French banks face increasing challenges to avoid electoral shock

French President Emmanuel Macron is campaigning for re-election in Marseille on April 16.
Credit: Louise Delmotte/Getty Images

France’s biggest lenders will grapple with dealing with deteriorating earnings prospects and asset quality after Emmanuel Macron’s re-election as president on April 24.

Macron beat far-right candidate Marine Le Pen by a margin of 17 percentage points, avoiding a Le Pen victory that would have sown uncertainty over the country’s future direction. Le Pen is a longtime Eurosceptic, and there were fears that his election would result in a loosening of political and economic ties between France and the European Union.

The share prices of the three largest French banks by total assets – BNP Paribas SA, Crédit Agricole SA and Société Générale SA – had already struggled in 2022 before growing concerns over a possible Le Pen presidency pushed them even lower in early April, before recovering in the lead up to the final vote. Soaring inflation and economic upheaval following Russia’s invasion of Ukraine have dashed hopes of a lucrative recovery in bad debt provisions related to COVID-19, while French banks are also particularly reliant on fixed-rate loans, undermining the benefit of any Eurozone rates rising, and further suggesting a slowdown this year after a record 2021.

“French banks are not going to experience continued strong revenue growth,” Arnaud Journois, vice president, financial institutions at ratings agency DBRS Morningstar, said in an interview. “The political environment in Europe and inflation are big challenges.”

BNP, CreditAg and SocGen all posted record profits in 2021, according to data from S&P Global Market Intelligence. Unlisted Groupe BPCE had its second best year ever. All four banks also posted record or near-record revenues, helped by the global economic rebound following the pandemic shutdowns.

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Growth in bad debts

Attempts by lenders to maintain this momentum will be countered by euro zone inflation which jumped to 7.5% in March from 5.9% in February. The French central bank estimated in March that French GDP growth would slow to 2.8% in 2022, from 7.0% in 2021, in an adverse scenario.

In addition to depressing French bank revenues, a slowdown in economic growth would threaten the ability of many borrowers to repay their loans, increasing the cost of loan losses for lenders.

“A further significant deterioration in geopolitical issues in Europe with more ripple effects on the macroeconomic climate would mean that the cost of risk would rise materially,” said Olivier Panis, senior vice president of the financial institutions group for France and the Benelux to the credit rating agency. Moody’s.

The fall in the cost of risk was one of the main drivers of French banks’ profits in 2021 following the huge provisions for bad debts they built up in 2020 in response to the COVID-19 pandemic. The aggregate cost of impairments on loans to customers of the four largest French banks fell by more than half in 2021, from 13.5 billion euros in 2020 to 6.7 billion euros, according to data from Market intelligence.

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Analysts had expected French banks to start releasing some of the bad debt provisions they had built up in response to the COVID-19 pandemic in 2022, which would have boosted profits. Such releases are less likely as the global economic outlook deteriorates.

“Increased commodity volatility and a broader weakening economic outlook may force banks to set aside higher provisions, although we also expect banks to use some of the provisions set aside in relation to COVID-19 which were not released in 2021,” DBRS Morningstar said in a March 16 report.

Groupe BPCE declined to comment on this article. BNP Paribas, SocGen and CrstarAgricole said did not respond to requests for comment.

Exposure to Russia, interest rate

French banks will derive less income from the Russian market in the future. SocGen, which had an exposure of 18.6 billion euros at the end of 2021, withdraws, sells its Rosbank subsidiary and insurance business amid global sanctions. BNPParibas and CRstarsays Agricole are also coming out and Groupe BPCE is reducing its activities in Russia.

Even the widely expected interest rate hike by the European Central Bank is unlikely to offset the downward pressure on French lenders’ incomes in 2022. While a rate hike by the ECB in response to soaring inflation will boost lending margins and net interest income for eurozone banks. French banks will be among the last to feel the benefits.

Most loans in France are fixed rate,” Journois said. “So it would theoretically take several years for the full impact on the new generation of loans to fully materialize.”

The revenue outlook for the major corporate and investment banking divisions of France’s largest banks is also mixed. Increased demand for currency and commodity hedging in response to market turmoil caused by Russia’s invasion of Ukraine will likely translate into strong first-quarter results, Panis said. But a prolonged economic downturn will offset this with lower costs due to reduced M&A activity and reduced debt issuance due to heightened uncertainty, while more extreme market volatility is also a downside risk, Panis said.

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“You can win on some businesses, but lose on others,” Panis said. “Our central assumption at the start of this year anyway was that it would be less positive than last year in terms of CIB activity. [for French banks].”

Pressure on French banks’ earnings could be compounded by rising costs as soaring inflation begins to affect operating expenses, said Johann Scholtz, banking analyst at financial services firm Morningstar, owner of the DBRS rating agency.

“The trend you’ve seen across Europe of a bit of inflationary pressure is starting to form on the cost side and you can see that reflected in most of the results,” Scholtz said.

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