That French banks have come through the crisis in relatively good shape is clear. So why can't analysts agree on their outlook as they front up to the changing regulation and the challenges of the digital age?

French banks diverging paths

Equity analysts are completely divided over the outlook for large French banks. At one end of the scale they take the decidedly negative view that French banks are likely to need more capital and that earnings will be weaker than forecast. There are concerns over exposures to commodities and emerging markets, and major structural changes cannot be ruled out, says one analyst.

At the other end of the scale there is a more positive view that argues that capital concerns have been exaggerated and that earnings will surprise on the upside. This school of thought sees the diversified franchises of BNP Paribas, Société Générale and Crédit Agricole SA as strengths and takes a positive line on the benefits of the universal banking model.

As if this divergence of opinion was not sufficiently bewildering, there is a further view that sits in the middle of these two extremes, and which is cautious on earnings but sees differences between the banks on how they are adapting to changes in the French retail market. This line of inquiry finds that the commodity exposures are mostly under control.

Track record

Confused? Perhaps the French banks should be asked what they think. Their answer is more than likely to be: “Judge us by our track record of coming through the crisis in relatively good shape and in taking tough restructuring decisions early on.”

So where to go from here? Nobody of course can have a definitive view on the impact on the French economy of November’s shocking terrorist attacks in Paris and whether or not further attacks can be prevented. But provided there is no escalation, the impact is likely to be short term in terms of lost retail sales and lower visitor numbers, rather than having any major impact on the gradual recovery of the French economy.

French banks, in any case, are not a homogenous group, which may account for some – but by no means all – of the polarised verdicts of the equity analysts. BNP Paribas and Société Générale have big international and capital markets operations, with French retail accounting for about one-third of profits in the case of Société Générale and about 13% for BNP Paribas. Overall French business is about 25% of BNP Paribas’ activities and less than half of Société Générale’s.

“There are no French banks,” says Lars Machenil, BNP Paribas’s chief financial officer, “only banks based in France.”

Co-operative banks

But while this bold statement applies aptly to BNP Paribas and Société Générale, 60% of the French banking sector is accounted for by three co-operative banks: Crédit Agricole, the largest French bank measured by Tier 1 capital; Groupe BPCE, the third largest; and Crédit Mutuel (see table 1). Domestic retail accounts for two-thirds of these three banks’ profits and they also have strong asset management and insurance businesses. Credit rating agency Fitch notes that all three have generated an operating profit on average equity of 9% to 10% over the past four years.

But as Crédit Mutuel is unlisted, and only minority stakes in Crédit Agricole (43% of the central body Crédit Agricole SA) and Groupe BPCE are quoted, the equity analysts focus mainly on BNP Paribas, Société Générale and Crédit Agricole SA. With Crédit Agricole SA, French business accounts for about 54% of revenues, Europe 35% and the rest of the world 11%. At group level, which includes the domestic regional banks, France accounts for 73%.

“French banks have traditionally had a diversified set-up but under the new regulations it has become more important than ever to focus and integrate our business while maintaining the strengths that come from diversification,” says BNP Paribas’ Mr Machenil.

“We began deleveraging in 2011, which puts us in a relatively strong position today. The leverage ratio is harsh on the capital markets business and in terms of capital allocation we believe that the right balance for corporate and investment banking [CIB] activities is about 30% of total activities, which is what we now have. At the end of 2014, we incorporated securities services into CIB and we gradually reduced the energy and commodities business, especially in Europe and in Asia-Pacific, partly due to oil price falls but also as we strengthened compliance requirements.” The bank was fined $9bn in 2014 by US regulators for sanctions violations. Crédit Agricole SA agreed to pay $787m to US regulators for sanctions violations last October.

Mr Machenil says the broad strategy is to build out in markets where the bank has core strengths, for example by developing wealth management where there is a strong retail presence such as in the US, Turkey and Poland, as well as in what the bank considers its four ‘domestic’ markets – France, Italy, Belgium and Luxembourg (see box story on wealth management) – underpinned by a strong risk approach and diversification. The same is true for consumer finance, car leasing and insurance.

Weathering the crisis

“French banks weathered the crisis well. In equity capital markets when the crisis came, BNP Paribas still had balance sheet strength and was able to underwrite many of the rights issues that followed,” says Thierry Olive, BNP Paribas’ global head of equity capital markets. The equity capital markets business reflects the broader changes at the bank, with the business mix changing from 80% French revenues 10 years ago to somewhere between 20% to 30% today.

The resilience of BNP Paribas’ capital markets and security services businesses, even in a tough environment, helped support revenue growth in the third quarter of 2015 at a time when French and Italian retail revenues fell. The standout area was international financial services, which includes wealth management, insurance, consumer finance and non-domestic retail and which saw an 11.6% revenue rise.

When it comes to Société Générale, the position is rather different, with French retail revenues rising 4.2% in the third quarter, international retail banking and financial services net banking income up 5% and global banking and investor solutions revenues down 10.7%. A Société Générale results press release commenting on a 22.7% drop in fixed-income, currencies and commodities revenues says: “The uncertainty in China created an unfavourable market environment for structured products and fixed-income activities during a summer period characterised by reduced volumes. This decline was partially offset by the good performance of activities in emerging markets and in commodities.”

In French retail the number of net openings of current accounts for individuals increased by 50% in the first nine months of 2015 compared with the equivalent period of 2014. This amounted to 274,000 accounts opened across the three brands: Société Générale, Crédit du Nord and online bank Boursorama.


A new era of wealth management

The good news for the wealth management business is that the world has a lot more wealthy people. The challenge, however, is keeping them well served in a low-interest environment where finding good returns can be difficult. On top of that, there are the hurdles of complying with a plethora of new regulations and meeting the demands of the digital age.

Small wonder, then, that Vincent Lecomte, co-chief executive of wealth management for BNP Paribas, talks about “entering a new era in wealth management” and one in which “there will be more wealthy people and fewer banks to serve them [as a result of consolidation]”.

BNP Paribas aims to keep its seat at the main table with wealth management assets of $371bn making it the eighth largest player worldwide (see table 2) and the largest in the eurozone. Wealth management accounts for 5% of group revenues and is organised in two divisions. One, run by Mr Lecomte, looks after the global business in Asia and the international business out of places such as Luxembourg, Switzerland, Monaco, Brazil and Spain. The other part, run by Sofia Merlo, consists of the wealth management business, where BNP Paribas has retail operations in France, Italy and Belgium but also in the US, Turkey, Poland and Morocco.

Mr Lecomte says: “The business delivers significant profits and liquidity, and doesn’t use much capital. It’s also a good way for us to serve entrepreneurs who are often corporate customers of the group but also need private banking services.”

Ms Merlo adds: “We find that a lot of entrepreneurs are selling companies at a younger age than they might have done in the past. They then often get involved in philanthropy and we can help them do this.”

BNP Paribas also offers a next-generation programme for the heirs to family businesses, advice on investing in art and wine, and financing for private jets and yachts.

But behind the glamorous client-serving part of the business, there has to be a very sleek and efficient machine. “The winners in wealth management will be those who deliver tailor-made solutions but who have also industrialised processes behind the scenes,” says Mr Lecomte.

Regulation is also weighing in on this process, with plans to introduce strict rules on commissions and inducements, and client suitability. Even though this is European regulation, BNP Paribas intends to conform to it worldwide.

In a low-interest environment, the search for new investment opportunities is always active and BNP Paribas launches two private equity funds a year on average that are available to high-net-worth individuals.

A lot of clients come through BNP Paribas’ retail network and BNP Paribas has the largest market share in wealth management in France, with €87.5bn of assets under management. Ms Merlo says: “France, similarly to other mature markets, remains very resilient. Our assets under management on behalf of French customers grew by more than 10% in the first half of [2015], and they have grown consistently, even throughout the crisis.”

Strength in adversity

“French banks have shown their robustness in the new market and regulatory landscape,” says Société Générale’s global head of business development, financial institutions and brokers, Guillaume Héraud.

Bruno Prigent, Société Générale’s head of securities services, adds: “The group has successfully completed its 2013 to 2015 €900m cost savings plan and at the beginning of August launched a second plan to deliver €850m of savings. This will give the group more operating flexibility and allow it to keep up with the pace of the digital revolution.”

So why have these initiatives convinced some analysts but not others? Of the equity analysts, investment bank Berenberg is the most bearish. It thinks all three – BNP Paribas, Société Générale and Crédit Agricole SA – will have to raise more capital as national discretions in regulation are removed. The analyst says consensus earnings forecasts are too high.

A November report on Société Générale entitled Structural Issues Persist says: “Going into 2016 we also expect stronger headwinds from emerging markets which account for one-sixth of SocGen’s exposures and see potential risks from higher US dollar funding costs.” Berenberg argues that the global markets business may need to shrink in order for the bank to quit businesses that rely on leverage.

But in a report from May 2015 entitled the Big Misunderstanding, Bank of America Merrill Lynch takes a very different stance. “We believe an exaggerated focus on capital positions has diverted market and consensus attention from French banks’ strong earnings growth and cash distribution potential,” it says.

“The European Central Bank’s capital harmonisation plan will be implemented smoothly so as not to jeopardise the fragile European recovery, we believe. The ‘national discretions’ reversal impact should be benign given French banks’ quality capital… our top pick is BNP Paribas, driven by its diversified, safer franchise and ability to benefit from eurozone recovery.”

SocGen’s positive momentum

By contrast, Barclays’ equity research team has Société Générale as its top pick among French banks. “Pressure on French retail is not new news but the ways in which the French banks are combating margin declines are starting to differ. The end result this quarter [third-quarter 2015] is positive momentum in Société Générale’s revenues, declines at Crédit Agricole SA and middling results at BNP Paribas,” it says.

Barclays does however think BNP Paribas and Société Générale have their energy and commodity exposures under control. “BNP Paribas had a head start in managing down its exposure to energy and commodities, having reviewed the book once in 2012 and scaling back exposures again following their [Office of Foreign Assets Control] fine [in 2014]. SocGen has reduced exposures since the end of 2014. The outlier is Crédit Agricole SA, which has the largest exposures as a percentage of [tangible common equity] at more than 100% and has not reduced exposures since end-2014.”

Xavier Musca, deputy chief executive of Crédit Agricole SA, says: “It’s true that we have a large and important energy business but we are very selective in our choice of counterparties and 80% of the portfolio has little or no sensitivity to oil prices.” 

Despite the analysts’ sometimes bearish comments, Crédit Agricole SA’s 2015 third-quarter results were “the best since 2011 when the eurozone crisis hit”, says Mr Musca. Net income rose 15% to €930m and return on equity in the first nine months was 10.4%. Net income at the Crédit Agricole regional banks grew 2.4% compared with the third quarter of 2014, international retail banking was up 39.3%, savings management and insurance increased 8.6%, specialised financial services, which includes consumer finance, were up 79.1%, while CIB fell 2.7%. Crédit Agricole SA’s savings management and insurance business is huge and contributed €438m in net income in the third quarter. It owns roughly 80% of one of Europe’s largest asset managers, Amundi, which raised €1.5bn in an initial public offering (IPO) in November. Amundi was created in 2010 by merging the asset management operations of Crédit Agricole with those of Société Générale. In the IPO, Société Générale sold its 20% stake.

Mr Musca accepts that margins in French retail are being squeezed as home-owners remortgage, but he says this will be offset by fee income from selling more life insurance and asset management products.

On the capital issue, Mr Musca believes that analysts should be looking at the group rather than at Crédit Agricole SA. “The group is the part that is classified as a globally systemically important bank, or G-SIB, by the Financial Stability Board and there we have core equity Tier 1 of 13.4%,” he says.

Cautious outlook

Fitch’s director of financial institutions, François-Xavier Marchand, says: “From a profitability perspective, BNP has the advantage of a very diversified franchise both in activity and geography. If it wants to increase capital, it generates about 100 basis points of core equity through profits before dividends.” But, of course, if all that was diverted into equity it would mean cutting dividends, which perhaps explains why some analysts are cautious on the outlook for French banks.

In terms of emerging market exposure, the big question mark is over Russia, where Société Générale owns Rosbank, the eighth largest bank in the country by Tier 1 capital. Russia’s economy has been struggling due to sanctions and falls in the oil price. But Société Générale sees long-term growth potential in Russia and, as with BNP Paribas, expects to build out the business. A retreat by foreign competitors has strengthened its position in security services, for example.

Mr Héraud says: “Société Générale’s European strategy must include a Russian strategy. Whatever the difficulties in eastern Europe, the growth potential is high and it is important for our business that we have a strong and diversified footprint.” Other key locations for Société Générale more broadly are the Czech Republic, where it owns Komercni Banka; Romania, where it owns BRD; Cameroon and Côte d’Ivoire.

With BNP Paribas, key overseas holdings include Bank of the West in the US, a long-established presence in Turkey, and Poland, where the purchase of BGZ from Rabobank has doubled its market share.

Top french banks by Tier 1 capital

Italian challenge

Closer to France, BNP Paribas’ biggest challenge is Italy, where BNL has been badly hit by the country’s recession. Experienced banker Andrea Munari has just been appointed as CEO. The onset of the financial crisis so soon after the purchase of BNL in 2006 means it has taken time to restructure.

Mr Machenil says: “We continue to adapt the business to the environment. The main challenge is with mid-cap companies and the economic conditions in Italy. But our aim is to focus the business on individual clients and large corporates, where we can bring our expertise.”

For all French banks, whether the most internationalised such as BNP Paribas or more domestically focused such as the co-operatives, the outlook for the French economy remains an important factor in their future earnings.

Again, opinion on this is divided. A Fitch report says: “French banks, like many European peers, are finding it hard to boost revenues due to weak credit demand and low interest rates… the domestic loan book of most French banks has been stagnating for two years, reflecting weak economic prospects in France.”

On the other hand, ING reports that bank credit to eurozone businesses recovered to 0.6% year on year in October and that credit growth is both solid and accelerating in France. The International Monetary Fund forecasts that the French economy will have grown 1.2% in 2015 and predicts 1.6% growth in 2016. While not stellar, this does suggest a recovery.

Whatever materialises, the ability of French banks to adapt will be key in their ability to deliver returns in challenging circumstances.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter