Profits at French lenders will continue to come under pressure in the year ahead due to regulation, tough competition, high costs and investments in digitization, but will not necessarily get a significant lift from a potential interest rate rise, according to analysts at S&P Global Ratings.
European bank profits remain low, and French banks have been singled out for weak profits. Many market watchers are hoping for an interest rate rise from the European Central Bank in 2019 to boost lenders' bottom line.
Mortgages for properties in the capital, Paris, as in the rest of France, are primarily offered at a fixed rate.
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"We get the feeling sometimes that the improvement in interest rates is going to bring about an immediate improvement in banks' profitability," S&P Global Ratings analyst Nicolas Malaterre told a news conference in Paris on Jan 10. "This is not our opinion. If interest rates were to rise, it would be good news for the European financial sector, but it would not be a panacea because, particularly for the French sector, there are other kinds of pressure that exist."
High cost-to-income ratios
While French banks have managed to diversify through selling insurance and asset management to its customers — which has somewhat offset margin pressure — they are operating in a competitive market. As a result their ability to raise fees is limited, something that has been accentuated by the arrival of online and mobile banks, Malaterre said.
French lenders also operate with a high cost-to-income ratio at 68%, in comparison to the European average of 58%, he said. This is unlikely to improve as they are spending a lot of money investing in digitization and online banking to remain competitive, Malaterre said. They also have to adapt their business models to new regulations, which also has a cost, he told reporters.
"Banks are not benefiting from the cost-cutting programs they have put in place," he said.
Larger lenders such as BNP Paribas SA and Société Générale SA have to cope with the cost of issuing senior nonpreferred debt to meet new capital buffers required under new rules such as TLAC, or total loss-absorbing capacity, which applies to the world's biggest banks. Banks also have to meet requirements for the European version of TLAC, known as MREL, or the minimum requirement for own funds and eligible liabilities, and which is required of all lenders.
Retail to stabilize at best
Retail banking revenues at French banks will at best stabilize in 2019 but that will depend whether rates rise, Malaterre said. SocGen, for example, is expecting its 2018 French retail revenues to fall between 1% and 2% as net interest margins remain under pressure.
Mortgages in France are primarily fixed-rate mortgages, and low interest rates have encouraged borrowers to renegotiate their home loans or contract new ones. This means banks will be left with a large stock of loans at low interest rates on their balance sheets over the long term, restricting their ability to benefit from an interest rate rise, Malaterre said.
In addition, banks have had access to high liquidity because depositors have left funds on their bank account because of low rates, but if rates rise, they could lose on that if depositors decide to invest their money for higher returns when interest rates rise, he said.
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