French lenders will have to wait several quarters before they see the full benefit of rising interest rates on their domestic loan books.
Net interest income, or NII — the difference between interest revenues and interest expenses — is providing a boost to banks across Europe on the back of central bank interest rate hikes. Yet national regulations on savings and the rate banks can charge for home loans, as well as changes to a European Central Bank funding scheme, are all weighing on French lenders' domestic NII prospects.
Aggregate NII at France's three largest listed lenders — BNP Paribas SA, Crédit Agricole SA and Société Générale SA — fell 2.5% in the third quarter from the previous three months, company filings show. In contrast, Spain's biggest lenders grew NII by an aggregate of 6.5% over the same period.
"The net interest income, and particularly in the countries where we are, takes time to materialize on the asset side," BNP Paribas CFO Lars Machenil said during the bank's third-quartier earnings call.
Crédit Agricole, or CASA, reported the largest quarterly fall in NII at its domestic retail bank, dropping 14.1% to €477 million. BNP Paribas' French retail banking business recorded a 2.2% quarterly decrease in the period.
Société Générale was the only bank of the three to grow domestic NII during the period, with a rise of 3.8% to €1.01 billion.
SocGen is more reliant on income from French retail banking than its two listed peers. Domestic NII made up almost 32% of its revenue in the third quarter, compared with 16.9% for CASA and 13.6% for BNP, S&P Global Market Intelligence data and company filings show.
French banks face rising deposit costs in the coming quarters as the rate on Livret A, a popular savings scheme that has about 60 million accounts, is likely to increase.
CASA Deputy CEO Jérôme Grivet said during a third-quarter earnings call that the bank expected the Livret A rate to average 3.5% throughout 2023. Livret A's rate was increased by the French government at the start of August to 2% from 1% in response to rising interest rates.
"This is going to have a negative pressure on the net interest income at the retail banks in France [that] have a significant amount of Livret A and products of this kind," Grivet said on a third-quarter earnings call.
* Access aggregate bank data for France.
* View a transcript of SocGen's third-quarter earnings call.
French lenders also face limits on the rate they can charge for mortgages, further tempering NII growth. Banque de France raised from Oct. 1 the country's "usury rate" — the maximum that lending institutions are allowed to charge when granting a home loan — to 3.05% from 2.57% for loans of 20 years or more. The new rate is still below what some lenders are charging in other European markets.
"[The usury rate] weighs on the margins for home loans and, to a lesser extent, on consumer credit," Sébastien Proto, deputy general manager and head of the Société Générale, Crédit du Nord and private banking networks, said during Société Générale's third-quarter earnings call. "All of this will last a little bit [longer] in the coming quarters."
Further pressure on NII materialized in recent weeks when the ECB announced a change to the terms of its ultra-cheap funding scheme, TLTRO III. The change means banks will lose hundreds of millions of euros in additional NII they expected to make by depositing unused funds with the ECB at a higher rate than they borrowed them.
"The increase in the cost of the TLTRO is a hit," said Grivet.