073 1143 1,390 22% 1,474 +6% 1,562 +6%
Operating Profit Pre Provisions 278 298 468 57% 515 +10% 565 +10%
Provisions -13 -12 -8 -33% -8 +5% -9 +5%
Pre-tax Profit 208 250 434 74% 477 +10% 524 +10%
Cost/income Ratio 74% 74% 66% -10% 65% -2% 64% -2%
INSURANCE
Total Operating Income 674 733 792 8% 839 +6% 889 +6%
Provisions 5 -4 -10 150% -11 +5% -11 +5%
Pre-tax Profit 352 391 394 1% 425 +8% 458 +8%
SECURITIES SERVICES
Provisions 0 0 -6 NM -6 +5% -7 +5%
Pre-tax Profit 227 82 130 58% 140 +8% 151 +8%
ADVISORY AND CAPITAL MARKETS
Total Operating Income 2,965 3,835 3,402 -11% 3,232 -5% 3,393 5%
Total Operating Expenses -2,245 -2,407 -2,233 -7% -2,121 -5% -2,206 4%
Operating Profit Pre Provisions 720 1,428 1,169 -18% 1,111 -5% 1,187 7%
Provisions 10 0 -6 NM -6 5% -7 5%
Operating Pre-tax Profit 730 1,428 1,163 -19% 1,104 -5% 1,181 7%
Pre-tax Profit 734 1,530 1,169 -24% 1,110 -5% 1,187 7%
Cost/income Ratio 76% 63% 66% 5% 66% 0% 65% -1%
FINANCING
Total Operating Income 2,181 1,983 2,184 10% 2,250 3% 2,340 4%
Total Operating Expenses -1,026 -977 -961 -2% -980 2% -1,009 3%
Operating Profit Pre Provisions 1,155 1,006 1,223 22% 1,270 4% 1,330 5%
Provisions -725 -633 -128 -80% -134 5% -148 10%
Operating Pre-tax Profit 430 373 1,095 194% 1,135 4% 1,182 4%
Pre-tax Profit 452 349 1,134 225% 1,174 4% 1,221 4%
54
Societe Generale
➤ Rating: Hold/Medium Risk (2M)
➤ Target price: €78 (current price €72)
➤ SOGN.PA
PE Rating
Figure 86. Societe Generale— PE+2yrs, relative to bank sector, 1999-2004 (Percentages)
130%
120% Societe Generale PE as % of sector PE
110%
100%
90%
80%
70%
60%
May-99
May-00
May-01
May-02
May-03
May-04
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Aug-99
Aug-00
Aug-01
Aug-02
Aug-03
Sep-04
Figure 87. Societe Generale— PE+2yrs, relative to bank sector, 1999-2004 (Percentages)
14.0x
Societe Generale PE +2yr
13.0x
12.0x
11.0x
10.0x
9.0x
8.0x
7.0x
May-99
May-00
May-01
May-02
May-03
May-04
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Aug-99
Aug-00
Aug-01
Aug-02
Aug-03
Sep-04
55
Investment Thesis
We rate Societe Generale a Hold/Medium Risk (2M) with a €78 target price. We find
the shares reasonably valued, but we do not see any obvious catalysts or change of
direction in its core businesses. Historically, a more geared play on equity markets
and credit quality compared to BNP Paribas, we would prefer to seek our equity
‘plays’ elsewhere at loan losses are now so low that they are unlikely to provide
positive surprises in the near term.
has historically been a higher return and faster growing business compared to BNP
Paribas, but the current momentum appears to be with its cross-town rival. The latter
has eroded the previous star status that SG had in French retail banking, at least as
measured by profitability. In capital markets, SG has greater exposure to the equity
markets than its French peers, and SG shares typically outperform BNP Paribas when
equity markets/bank shares are rising. Investors seeking to ‘play’ a bullish call on
equity markets may prefer SG to BNP Paribas. However, it should be remembered
that SG also has reasonable gearing to fixed income markets and commercial
banking, not to mention retail banking, and is thus far from being the best ‘play’ on
equity markets. This can be better achieved by buying the shares of UBS or one of its
US peers. In addition to greater gearing to equity risk, SG also offers greater gearing
to credit risk, given its historically greater loan loss volatility and also greater
earnings sensitivity to this factor given its higher cost/income ratio. However, large
corporate credit losses are already at very low levels and thus unlikely to provide a
further positive earnings (or capital) boost from here.
Finally, as we discuss in greater detail in the valuation section below, we find the
shares reasonably valued. Using a normalised ROE of 15.6% — our 2005E ROE
adjusted for one-off items and 55bp loan loss ratio — we believe a target price-to-book
multiple of 1.7 times justifiable. This supports our €78 target price. We are forecasting
cash EPS at SG to increase from €7.3 in 2004E to €7.9, which places the shares at
9.8x 2004E cash EPS and 9.1x 2005E. Since 2002, SG shares have tended to trade at
between 90% and 105% of the sector average P/E multiple. Thus, on our estimates, the
shares are currently trading at the lower end of that recent historical range.
Valuation
ROE/Price-to-book
We use a ROE/Price-to-book approach as a primary valuation guide for the French
banks, similar to the other European banks we follow (target P/B = (ROE-G)/(COE-G).
Our forecast underlying ROEs are a key driver of our valuation for these shares. We use
a normalised ROE that makes two modifications to our forecasts — firstly, we exclude
items such as capital gains and goodwill; secondly, we adjust current levels of loan
losses, using the average loss ratio over 2000-04E (loss ratio of c55bp for both banks).
Using the more conservative possible assumptions, we can justify a valuation of €78 per
share for SG. At its closing price of €71 on 28 September, we can derive 10% upside for
the shares. In addition, if 2004E dividends grow in in-line with reported earnings, the
shares offer a 4% dividend yield, for an estimated total return of c14%.
56
Figure 88. SG — Sustainable ROE and Valuation

2005E 2005E 2005E 2005E
ROE 16.9% 16.6% 15.5% 15.5%
COE 9.0% 9.0% 9.0% 9.0%
G 0.0% 2.5% 0.0% 2.5%
BVPS 04E 45.3 45.3 45.3 45.3
BVPS 05E 49.6 49.6 49.6 49.6
Target P/B Multiple 1.87 2.17 1.72 2.00
Price Target 04 84.9 98.2 78.0 90.6
Price Target 05 92.9 107.5 85.4 99.2
Cash EPS 04 7.29 7.29 7.29 7.29
Cash EPS 05 7.87 7.87 7.87 7.87
Source: Smith Barney analysis.
Earnings and P/E multiple comparison

We are forecasting cash EPS at SG to increase from €7.3 in 2004E to €7.9 in 2005E.
At its closing price of €71 on 28 September, the shares are trading at 9.8x 2004E
cash EPS and 9.1x 2005E. By comparison, the European bank sector trades at 10.2x
2005E cash EPS. Since 2002, SG shares have tended to trade at between 90% and
105% of the sector average P/E multiple. Thus, on our estimates, the shares are
currently trading at the lower end of that recent historical range.
We are forecasting 8% cash EPS growth in 2005E. We expect underlying cash EPS
to increase close to 24% in 2004E versus 2003, driven primarily by substantially
lower loan losses. However operating profit growth (pre-provisions and excluding
capital gains and one-off items) is expected to be only 2% in 2004E, increasing to
7% in 2005E. Net profit in 2004E is boosted by currently low loan losses — 2004E
loss ratio of 36 basis points (average customer loans) versus c55 basis point average
over 2000-04E. However, we would note that we expect the average sector loan loss
ratio to be 46bp in 2004E compared to 58bp in 2003, so the earnings of SG are not
unduly flattered versus peers.
Risks
We rate Societe Generale Medium Risk. The rating on the stock is derived after
consideration of a number of specific factors. These factors include an assessment of
industry-specific risks, financial risk and management risk. In addition, we consider
historical share price volatility, based upon the input of the Smith Barney
quantitative research team, as a possible indicator of future stock-specific risk. We
believe a Medium Risk rating is appropriate given the bank’s earnings gearing to the
French economy and the global corporate credit cycle.
The following risks may cause the shares to deviate from our target price.
57
Credit risk and earnings sensitivity — One of the most significant financial
risks faced by a broadly based commercial bank is sensitivity to loan losses. Past
results indicate that SG is more exposed to volatility in loan losses. In addition, its
higher cost/income ratio — 67%, 2004E versus 61% for BNP Paribas — gives it
greater earnings sensitivity to volatility in loan losses. The weakest financial result in
recent years for SG was 2002 (reported ROE 8.9%, underlying ROE 11.4%), and it
was when its loan loss provisions as a percentage of customer loans peaked at 70
basis points. Following the improvement in the global corporate credit cycle, we
expect the bank’s loan loss ratio to be below 40 basis points in both 2004E and
2005E. An increase in loan losses would obviously reduce reported earnings. If we
assume a re-run of 1998, when SG booked a loan loss ratio of 118 basis points, our
2005E underlying ROE would decline over five percentage points to 11.4% from our
forecast 16.6%. This would be a similar underlying ROE as achieved in 2002. By
contrast, adjusting BNP Paribas’ 2005E earnings for its 1998 credit experience
would result in a reduction of only two and a half percentage points in forecast
underlying ROE from 16.3% to 13.7%.
Capital market risks — Wholesale banking accounts for approximately one-
third of the revenues and capital of SG, and the bank may be exposed to downturns
in its any of its key market segments, such as global equity derivatives, European
capital markets or structured finance. SG has tended to suffer greater earnings and
revenue volatility in its wholesale banking activities compared to BNP Paribas. An
analysis of quarterly wholesale banking earnings trends indicates five occasions in
the past three years when the quarter-on-quarter earnings change has been greater
than fifty percent. This is a similar hit rate as at Deutsche Bank. By contrast, BNP
Paribas has suffered only two such quarters in the past three years and UBS only one.
Trading risk, as measured by VAR, has evolved in a mixed direction. Total reported
VAR at SG at end 2Q04 was lower than two years ago, but was up year-on-year
(unlike BNP Paribas). Fixed income VAR in 2Q04 was stable versus two years
earlier, but up substantially year-on-year. However, both Deutsche Bank and UBS
have reported greater increases in total VAR recently.
Acquisition risk and surplus capital — SG has often worn the mantle of a
possible takeover candidate in French or European banking, rather than being viewed
as a vehicle for the acquisition ambitions of management. Thus, it has tended to be
less discussed from an “acquisition risk” perspective. However, we would note that
its Tier 1 ratio at end 2Q04 of 8.5% was higher than that of BNP Paribas. While the
higher risk profile of SG may warrant a higher Tier 1 ratio, we believe the bank is
more than adequately capitalised. In addition, unlike BNP Paribas, SG has not
pursued an aggressive buy back programme.
Derivative accounting — The 2005 switch to IAS accounting will result in
restatements and changes in accounting presentation for European banks, French
banks have been particularly hostile to various parts of the proposed IAS regime, and
we have stock specific examples (such as the transition to US GAAP by Deutsche
Bank and Credit Suisse) of the stock price uncertainty caused by accounting changes.
However, the most contentious changes — IAS 32 and 39 which affect financial
instruments, including derivative hedging — have not been endorsed by the EU.
58
Financial Forecasts
Figure 89. SocGen — Group Profit and Loss Account, Key Rations and Selected Other Items, 1999-06E (Euros in Millions)
GROUP P&L (SB Format)
Net Interest Income 3,951 4,091 5,086 5,767 6,613 +15% 5,571 -16% 5,793 +4% 6,025 +4%
Net Fee & Commission Income 3,892 4,900 5,008 4,993 5,084 +2% 5,335 +5% 5,655 +6% 5,938 +5%
Net Trading Income 2,879 4,223 3,258 3,263 3,002 -8% 4,404 +47% 4,536 +3% 4,750 +5%
Net Insurance Income 79 45 136 51 45 -12% 50 +11% 53 +6% 56 +5%
Other Income 608 640 587 630 1,013 nm 766 -24% 812 +6% 853 +5%
Personnel Expenses -4,915 -5,893 -5,897 -6,179 -6,323 +2% -6,607 +4% -6,805 +3% -7,044 +3%
General & Administrative Expenses -2,958 -3,273 -3,698 -3,669 -3,580 -2% -3,604 +1% -3,712 +3% -3,842 +3%
Depreciation of Property & Equipment -411 -488 -601 -678 -665 -2% -631 -5% -657 +4% -676 +3%
Operating Profit pre Provisions 3,125 4,245 3,879 4,178 5,189 +24% 5,285 +2% 5,676 +7% 6,061 +7%
Credit Loss Expense -723 -753 -1,067 -1,301 -1,226 -6% -708 -42% -780 +10% -821 +5%
Profit Before Tax 2,402 3,492 2,812 2,877 3,963 +38% 4,576 +15% 4,896 +7% 5,240 +7%
Gains on Long-term Invest & Changes in Prov 939 941 474 -299 397 -233% 179 -55% 160 -11% 160 +0%
Associate Income 61 31 -18 48 43 -10% 37 -14% 39 +5% 41 +6%
Net Non-recurring Expense -151 -70 -17 -170 -46 -73% -44 -4% -6 -86% -8 +33%
Tax -1,148 -1,357 -739 -649 -1,161 +79% -1,304 +12% -1,397 +7% -1,492 +7%
Amortisation of Goodwill & Intangibles -37 -60 -76 -184 -217 +18% -230 +6% -230 +0% -230 +0%
Change in General Banking Risk Reserve 0 0 0 159 -104 -165% 0 -100% 0 NM 0 NM
Minorities -86 -279 -282 -385 -383 -1% -324 -15% -347 +7% -371 +7%
Net Profit (Attributable) 1,980 2,698 2,154 1,397 2,492 +78% 2,891 +16% 3,115 +8% 3,341 +7%
SB Attributable Profit 1,410 2,108 1,864 1,801 2,418 +34% 2,991 +24% 3,229 +8% 3,455 +7%
PER SHARE FIGURES
EPS - Basic, as Reported 4.92 6.78 5.35 3.41 6.07 +78% 7.05 +16% 7.59 +8% 8.14 +7%
EPS - Basic, SB 3.50 5.30 4.63 4.39 5.89 +34% 7.29 +24% 7.87 +8% 8.42 +7%
Dividend per Share 1.55 2.10 2.10 2.10 2.50 +19% 2.88 +15% 3.31 +15% 3.80 +15%
Payout Ratio 31% 31% 39% 62% 41% -33% 41% -1% 44% +7% 47% +7%
Book Value Per Share 29.6 34.4 38.6 38.4 41.1 +7% 45.3 +10% 49.6 +9% 53.9 +9%
OPERATING RATIOS
Net Interest Margin 0.94% 0.92% 1.05% 1.14% 1.27% 1.02% 1.03% 1.03%
Non-interest Income as % of Total 65% 70% 63% 60% 58% 65% 65% 65%
Compensation Ratio 43% 42% 42% 42% 40% 41% 40% 40%
Cost / Income Ratio 73% 69% 72% 72% 67% 67% 66% 66%
Operating Profit / Avg RWAs 1.94% 2.61% 2.23% 2.25% 2.71% 2.65% 2.74% 2.81%
Provision Charge / Customer Loans 0.50% 0.46% 0.58% 0.70% 0.63% 0.36% 0.38% 0.38%
Effective Tax Rate (Ex Goodwill, Etc) 35% 31% 23% 26% 27% 27% 27% 27%
Return on Avg RWAs 1.23% 1.66% 1.24% 0.75% 1.30% 1.45% 1.50% 1.55%
Return on Equity (As Reported) 18.3% 21.1% 14.6% 8.9% 15.3% 16.3% 16.0% 15.7%
Return on Equity (SB) 13.0% 16.5% 12.7% 11.4% 14.8% 16.9% 16.6% 16.3%
CAPITAL RATIOS
BIS Tier 1 Ratio 7.6% 8.9% 8.4% 8.1% 8.7% 8.8% 9.6% 10.1%
BIS Total Capital Ratio 11.9% 12.5% 11.5% 11.3% 11.7% 11.7% 12.4% 12.8%
Equity / RWAs 7.4% 8.3% 8.6% 8.4% 8.6% 9.1% 9.6% 10.1%
Loans / Deposits 92% 99% 91% 94% 99% 98% 98% 98%
SHARES OUTSTANDING
Basic (Period End, m) 402 398 403 410 410 410 410 410
Basic (Period Avg, m) 402 398 403 410 410 410 410 410
59
Figure 90. SocGen — Divisional Profit and Loss Account, 1999-06E (Euros in Millions)
TOTAL RETAIL BANKING
Total operating income 5,849 6,744 7,810 8,447 8,980 +6% 9,702 +8% 10,167 5% 10,614 4%
Total operating expenses -4,216 -4,710 -5,322 -5,692 -5,983 +5% -6,400 +7% -6,615 3% -6,837 3%
Operating profit pre provisions 1,633 2,034 2,488 2,755 2,997 +9% 3,302 +10% 3,552 8% 3,777 6%
Provisions -329 -383 -511 -649 -647 -0% -619 -4% -590 -5% -614 4%
Operating pre-tax Profit 1,304 1,651 1,977 2,106 2,350 +12% 2,683 +14% 2,962 10% 3,162 7%
Non Operating Items 62 61 -3 35 19 -46% 24 +26% 20 -16% 20 0%
Pre-tax Profit 1,366 1,712 1,974 2,141 2,369 +11% 2,707 +14% 2,982 10% 3,183 7%
Cost/income ratio 72% 70% 68% 67% 67% -1% 66% -1% 65% -1% 64% -1%
o/w FRENCH RETAIL BANKING
Total operating income 4,504 4,887 5,203 5,414 5,645 +4% 5,875 4% 6,110 4% 6,355 4%
Total operating expenses -3,365 -3,541 -3,678 -3,806 -3,915 +3% -4,091 4% -4,213 3% -4,340 3%
Operating profit pre provisions 1,139 1,346 1,525 1,608 1,730 +8% 1,784 +3% 1,897 6% 2,015 6%
Provisions -230 -206 -244 -297 -331 +11% -301 -9% -256 -15% -264 3%
Operating pre-tax Profit 909 1,140 1,281 1,311 1,399 +7% 1,483 +6% 1,641 11% 1,751 7%
Non Operating Items 23 23 17 14 12 -14% 2 -84% -2 -203% -2 0%
Pre-tax Profit 932 1,163 1,298 1,325 1,411 +6% 1,485 +5% 1,643 11% 1,753 7%
Cost/income ratio 75% 72% 71% 70% 69% -1% 70% +0% 69% -1% 68% -1%
o/w INTERNATIONAL RETAIL BANKING & FINANCIAL SERVICES
Total operating income 1,345 1,857 2,607 3,033 3,335 +10% 3,827 +15% 4,057 6% 4,260 5%
Total operating expenses -851 -1,169 -1,644 -1,886 -2,068 +10% -2,309 +12% -2,401 4% -2,498 4%
Operating profit pre provisions 494 688 963 1,147 1,267 +10% 1,518 +20% 1,655 9% 1,762 6%
Provisions -99 -177 -267 -352 -316 -10% -318 +1% -334 5% -351 5%
Operating pre-tax Profit 395 511 696 795 951 +20% 1,200 +26% 1,321 10% 1,411 7%
Non Operating Items 39 38 -20 21 7 -67% 22 +214% 22 0% 22 0%
Pre-tax Profit 434 549 676 816 958 +17% 1,222 +28% 1,343 10% 1,434 7%
Cost/income ratio -3% -3% 63% 62% 62% -0% 60% -3% 59% -2% 59% -1%
GLOBAL INVESTMENT MANAGEMENT
Total operating income 673 900 1,097 1,981 1,983 +0% 2,152 +9% 2,273 6% 2,401 6%
Total operating expenses -397 -491 -687 -1,481 -1,511 +2% -1,578 +4% -1,641 4% -1,707 4%
Operating profit pre provisions 276 409 410 500 472 -6% 573 +22% 632 10% 694 10%
Provisions 0 -4 -1 -15 -13 -13% -23 +77% -24 5% -25 5%
Operating pre-tax Profit 276 405 409 485 459 -5% 550 +20% 608 10% 669 10%
Non Operating Items 0 0 -5 -9 -10 +11% 1 -110% 1 5% 1 5%
Pre-tax Profit 276 405 404 476 449 -6% 551 +23% 609 10% 670 10%
Cost/income ratio 59% 55% 63% 75% 76% +2% 73% -4% 72% -2% 71% -2%
CORPORATE AND INVESTMENT BANKING
Total operating income 4,756 6,096 5,037 4,364 4,734 +8% 4,338 -8% 4,478 3% 4,676 4%
Total operating expenses -3,332 -4,251 -3,721 -3,139 -2,913 -7% -2,706 -7% -2,757 2% -2,854 3%
Operating profit pre provisions 1,424 1,845 1,316 1,225 1,821 +49% 1,632 -10% 1,721 5% 1,823 6%
Provisions -290 -207 -543 -720 -510 -29% -64 NM -165 157% -179 9%
Operating pre-tax Profit 1,134 1,638 773 505 1,311 +160% 1,568 +20% 1,556 -1% 1,643 6%
Non Operating Items -16 81 25 42 46 +10% 12 -74% 12 1% 12 1%
Pre-tax Profit 1,118 1,719 798 547 1,357 +148% 1,595 +18% 1,568 -2% 1,656 6%
Cost/income ratio 70% 70% 74% 72% 62% -14% 62% +1% 62% -1% 61% -1%
CORPORATE CENTRE
Total operating income 132 59 -70 -219 -60 -73% -65 +8% -68 4% -70 3%
Total operating expenses -340 -202 -374 -214 -161 -25% -158 -2% -160 2% -163 2%
Operating profit pre provisions -208 -143 -444 -433 -221 -49% -223 +1% -228 2% -232 2%
Provisions -104 -159 -12 83 -56 -167% -2 NM -2 -15% -1 -15%
Operating pre-tax Profit -312 -302 -456 -350 -277 NM -225 -19% -230 2% -234 2%
Non Operating Items 803 760 489 -330 237 NM 135 -43% 160 19% 160 0%
Pre-tax Profit 491 458 33 -680 -40 -94% -90 +125% -70 -23% -74 6%
Cost/income ratio 258% 342% -534% -98% -268% +34% -243% -9% -237% -2% -234% -1%
60
Figure 91. SocGen — Sub-divisional Profit and Loss Account, 2002-06E (Euros in Millions)
2002 2003 2004E % Chg 2005E % Chg 2006E % Chg
INTERNATIONAL RETAIL BANKING
Total Operating Expenses -1,005 -1,039 -1,209 16% -1,258 4% -1,308 4%
Operating Profit Pre Provisions 670 663 756 14% 826 9% 880 7%
Provisions -217 -161 -164 2% -172 5% -181 5%
Operating Pre-tax Profit 453 502 592 18% 654 10% 699 7%
Pre-tax Profit 455 510 614 20% 676 10% 721 7%
Cost/income Ratio 60% 61% 62% 1% 60% -2% 60% -1%
FINANCIAL SERVICES
Total Operating Expenses -881 -1,029 -1,100 7% -1,144 4% -1,189 4%
Operating Profit Pre Provisions 477 604 762 26% 829 9% 882 6%
Provisions -135 -155 -154 -1% -162 5% -170 5%
Operating Pre-tax Profit 342 449 608 35% 668 10% 713 7%
Pre-tax Profit 361 448 608 36% 668 10% 713 7%
ASSET MANAGEMENT
Total Operating Income 987 911 934 3% 991 +6% 1,050 +6%
Provisions -8 -2 -6 200% -6 +5% -7 +5%
Pre-tax Profit 327 315 327 4% 359 +10% 393 +10%
PRIVATE BANKING
Provisions -8 0 -10 NM -11 +5% -11 +5%
Pre-tax Profit 60 85 116 36% 129 +12% 144 +11%
GSSI and Boursorama
Provisions 1 -11 -7 -36% -7 +5% -8 +5%
Pre-tax Profit 89 49 109 122% 121 +11% 134 +11%
ADVISORY AND EQUITY
Total Operating Income 1582 1864 1,794 -4% 1,884 5% 1,978 5%
Total Operating Expenses -1518 -1329 -1,287 -3% -1,338 4% -1,392 4%
Operating Profit Pre Provisions 64 535 508 -5% 546 8% 587 7%
Provisions -18 -37 -31 -16% -33 5% -34 5%
Operating Pre-tax Profit 46 498 477 -4% 513 8% 553 8%
Pre-tax Profit 30 496 475 -4% 512 8% 551 8%
CORPORATE BANKING & FIXED INCOME
Total Operating Income 2782 2870 2,543 -11% 2,594 2% 2,698 4%
Total Operating Expenses -1621 -1584 -1,419 -10% -1,419 0% -1,462 3%
Operating Profit Pre Provisions 1161 1286 1,124 -13% 1,175 5% 1,236 5%
Provisions -702 -473 -33 -93% -132 300% -145 10%
Operating Pre-tax Profit 459 813 1,106 36% 1,043 -6% 1,091 5%
Pre-tax Profit 517 861 1,120 30% 1,057 -6% 1,105 5%
61
Appendix: IAS/IFRS accounting

changes
SG investor day extracts
At their investor day in Paris on 27 September, SG provided a discussion of the
impact of IAS/IFRS on French banks. Readers may wish to refer to the presentation
to be found on the SG website, and for reference we provide below extracts from
some key slides.
Figure 92. French Banks — IAS versus French GAAP Accounting Pillars
French GAAP IAS
Balance Sheet Valuation Based on historical cost. Legal form prevails Fair value approach, substance prevails over form
Earnings Reflect operations carried out + principle of conservatism Information driven by balance sheet and measurement of performance
Sector Comparisons Adaptation to sector considering mgmt intent Absence of sector-based standards
Guidelines and Principles Principles are defined and their application is clear Based on principles but no guidelines are provided for their application
Non-balance sheet items Regulation – Impact of IAS 39 Regulation on Securities Includes non-balance sheet data (unrealised capital gains) as well as
Portfolios and Hedging Derivatives qualitative data
Sources: Societe Generale and Smith Barney.
Figure 93. IAS Regulation Overview and Impact on French Banks Accounting
Rule Endorsed by EU Subject Comments Financial Impact / Accounting Method
IFRS 1 ✓ First-Time Adoption Comments Financial Impact / Accounting Method
IFRS 2 ✗ Share-based Payments This regulation is currently under Stock options and Share issues to be recognised
discussion on P&L only;
IFRS 3 ✗ Business Combinations Assets are booked at fair value; Under IFRS1 companies can choose to adopt or
goodwill is fair value minus price not new methods for business combinations
paid; restructuring charges are pre-Jan04.
booked to P&L, not goodwill; Only
purchase method allowed; No
goodwill amortisation allowed;
Impairment test for goodwill
introduced.
IFRS 4 ✗ Insurance Contracts Currently under discussion
between regulators and IAS body
IAS 17 ✓ Leases Changes in classification of No impact - French GAAP already reflects this
leases
IAS 18 ✓ Fees & Commissions Syndication fees, opening loan No impact - French GAAP already reflects this
fees, sales commissions to be
spread over time
IAS 19 ✓ Employee Benefits Benefits must be identified and Can be booked once against equity or spread out
valued; Provisions for these are in P&L under IFRS1; Charged against P&L under
mandatory IAS19
IAS 27 ✓ Consolidation IAS place substance over form of No major changes expected from this rule
the application of consolidation
criteria
IAS 32 & 39 ✗ Financial Instruments Financial Impact / Accounting Method
(Securities, Derivatives &
Hedging, Day One P&L,
Provisions)
IAS 16,36,38,40 ✓ Fixed Assets Fair Value can be used; If value in Under IFRS1 companies can choose to revalue at
use is lower than net book a loss market value; Rest of rule converges w/ French
must be booked through P&L GAAP as of 2005 (except Fair Value concept)
Sources: Societe General and Smith Barney analysis.
62
Figure 94. IAS Regulation — Impact of IAS 39 Regulation on Securities Portfolios and Hedging Derivatives
Reclassification of Securities Portfolios
French GAAP IAS
Previous Classification Previous Accounting New Classification New Accounting

Trading Marked-to-market in P&L Trading Portfolio Marked-to-market in P&L
Short-term Investment Amortised Cost + LCoM Investment Portfolio Marked-to-market in Equity; Provision for l/t depreciation
Long-term equity investments Acquisition Cost + LCoM Held-to-maturity Portfolio Amortised cost; Tainting rule; Provision for Credit Risk
Long-term investment Amortised Cost + Provision for Credit Risk
Hedging Derivatives
French GAAP IAS
Previous Classification Previous Accounting New Classification New Accounting

Micro-hedging Accrual of Interest or Historical Value Fair Value Hedge At Fair Value in P&L
Macro-hedging Accrual of Interest or Historical Value Cash Flow Hedge At Fair Value in Equity
Macro Fair Value hedge At Fair Value in P&L
Trading At Fair Value in P&L
ALM is deemed as not eligible for IAS 39 as it creates volatility which does not reflect the nature of the business or the underlying earnings trend.
63
Notes
64
Notes
65
ANALYST CERTIFICATION Appendix A-1
We, Ronit Ghose and Albert Coll, hereby certify that all of the views expressed in this research report accurately reflect our personal
views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or
indirectly related to the specific recommendation(s) or view(s) in this report.
IMPORTANT DISCLOSURES
BNP Paribas (BNPP.PA)
Ratings and Target Price History Target Closing
EUR # Date Rating Price Price
1: 7 Nov 01 2M *54.50 48.15
Chart current as of 29 September 2004

2: 7 Dec 01 2M *56.00 50.10
3: 22 Feb 02 2M 56.00 52.20
60 4: 1 Mar 02 2M *59.00 55.10
6 5: 5 Mar 02 2M *60.00 56.40
6: 23 May 02 2M *63.00 61.00
7: 2 Aug 02 2M *60.00 45.40
3 15 19 50 8: 6 Sep 02 Stock rating system changed
7 16
2 4 14 17 9: 6 Sep 02 2M 60.00 44.00
1 11 13 18 10: 9 Oct 02 *1M *58.00 29.70
5 11: 25 Nov 02 1M *52.00 42.14
10 12 40 12: 6 Jan 03 1M 52.00 40.98
8 13: 31 Jan 03 1M *54.00 36.77
9 14: 12 Sep 03 Stock rating system changed
15: 12 Sep 03 1M 54.00 44.34
30 16: 2 Feb 04 1M *57.00 51.15
17: 6 May 04 1M *60.00 49.45
18: 13 Aug 04 Coverage suspended
20 19: 29 Sep 04 *1M *60.00 NA
*Indicates change.
O N D J FMAM J J A SO ND J FMAM J J A S O ND J FM AM J J A S
2002 2003 2004
Covered See "Important Disclosures" at the end of this report for
Not covered a description of the firm’s current and former rating systems
Societe Generale (SOGN.PA)

Ratings and Target Price History Target Closing
EUR # Date Rating Price Price
1: 7 Nov 01 2M *69.00 58.90
Chart current as of 29 September 2004
2: 20 Nov 01 2M *71.00 64.50

80 3: 22 Feb 02 2M *74.00 64.85
4: 16 May 02 2M *78.00 76.50
4 5: 30 Jul 02 *1M *73.00 55.05
70 6: 6 Sep 02 Stock rating system changed
15 18 7: 6 Sep 02 1M 73.00 55.45
7
17 8: 9 Oct 02 1M *70.00 38.10
6 16 9: 6 Jan 03 1M 70.00 58.20
3 5 10 60
14 10: 31 Jan 03 1M *68.00 54.40
9 11 11: 5 Aug 03 *2M 68.00 62.55
1 8 12: 12 Sep 03 Stock rating system changed
12 50 13: 12 Sep 03 2M 68.00 60.80
2
13 14: 7 Nov 03 2M *70.00 67.30
15: 2 Feb 04 2M *75.00 73.60
40 16: 13 May 04 2M *77.00 69.05
17: 13 Aug 04 Coverage suspended
18: 29 Sep 04 *2M *78.00 NA
30 *Indicates change.
O N D J FMAM J J A SO ND J FMAM J J A S O ND J FM AM J J A S
2002 2003 2004
Covered See "Important Disclosures" at the end of this report for
Not covered a description of the firm’s current and former rating systems
Within the past 12 months, Citigroup Global Markets Inc. or its affiliates has acted as manager or co-manager of a public offering of
securities of BNP Paribas and Societe Generale.
Within the past 5 years, Citigroup Global Markets Inc. or its affiliates has acted as manager or co manager of a public offering of equity
securities of BNP Paribas and Societe Generale.
Within the past 5 years, Citigroup Global Markets Inc. or its affiliates has acted as manager or co manager of a public offering of fixed
income securities of BNP Paribas and Societe Generale.
Citigroup Global Markets Inc. or its affiliates has received compensation for investment banking services provided within the past 12
months from BNP Paribas and Societe Generale.
Citigroup Global Markets Inc. or its affiliates expects to receive or intends to seek, within the next three months, compensation for
investment banking services from BNP Paribas and Societe Generale.
Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following company(ies) as investment banking client(s):
BNP Paribas and Societe Generale.
Analysts' compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global
Markets Inc. and its affiliates ("the Firm"). Like all Firm employees, analysts receive compensation that is impacted by overall firm
profitability, which includes revenues from, among other business units, the Private Client Division, Institutional Equities, and Investment
Banking.
66
Smith Barney Equity Research Ratings Distribution
Data current as of 30 June 2004 Buy Hold Sell
Smith Barney Global Equity Research Coverage (2402) 40% 43% 17%
% of companies in each rating category that are investment banking clients 58% 56% 47%
Banks -- Europe (48) 48% 42% 10%
% of companies in each rating category that are investment banking clients 78% 70% 80%
Guide To Investment Ratings:
Smith Barney's stock recommendations include a risk rating and an investment rating.
Risk ratings, which take into account both price volatility and fundamental criteria, are: Low [L], Medium [M], High [H], and Speculative
[S].
Investment ratings are a function of Smith Barney's expectation of total return (forecast price appreciation and dividend yield within the
next 12 months) and risk rating.
For securities in developed markets (US, UK, Europe, Japan, and Australia/New Zealand), investment ratings are: Buy [1] (expected total
return of 10% or more for Low-Risk stocks, 15% or more for Medium-Risk stocks, 20% or more for High-Risk stocks, and 35% or more for
Speculative stocks); Hold [2] (0%-10% for Low-Risk stocks, 0%-15% for Medium-Risk stocks, 0%-20% for High-Risk stocks, and 0%-35%
for Speculative stocks); and Sell [3] (negative total return).
Investment ratings are determined by the ranges described above at the time of initiation of coverage, a change in risk rating, or a
change in target price. At other times, the expected total returns may fall outside of these ranges because of price movement and/or
volatility. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management.
Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after
evaluating the stock's expected performance and risk.
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See page 66 for Analyst Certification and Important Disclosures

1999 And All That

French Banks — BNP Paribas and Société

➤ This conversion was achieved by successfully

➤ In this report, we initiate coverage on BNP Paribas

Financial Forecasts and Investment Thesis — By Bank 47

Modern French banking began in 1999. A three-way bid battle

The disappearing French discount

Investment Summary Where’s the next ‘big idea’ in French banking?

Well managed franchises, attractive niches, inexpensive prices

Initiate coverage with a Buy rating on BNP Paribas

Initiate coverage with a Hold rating on Societe Generale

BNP Paribas — Buy rating, €60 target price

Societe Generale — Hold rating, €78 target price

➤ We forecast c15-16% sustainable ROEs for BNP Paribas and Societe

French banks move from periphery to centre

Sources: Datastream and Smith Barney analysis.

So why did the French banks increase in importance?

Successful domestic consolidation

Retail focused strategies and a resilient economy

Net new bank stock issuance

Surviving a sector de-rating

From a 70% rating to a sector multiple

SG P/E vs BNPP P/E 5-year average

Why did the French banks re-rate?

The 1999 French bank battle

Feb-01 Announcement of SG-Paribas

The retail banking holy grail

Allocated Allocated Allocated

Total Retail 10.9 42% 24% 15.9 53% 34%

Total Retail 6.6 33% 20% 9.7 44% 27%

Continuity of management and ideas

SBP lost . . . and then won

What’s the next big idea?

Attractive for value investors

Valuing BNP Paribas and SG

As Forecast As Forecast Static Model Growth-Adjusted Model

Figure 19. SG — Sustainable ROEs and Key Valuation Inputs

As Forecast As Forecast Static Model Growth-Adjusted Model

Differing perceptions of risk

SG a riskier stock compared to the old BNP

Sources: Datastream and Smith Barney analysis.

SG shares remain riskier though relative volatility has declined

Sources: Datastream and Smith Barney analysis.

An interesting timing variation of this theme of SG performance correlation to

Retail Banking — Home and Away

➤ SG has historically been more profitable and a faster grower, but

➤ BNP Paribas has a more focused international retail network and

Retail banking overview

Attractive features of retail banking in France . . .

The non-quoted sector is an important participant in French retail banking,

. . . but with limited revenue growth potential

Chasing retail growth overseas and in specialised finance

Overview of French Banking Market

Commercial Banks Mutual and Mutual and

Sources: European Bank Health Barometer and Smith Barney.

Market segmentation by demographic and regional characteristics

Figure 28. Socioeconomic Profile of Customer Base

Figure 30. SG — French Retail Banking Client Age Pyramid (Percentages)

SG French Bank average

Sources: SG 2002 Investor Day and Smith Barney estimates.

Profitable retail banking franchises

Source: Smith Barney estimates. Source: Smith Barney estimates.

BNP Paribas closing the gap with SG on French retail profitability