N° 46 : French banks’ performance in 2014

They were, however, affected by a number of fairly sizeable exceptional items, including payment of the fine imposed on BNP Paribas by the US authorities. Excluding these exceptional items, profitability rose slightly:

• Aggregate net banking income (NBI) for the six groups rose by a modest 1.8% (0.8% after correcting for accounting effects related to own debt adjustment) on the strong performance by insurance and asset management. In contrast, French retail banking NBI was flat overall, and even deteriorated at some banks reflecting the combined impact of fee stabilisation, mainly because of the cap on service fees, and pressure on interest margin : on the asset side, the average return on outstanding personal home loans diminished further in a context of record high loan transfers and renegotiations while production of loans to businesses remained low given the sluggish economy in 2014 ; on the liabilities side, while banks have so far taken advantage of the sharp drop in the cost of market-based financing, returns on regulated deposits have fallen more slowly than non-administered funds.

• Cost of risk fell 17.8% and was concentrated in retail banking and corporate and investment banking. This trend reflects significant progress on risk quality. The improvement in cost of risk is only partially mitigated by the 1% increase in operating expenses: NBI less operating expenses and cost of risk rose 15.3%.

• Tax expense rose 14.4%, due mainly to the non-deductibility of the systemic risk tax and the increase, from 5% to 10.7%, in the exceptional contribution on the corporate tax, which was introduced in 2013 and then extended.

• In sum, the six largest French banking groups generated net profit (group share) of EUR 14.3 billion in 2014, down 20.6% from 2013. Adjusted for exceptional items, net profit (group share) rose 8%.

Earnings in Q1 2015 indicated an overall improvement in profitability, confirming the underlying trends of 2014 while highlighting the weaknesses observed in French retail banking:

• The main French banking groups that publish quarterly financial statements (BNPP, SG, GCA, GBPCE) generated net profit (group share) of EUR 4.4 billion, up 22.8% relative to Q1 2014. This sharp increase resulted primarily from the financial markets’ strong performance in response to the launch of the ECB's asset purchase programme in January 2015 and from a favourable foreign exchange effect.

• Income from French retail banking continued to slide, by as much as 0.8% in Q1 2015 compared with the year-ago period, despite renewed demand for credit by businesses and households.

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

• The six groups posted full CRD IV Common Equity Tier 1 ratios of more than 10%, with the overall ratio rising to 11.8% at 31 December 2014 from 11% at 31 December 2013. All the banks reported leverage ratios of more than 3%, calculated in accordance with the provisions of the European Commission delegated regulation of 10 October 2014.

• All groups had solid liquidity positions based on the new liquidity ratios: with the exception of Crédit Mutuel Group, which does not disclose this information, the groups all reported LCRs of more than 100%. The improvement in the LCR stemmed mainly from an increase, in the numerator of the ratio, in the share of high-quality assets (consisting mostly of sovereign securities and cash deposited with central banks), which was 11.4% of total assets at 31 December 2014.

• Loan-to-deposit ratios continued to decline due to the combined impact of increasing customer deposits and stagnating outstanding loan amounts.

Despite this progress, risks remain and are weighing on banks' profitability:

• The low interest rate environment poses a twofold risk: first, the smallness of the slope of the curve automatically reduces bank margins, with a particularly significant impact in France due to the slow adjustment of funding costs to market conditions because of the high proportion of regulated savings, and to the significant rise in home loan renegotiations; second, a sharp increase in interest rates could cause funding conditions for banks to deteriorate and reduce interest margins if rate hikes cannot be quickly passed on to customer loans.

• Other factors having an adverse impact on French banks' profitability also bear watching: pending litigation risks, geopolitical risks related to international exposures, and regulations under discussion at the international and European level.

• Lastly, the banks' poor profitability is pushing them to question their business models. The underwhelming performance of French retail banking could prompt banks to seek other sources of growth, whether internationally or by focusing on other more dynamic businesses such as insurance and asset management. Moreover, this poor profitability could cause banks to cut costs even further.