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Retail, CIB and cost questions hang over trio of big French banks

Pressuredby ECB monetary policy, volatile markets and low domestic growth, French banksface a tough couple of years, despite being part of a banking system whichFrédéric Oudéa, CEO of SociétéGénérale SA, declaredearlier in the year to be the strongest among the major eurozone economies.

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Whilethree of the country's largest banks —SocGen, BNP Paribas SA and Crédit Agricole SA — did see some loan growth and risingdeposits in 2015,operating income in the fourth quarter of 2015 was squeezed — at and SocGen, in fact,operating income was outpaced by rising costs.

Toaddress the problem, the banks are shuttering branches and reducing headcount.SocGen aims to have 20% fewer bank branches by 2020 in France but is alsocommitted to investing particularly in digital banking, as are the other twobanks, in varying degrees.

Commentingon the banks' plans, Alain Tchibozo, a bank analyst at Mediobanca,pointed out that it waseasier and swifter to reduce expenditure in retail banking than in corporateand investment banking. CASA claims to have shrunk its to an appropriate size.

Heforesaw the banks' CIB segments coming under increasing pressure, particularlyamid a rising cost of risk.

Moreover, the analyst did not see the banks achieving the sales volumes fromfee-generating products that are required to compensate the margin pressure. Tchibozo further thought Frenchretail banking would "be flat" over the next couple of years, whilealso noting that France's banks would remain profitable but still only promisedweak returns.

Datafrom all three banks suggest that loan growth in France has helped them absorbsome margin pressure. The question is whether this will continue and at whatlevel in the current uneasy economic environment.

"Revenuegrowth, loan growth have turned positive while margins will remain under a lotof pressure, [particularly since] the ECB has recently reduced rates,"Shailesh Raikundlia, a bank analyst at Haitong Research, said in an interview.

Heexpressed skepticism about whether French banks could fully offset the pressureon net interest income by increasing fee income.

In agenerally upbeat assessment of the country's banking outlook, SocGen analystsdid say in a March 23 note that French banking faces major earnings risk in2016 and said French retail operations would "remain under pressure until2017." They added that retail banking revenues probably would not pick upuntil 2018.

Theanalysts also highlighted that the CIB divisions are "experiencing toughtimes" and the banks should be "more aggressive" in reshufflingthese operations to improve overall profitability.

Theissue will not disappear soon. French banks' returns, though superior to thoseof many of their European peers, remain below their cost of capital, typicallyassumed to be around 10%.

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Click here to view country-level information for France. Click here to access the SNL worldwide bank ranking template to view key balance sheet figures as well as performance and capital adequacy ratios for individual European banks.