Shares in French bank BNP Paribas rose in a falling market yesterday (June 8) after a newspaper report that smaller local rival Societe Generale was mulling a tie-up that would create a combined bank ranking number three in Europe.

Les Echos said the head of Societe Generale had hired investment banks to advise on the possibility of a merger with larger domestic rival BNP Paribas.

The newspaper said both a friendly deal and hostile bid were being examined but that Societe Generale's management was divided over the idea. It named one of the banks advising SocGen as Morgan Stanley.

'We do not comment on rumours,' a Societe Generale spokeswoman said.

BNP shares opened more than three per cent higher and Societe Generale was down 0.3 per cent while European banks in general were dragged lower by concerns over rising interest rates.

The report of a possible merger between France's top listed banks comes after Italy's UniCredit, with which Societe Generale has been linked in the past, moved to merge with domestic rival Capitalia.

In the same consolidating European sector, Dutch ABN Amro agreed a deal with Barclays but also faces a rival offer by a consortium of Royal Bank of Scotland, Fortis and Santander.

BNP Chief Executive Baudouin Prot said on May 15 that his bank was not interested in any deal with Societe Generale, telling shareholders such a link would carry 'huge execution risks.'

BNP is larger than SocGen with a market capitalisation of around 80 billion euros compared with SocGen's 64 billion.

At the moment, HSBC is the biggest European bank by market value, followed by Royal Bank of Scotland and Banco Santander.

BNP is currently number 4 and SocGen ranks 9 by market capitalisation and the combination would be third.

The CGT trades union said in May that SocGen's Bouton had identified eight banks with whom it could strike a possible merger deal.

The CGT said that at meetings with unions, Bouton said there were eight possible partners for SocGen, including Italian bank UniCredit but not including BNP Paribas.

Societe General has regularly said it has the capacity to generate a high profitability on its own but would look at alternatives to see whether that could create more value.Reuters