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      French banks quarterly: Heading into a more volatile business environment
      THURSDAY, 11/04/2024 - Scope Ratings GmbH
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      French banks quarterly: Heading into a more volatile business environment

      Stalling economic growth in France could herald a more difficult period for French banks. Lacklustre fourth-quarter bank results, which already cast a shadow over otherwise satisfactory full-year performance, look increasingly less like an anomaly.

      “Sluggish business prospects from the downward revision of French economic growth are likely to cancel out the positive impact of rising interest margins,” said Nicolas Hardy, deputy head of financial institutions. “Two scenarios have emerged for French banks this year: a moderate recovery, with 2024 economic growth of 0.8% coinciding with a gradual decline in interest rates; or a prolonged contraction in business activity with little sensitivity to the expected fall in interest rates in the second half of the year.

      Both scenarios are equally plausible in view of current macroeconomic and credit dynamics. That said, neither scenario will change the banks' risk profiles in the short term, so financial performance will be affected rather than structural soundness. Neither provisioning policies and cost-of-risk forecasts for 2024 nor capital management suggest substantial adverse pressures.

      Interest rates on loans finally caught up with deposit rates in the fourth quarter of 2024 but French banks have missed out on retail revenue gains compared to European peers as their net interest margins remain among the lowest in Europe. For some banking groups, geographic diversification, particularly in Italy, helped offset slow repricing in France.

      But with interest rates on loans having materially increased, banks now have to adapt to slowing economic momentum. France’s 2023 GDP growth of 0.9% was below previous estimates. Forecasts for 2024 are just 0.5% before a potential rebound in 2025.

      “In this environment, credit demand will stagnate as rate cuts expected later this year will likely incentivise clients to postpone investment decisions. But at the same time they provide stimulus for a more pronounced rebound toward the end of this year and into 2025,” Hardy said.

      A sustained economic slowdown could make it harder for banks to restore earnings but Hardy believes operational efficiency is less of a pressure point as long as banks maintain conservative loss-absorption buffers and robust asset quality with limited credit-impairment charges. French banks ended 2023 with controlled asset-quality indicators showing no widespread pick-up of Stage 2 or Stage 3 or sizable increases in forward-looking provisions.

      Stable asset-quality indicators

      *SG: estimated evolution of Stage 1 and 2 loans. **CMAF: Stage 2 ratio not yet available.
      Source: banks, Scope Ratings

      The overall increase in bad loans remained modest, and some banks were still able to release provisions. Cost-of-risk expectations for 2024 are in line with medium-term averages, in the 25bp-40bp range.

      Risks attached to the real estate and construction sectors remain under focus. The two sectors represent about 25% of banks’ corporate exposure, in line with the European average. So far, bankruptcies in the two sectors are not noticeably higher than the average for all sectors. The granularity of real-estate exposures by sub asset class (offices, retail, etc) is an important mitigating factor. There is no evidence that the Olympic Games have artificially inflated the performance of the sector, or concealed a more substantial slowdown.

      Download the French banks quarterly here.

      WEBINAR: Join us for a webinar at 15:30 CEST on Tuesday April 23rd when Nicolas Hardy will discuss the key themes playing into Scope’s outlook for French banks. Register here.

      The following issuer rating reports are available to ScopeOne subscribers:

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