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Declining rates raise specter of new mortgage renegotiation wave at French banks

The continuing fall in interest rates could lead to another wave of French mortgage renegotiations, undermining profitability of French banks' retail operations.

Almost all French mortgages are fixed rate, and borrowers have taken advantage of the slide in interest rates to renegotiate their housing loans at a more advantageous level. Renegotiations reached a peak in early 2017, but tapered off on expectations of increases in interest rates. However, the ECB brought interest rates further into negative territory in September 2019.

According to mortgage guarantor Crédit Logement, the average interest rate on home loans fell to 1.12% in November 2019, compared to 1.44% in December 2018.

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Loan renegotiations have started picking up again and accounted for 28.7% of new property loans in November 2019, compared to 17.6% the year before, Bank of France data shows, although they remain off their peak of 61.6% in January 2017.

Jérôme Legras, head of research at Axiom Alternative Investments, said there was a "real risk" of a renewed wave of renegotiations given the long-term decline in rates, with borrowers paying back mortgages and changing banks as they seek home loans at the lowest possible rate, putting long-term pressure on banks' revenues.

France's High Council for Financial Stability has warned against the risk of a new wave of renegotiations given the decline in interest rates, something it quantified as "worrying as it would come at a time when bank profitability is already low."

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Renegotiations between 2015 and 2017 led to a 60 basis point decline in net interest margin between 2016 and 2019, equivalent to €6 billion a year of net interest income, the council said.

Nicolas Malaterre, senior director for financial institutions at S&P Global Ratings, said falling rates increased the chance of mortgage negotiations. As mortgages granted at very low rates replace those at higher rates, their profitability and banks' net profit margin on home loans will only decrease, he said.

Long-term impact

Tomasz Walkowicz, analyst at DBRS Morningstar, said a new round of renegotiations would put "additional pressure" on French banks but a new wave would be less significant than that of 2015 to 2017 because interest rates are falling at a slower pace than before.

While most borrowers retain a home loan for a period of between seven to 10 years, historically low interest rates might encourage them to hold onto a property for longer, especially as the length of mortgage loans is increasing. According to Crédit Logement, mortgages lasting between 25 to 30 years hovered around 40% for the first 11 months of 2019, compared to 16.9% in 2015.

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"If there is suddenly a drastic change in the behavior of the maturity of these housing loans, then potentially this could contain risks to the long-term profitability of the portfolio," Walkowicz said.

Profit pressure

Banks have up until now compensated low interest rates by increasing lending, but may not be able to continue doing so over the long term, Arnaud Journois, analyst at DBRS Morningstar said. They will not make profits out of their current mortgage portfolio, which will take several years to renew, he added.

While the home loan market continues to rise, up 6.8% in November, French retail profits are under pressure, especially at more domestically focused mutual banks such as Groupe BPCE, which have been more aggressive in selling mortgages to maintain high market share, Journois said. The main aim of banks such as Société Générale SA and BNP Paribas SA, which have a more global reach, is to keep market share without being "significantly" aggressive, he added.

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While S&P Global Ratings has a stable rating on the French banking sector, increasing pressure on profits or further interest rate cuts may raise the question of a change in rating, said Pierre Gautier, senior director at S&P Global Ratings' EMEA financial institutions group.

At Crédit Agricole SA, home loans rose 9.1% in the first nine months of 2019, while the bank's third-quarter 2019 revenues inched up just 0.7% and net profit fell 1.4%. At BPCE, parent of retail banks Banque Populaire SA and Caisse d'Epargne, residential mortgages grew by 8.1% in the nine-month period, but third-quarter retail net banking income and retail net income before tax were down fell 0.1% and 6.2%, respectively.

Loan growth at BNP Paribas' French retail operations was up 5.9% in the third quarter of 2019, while revenues dipped 0.2% and net interest income rose just 0.6% in the period. SocGen's French retail operations, meanwhile, saw net banking income and net income decline 3.6% and 2.8%, respectively, in the period.