Domestic operations key as French banks look ahead to 2025

French banks expect domestic retail banking operations to sustain their recovery in 2025, following encouraging third-quarter results.

The combined domestic net interest income (NII) of France's largest banks — BNP Paribas SA, Crédit Agricole SA (CASA) and Société Générale SA — climbed 17% year over year to €2.41 billion in the third quarter, S&P Global Market Intelligence data shows.

SocGen led the group with a 43% jump in NII, which is the difference between what banks earn from loans and pay on deposits. The bank, which relies more on domestic retail banking than its peers, saw increased demand for domestic mortgages. It expects this to support domestic lending income next year.

"Our revenues are up thanks to the solid performance of our businesses, with a strong rebound of the net interest income in France," SocGen CEO Slawomir Krupa said in a release detailing the bank's third-quarter results. He also cited the "remarkable contribution" from its global banking and investor solutions unit.

Growing domestic income is a welcome sign for French banks, which have not received as significant a boost from rising interest rates as their continental peers in recent years due to their largely fixed-rate loan books and rising deposit costs from the country's regulated savings plans.

A recovery in home loans and higher corporate loan production also drove higher domestic lending income at CASA. The worst for the French housing market could have passed now that production of new home loans has accelerated and home prices are stabilizing, CEO Jérôme Grivet said during the bank's earnings call.

"All these elements are fueling the feeling that the low point is behind us. Some elements are here for the home loan market to pick up," Grivet said.

Housing loan growth for French banks is forecast to pick up to about 2% to 3% in 2025 as lenders ease their credit standards and households regain purchasing power, S&P Global Ratings said in an Oct. 21 report. "Margins and net interest income from domestic activities should gradually improve as French banks reprice their assets and pressures on funding costs gradually abate," Ratings said.

BNP Paribas' French retail banking division also rebounded in the third quarter and is poised to maintain momentum into 2025 with estimated revenue growth of 3%, CEO Jean-Laurent Bonnafé said. The group's commercial, personal banking and services (CPBS) unit, which includes all its retail banking networks globally, accounted for more than half of the group's 2023 revenue.

"CPBS is under heavy pressure this year, probably more than anticipated," Bonnafé said during the bank's earnings call, but would benefit from a "pivotal moment" at the start of next year as conditions for eurozone banks improve amid a favorable shift in interest rates.

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The aggregate net profit of the three banks rose 26% year-over-year to €5.90 billion in the third quarter. SocGen led the rise, with profit more than quadrupling to €1.37 billion, Market Intelligence data shows. BNP Paribas' net income rose about 8% during the same period, while CASA's dipped about 5%.

BNP Paribas praised the third-quarter performance of its corporate and institutional banking (CIB) unit, which contributed a 9% year-over-year jump in revenue.

"CIB is a strong performer this year. It should stay that way for the years to come," said Bonnafé.

CASA also recorded strong activity in its CIB, asset management and insurance businesses on the back of high gross inflows in life insurance, robust asset inflows and a record nine-month CIB revenue.

Cost control

The banks have pressed on with cost-cutting strategies and diversified revenue streams during the quarter in a bid to boost profitability.

Only SocGen reported higher return on tangible common shareholders' equity (ROTCE) — a key profitability metric — of 9.6% in the third quarter, versus 7.4% in the preceding three months. CASA's ROTCE fell to 13.67% from 15.44% during the same period, while that of BNP Paribas slipped to 11.02%.

Krupa said strict cost control measures allowed SocGen to reduce operating expenses 0.8% in the quarter.

"We'll continue to look at how we can optimize the cost to serve but also how we can optimize revenue generation, how we can optimize client satisfaction, which is absolutely key in these businesses," Krupa said, referring to the bank's strategy to improve efficiency in domestic retail banking.

Diversifying revenue streams

Despite domestic NII improvement, French banks still reported lower aggregate revenues and profits on a quarter over quarter basis.

French retail banking is one of the least profitable banking systems in Europe, which has pushed the country's lenders to seek growth in other income streams across geographies and in various products, Morningstar DBRS said Oct. 30.

The agency expects banks to remain active in acquisitions, strategic investments and partnerships to strengthen and scale up certain business segments.

It said wealth management has emerged as a "targeted growth area" for the banks, as seen in BNP Paribas' acquisition of HSBC Holdings PLC's German private banking unit, announced in September, as well as CASA's purchase of Belgian wealth manager Degroof Petercam in a deal closed in June.

French banks are also expanding fast in auto leasing and fleet management, while growth in corporate banking operations will likely be organically driven, Morningstar DBRS said.

"Given the size of French banks, it does not come as a surprise that the banks are diversified across multiple European countries and are among the market leaders in a number of financial services," Morningstar DBRS said in the report.

– Read the latest earnings transcripts for BNP Paribas, SocGen and Crédit Agricole.  – View aggregate financial highlights for France's banking industry.