A protracted economic recovery from the coronavirus crisis could result in higher corporate losses and thus depress bank earnings due to a rise loan loss provisions, the Bank of France said in a report on Jan. 7.
In an assessment of risks to the French financial system, the central bank said it saw a systemic risk from a rise in corporate debt and that it expected the gross debt of nonfinancial companies, which rose sharply at the outbreak of the coronavirus, would remain high as long as the crisis lasts. A "muted recovery" could have a dire financial impact on the weakest companies, increasing risk for the banking sector, it said.
"In a slow recovery scenario, a substantial increase in [nonfinancial corporation] defaults could depress bank earnings through increased losses and provisions for corporate credit risk. Consolidation of NFC liabilities, through steps to strengthen capital, looks necessary to promote a macroeconomic rebound," the central bank said in its semiannual risk assessment.
However, Sylvie Goulard, Bank of France second deputy governor, told journalists in Paris that banks were not at any immediate risk, and much will depend on the economic recovery. The central bank is expecting a 4% contraction in gross domestic product in the fourth quarter of 2020, according to its November update on economic conditions, after the economy grew by 18.7% in the third quarter, rebounding from a slump following the country's first lockdown. Economic activity contracted by 9% in June, compared to 17% in May.
"It's true that if we move to a situation in which things are under control for companies, with debt well managed, to a situation where there are insolvencies, then we'll be opening a new chapter," she said.
Some sectors will be hit more than others, she added. The restaurant sector has come under pressure, while supermarket chains have done very well, Goulard said.
France implemented a €300 billion loan-guarantee scheme at the start of the crisis, while banks granted loan holidays for businesses and individuals. The government has so far granted €128.4 billion of loans, guaranteed by up to 90%, according to Ministry of Finance figures. Prior to France's second lockdown at the end of October, the government extended the program to June 30, 2021, from Dec. 31, 2020.
The central bank also noted long-term low interest rates would continue "to act as a drag" on banks' profits.
"Lending returns are being hurt by the flatter yield curve and the increased cost of credit," the report said.
However, the effects should be mitigated from negative refinancing rates and the ECB's tiering program, it said.