N° 29 : French banks’ performance in 2013

At the same time, continuing efforts to consolidate public finances in several European Union countries meant that macroeconomic conditions were relatively depressed in these banks’ main markets, particularly Italy and Spain.

Against this backdrop the top six French banking groups reported sharply higher profits compared with 2012, which was particularly tough:

• aggregate net banking income was up 1.1% to EUR 136.5 billion on the back of retail banking in France;

• the banks' restructuring programmes helped reduce operating costs by 0.8% overall and lowered the average cost-to-income ratio by 1.3 points to 67.9%;

• the cost of risk declined 2.7%, despite provisions for litigation at SG and BNPP and changes to provisioning policies at several groups. However, the drop mainly reflects lower cost of risk in corporate and investment banking, whereas the cost of risk actually rose further in retail banking;

• in sum, the six largest French banking groups generated net profit (group share) of EUR 18 billion in 2013, more than twice the 2012 figure of EUR 8.4 billion.

At the same time, the groups continued to refocus their balance sheets and strengthen their financial structure:

• all posted improved solvency, with full CRD4 Tier 1 common equity ratios of 10% or more. Moreover, all reported leverage ratios greater than 3%;

• the liquidity position also continued improving. Quick liquidity reserves, which grew further in 2013, are largely sufficient to cover short-term funding requirements; medium- to long-term refinancing during the year was above-target, enabling the banks to get ahead of their 2014 refinancing schedules; and loan-to-deposit ratios declined again.

This overall improvement should not conceal the major risks that continued to weigh on the largest French banking groups, particularly in terms of profitability. The main contingencies were stubbornly mediocre macroeconomic conditions and an unfavourable yield curve:

• a downturn in the economic and social climate could cause a more serious contraction in credit demand and a rebound in the cost of risk (especially in retail banking) due to a further decline in asset quality;

• a sharp increase in market short- and medium-term interest rates triggered by higher risk premiums could raise the cost of bank funding; where these costs are not passed through swiftly to lending rates, they could put additional pressure on margins (the net interest margin for the six main French banking groups dipped to 4.3% in 2013).

From this point of view, it is especially important for banks to meet the cost-cutting targets they have announced.

Two other factors could quickly affect the cost of risk at French banks:

• in the near term, the ECB’s comprehensive assessment could result in additional provisioning requirements that are hard to quantify at the moment, given the unprecedented nature of the methodology being used. For example, some of the data used to examine banks' assets have never been gathered before and are liable to raise problems of quality or availability in some portfolios. Other drawbacks include the use of models based on these same data, the application of conservative hypotheses when data are lacking, the extrapolation of results obtained from sampling, and a collective provisioning methodology that differs from that generally used by French banks. Nonetheless, French banks seem to be in a better position than their European counterparts to cover their doubtful loans;

• in the near and medium term, and in common with the rest of the banking sector worldwide, French banks could face heightened operational risk due to the legal and compliance component. French groups have set aside substantial provisions for current legal proceedings and fines already handed down for various reasons, such as the manipulation of interbank indices and the failure to respect US embargo rules set by the Office of Foreign Assets Control.

With the introduction of the Single Supervisory Mechanism, the Autorité de contrôle prudentiel et de résolution (ACPR) will continue to scrutinise developments in the French banking system as a whole, liaising closely with ECB supervisors starting in November 2014. Attention will be paid first and foremost to the largest groups and the specific role they play in the European banking system.