Axel Pierron, senior vice-president at Celent

Although France's banking sector has been dealt a few blows during the past two years, its retail sector remains strong compared with its European peers. Writer Wendy Atkins

As the global economic crisis deepens, France is facing major upheaval and challenges in its own financial sector. The merger of two of the country's biggest banks, to create the second biggest banking network in France, appears set to go ahead, and the retail divisions are happily showing a profit. But France is being hit by the same 'crise financière' that has swept the rest of the world, bringing its workers out onto the streets to protest and, in turn, undermining consumer confidence. What now for the republic's retail banks?

The shake-up of the banking sector through the proposed merger of the two mutual banks - Banque Fédérale des Banques Populaire's (BFBP) and Caisse Nationale des Caisses d'Epargne's (CNCE) - is due to be finalised later this year. In March, the senior executives of the two groups were given the go-ahead to negotiate the terms of the final deal. The negotiation agreement details the French state's equity contribution of about €5bn to the future central body of the merged group. This contribution comprises €3bn in preference shares that are convertible into ordinary shares under certain conditions, starting from the fifth anniversary of their date of issue, resulting in the state holding a maximum of 20% of the new central body's ordinary shares, and €2bn of undated super-subordinated notes.

Encouraging negotiations

In an official statement, Philippe Dupont, chairman of BFBP's board of directors, and Yves Hubert, chairman of CNCE's supervisory board, added they were pleased with this new stage in the negotiations between the two groups. They said that "the French state's support will enable the new entity to benefit from measures adapted to its development". François Pérol, chairman of CNCE's management board and BFBP's chief executive officer, said: "The signing of the agreement marks an important step towards carrying out the merger which began in October 2008, leading to the creation of one of the most solid banking groups in France."

Carol Wheatcroft, a retail banking specialist at financial analyst house TowerGroup, says the acquisition will have repercussions for the country's retail banking sector, which has traditionally enjoyed low levels of customer churn. "The sector has traditionally been stable and customers have not moved around much. This merger will upset the status quo and everyone will have to up their game," she adds. A similar upheaval occurred after the last shake-up in the sector, when Banque Postale was formed. "We saw a surge in bank branch numbers in 2006 due to the formation of the post office's retail bank operations," she says.

Into the crisis

In contrast with many other European countries, the French economy typically enjoys strong levels of state support, a phenomenon which some analysts believe will be advantageous to the retail banking sector throughout the economic downturn. "The social [safety] net provided by the state is softening the impact of the crisis on retail banking activity," says Axel Pierron, senior vice-president at Celent. "If you've been working long enough and lose your job, you know that at least for two years you will have unemployment benefits that are 80% of your previous salary. So in the short term, consumers feel less exposed than they do in countries such as the UK," he says, meaning that deposit ratios are unlikely to fall dramatically due to mass unemployment.

French households also enjoy a lower level of debt than in other European markets. According to Eurostat, the European Commission's data depository, the financial liabilities of French households as a percentage of gross domestic product (GDP) in 2007 was 63.3% in France, compared with 105.5% in Ireland, 88.9% in Spain and 110.7% in UK. "And the French market did not loosen its risk management procedures in the way that other countries did. Therefore we're very unlikely to see a high default rate in that segment," says Mr Pierron.

Despite some indicators being more positive than those of other western European nations, French consumers are still cautious. The financial crisis has led to workers concerned about job security going onto the streets to protest against its so-called 'architects'. The number of so-called boss-napping incidents - in which workers, protesting against job losses, take their managers hostage - has also surged in recent weeks, with popular polls suggesting that up to 50% of the French population believes that this is justified. As such, an upswing in popular unrest, rather than toxic debt, is threatening to unsettle the country's banking sector.

Confidence sapped

According to Georges Pauget, the CEO of France's largest bank, Crédit Agricole, the economic turmoil is undermining customer confidence, which in turn is calling into question the viability of current banking regulation. "The Basel II model will be useful as a tool to help the banks understand and manage the cost of risk," says Mr Pauget. However, he adds: "Greater liquidity requirements call for a new model, the cost of which will remain high. Deposit bases will be a competitive edge."

As with other European countries, the mortgage market has also been hit by the crisis, with banks revealing a slowdown in the business. Crédit Agricole reported that growth in residential mortgage loans slowed from 11.5% in 2007 to 5.5% in 2008. However, the retail activity of most French banks remained profitable during 2008.

Encouragingly, BNP Paribas' French retail bank division achieved revenues of €5.94bn in 2008, up by 2.2% on 2007 figures, while Société Générale's revenues for retail banking inside and outside France were up by 2.7%. Furthermore, Crédit Agricole reported an increase in its online banking income in the retail banking and specialised financial services space. This reflects steady and solid business momentum for the old Crédit Lyonnais branch network in France (up by 2.9%), with its branches abroad also holding up well. Its 38 regional banks put in a solid performance during the year as well.

Product trends

Unsurprisingly, French retail banks are trying both to contain their costs and rethink their processes to create efficiencies. "Two or three years ago, banks were launching new retail banking products at the same pace as Nike was launching new shoes," says Celent's Mr Pierron. Now, product portfolios are being changed in response to the crisis, he adds. Crédit Agricole's Mr Pauget says: "Consumers are looking for simplicity, for products that are easily understood. There is renewed demand for entry-level products that are easy to use and less expensive. Elsewhere, the demand for 'socially responsible' investment products will continue to grow as part of a long-term trend."

Monopoly over

TowerGroup's Ms Wheatcroft says that, beyond the crisis, other Europe-led initiatives are taking their toll on the sector. "The decision by the European Commission in 2007 to instruct France to end the monopoly that certain banks had on Livret savings schemes is having an impact," she says. The savings schemes, which are guaranteed by the government and offer a reasonable rate of return, have enjoyed a rise in popularity. There has been a surge in demand during the financial crisis as savers have sought products deemed to be safe and which give them a positive return, says Ms Wheatcroft.

As a result, there has also been an influx of money into these accounts because interest rates, linked to inflation, rose to 4.8% in August 2008. However, until recently the scheme was only available via three banks, Banque Postale, Caisses d'Epargne and Crédit Mutuel, and this was considered to be in breach of EU competition rules. At the beginning of 2009, the Livret A scheme was made available to all banks, with a limit of one Livret A account per customer. "But there is a potential for some banks to go for more product bundling as a result of the wider distribution of these accounts," says Ms Wheatcroft.

France's banking sector is still seeking to innovate where its products and services are concerned. Years before consumers in other countries became familiar with chip and PIN payments, France was rolling out its own smart card-based payment cards. The Groupement des Cartes Bancaires (CB), the French interbank card payment and cash withdrawal system, reports that in 2007, there were 55.7 million CB cards in circulation in France (up by 4% on 2006), 5.85 billion CB card payments (with more payments by CB cards than by cheques in Europe), adding up to €283.3bn in payments.

No surprises

Where branch strategy is concerned, there are no radical surprises in the pipeline. Consumers are used to interacting with their banks via a number of self-service channels. But although self-service banking has enabled banks to cut their costs, relationships between branches and customers continue to be important, according to analysts. "France has one of the highest cross-sell rates for European retail bank products," says Ms Wheatcroft. "Cross-sell rates are as high as five to six products per customer, and there's a lot of relationship building in the branch network - something that doesn't happen overnight."

Mr Pierron believes there is not much of an appetite to cut costs by closing branches. Rather, they are focusing on differentiation. "What is likely to happen is that banks will continue the revamping of their branch network by having smaller branches with fewer employees, geared towards sales rather than transactions. Also, I think they will review their branch network on a more frequent basis. So they'll be closing and opening branches based on results and revenue generated by branch."

Mr Pauget agrees: "The appetite for self-service products will continue to grow but, at the same time, consumers will want to strengthen their relationship with the local bank. They will look for a personal relationship with the banker, who has the power to decide on lending or advise on savings products."


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