French banks’ cost-to-income ratios

Adjusted for Single Resolution Fund contributions.
Source: banks, Scope Ratings

While interest revenue from domestic retail banking activities remains a key driver of this trend, any uptick in margins is unlikely to become more pronounced before the fourth quarter. We also expect further reductions in policy rates, which will limit upside potential for earnings. The benefits of the repricing will be less pronounced than in other EU countries that have adjusted more rapidly, like Spain for example.

“The robust performance of corporate and investment banking and the absence of excessive pressure on asset quality has resulted in limited pressure on profitability for now. But CIB is volatile and the deterioration in asset quality may continue,” said Nicolas Hardy, Deputy Head of Financial Institutions. “Asset quality has already converged towards historical averages and corporate bankruptcies are at their highest level in years.”

Hardy adds that two trends are providing some comfort to French banks’ creditworthiness, however. “First, the unabated pressure on margins is encouraging banks to adapt their business models. All banks have retained an ability to make strategic moves to either develop or reinforce leading market positions. Second, the banks are maintaining excess buffers to regulatory requirements, which has helped to preserve investor confidence,” he said.

Balancing pressure on earnings, French banks maintain substantial buffers above minimum regulatory requirements, which is a must to preserve investor confidence. “Because of pressure on earnings, organic and non-organic growth ambitions or already tightly managed capital positions, French banks’ share buyback programmes are limited than those of more profitable European peers that have plans to reduce excess capital above regulatory minimums,” Hardy said.

Download the French bank quarterly here.

Issuer rating reports available to ScopeOne subscribers:

Banque Fédérative du Crédit Mutuel
BNP Paribas S.A.
BPCE S.A.
Crédit Agricole S.A.
Société Générale S.A.

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