February 11, 2011
French Banks Proved Resilient To
Crisis But Will Need To Bulk Up
Ahead Of Stricter Regulation
Primary Credit Analyst:
Elisabeth Grandin, Paris (33) 1-4420-6685; [email protected]
Secondary Contacts:
Sylvie Dalmaz, Paris (33) 1-4420-6682; [email protected]
Francois Moneger, Paris (33) 1-4420-6688; [email protected]
Aurelie Thiellet, Paris (33) 1-4420-7303; [email protected]
Constance Hauville, Paris (33)1-44-20-67-49; [email protected]
Table Of Contents
The Outlook For The Ratings Is Generally Stable After A Moderate
Decline In Creditworthiness
Results Should Be Significantly Higher In 2010 And Then Stabilize Or
Increase Moderately In 2011
Asset Quality Has Improved Noticeably Now That Banks Have Covered
Sensitive Exposures And The Worst Of The Recession Is Over
Funding And Liquidity Remain Sound And Should Remain A Strategic
Priority As Markets And Regulators Keep Close Watch
Our Ratings Incorporate Basel III's Provisions For Better Quality Capital
Related Criteria And Research
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The French banking industry will likely post improved results for full-year 2010, after resilient profits in 2009,
thanks to recurrent domestic revenues, lower credit risk, and diversified income sources by business and geography.
Standard & Poor's Ratings Services expects that results overall for the banking industry will remain at their
adequate level in 2011.
We consider that in the two coming years, French banks will continue to operate in somewhat difficult and
constraining environment featuring low domestic economic growth, uncertainties in the eurozone capital markets,
and stricter regulatory rules in the run-up to Basel III.
Nevertheless, most of our outlooks on the French banks we rate are stable because we believe that they will likely
retain their credit strength. As a whole we see that the major strengths for the ratings are business position and asset
quality--in particular in the domestic market. We see liquidity and profitability as generally neutral, and capital as a
neutral to negative rating factor.
The 2007-2008 crisis did not spare French banks, which so far through 2010 has resulted in, we estimate, €37
billion of write-downs. Thanks to diversified earnings streams and sound domestic activities, French banks bore the
costs themselves, essentially through reduced dividends, unlike banking industries in most countries hit by the crisis.
Furthermore, French banks haven't compensated for the decline in retained earnings in 2007-2009 with massive
capital increases or large disposals of assets. This is in our view one of the main reasons why their capital position
hasn't increased to the same extent as for European peers. Indeed, we found that our risk-adjusted capital (RAC)
ratio for most large French banks is about just in line with the average for large international banks, in our recent
article comparing 75 international banks. However, we view this average as relatively weak in relation to the ratings
(see "Despite Significant Progress, Capital Is Still A Rating Weakness For Large Global Banks," Jan. 18, 2011). As
for many peers, our ratings on most large French banks incorporate our opinion that they will continue to improve
their capital position in the coming years under tighter regulatory rules.
Overall sound asset quality, in particular in their domestic lending portfolios, has helped French banks remain
resilient. The economic recession, for the largest banks, mainly hit their sizable corporate and international loan
portfolios and consumer lending activities. Banks have nevertheless been able to absorb most of the sharp rise in cost
of risk through additional revenues enhanced by lower short-term rates and contained overhead expenses.
Given their international activities and strong involvement in the eurozone, most large French banks have some
significant holdings of European sovereign debt, with a concentration on the debt of the Republic of France and
other 'AAA' rated governments. They also carry out some large lending activities in some countries of South Europe.
We consider that related exposure is either of moderate risk, concentrated on loans to the resilient Italian private
sector, or manageable, such as for Greek sovereign debt.
We expect French banks overall to post a double-digit increase in domestic retail pretax profit in 2010. For the top
players, we see profitability, as measured by the ratio of net operating income after cost of risk to revenues, in the
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30%-35% area, not far from the 2006-2007 numbers. Domestic results should stabilize or erode in 2011, with
renewed pressure on interest margins and stable or slightly declining cost of risk.
We see corporate and investment banking (CIB) activities as only slightly negative or neutral for French banks'
relatively high ratings: their benefits are helping to compensate for their risks. For the best performers in this
business line--BNP Paribas and to a lesser extent Société Générale--we expect CIB to continue to enhance
profitability over the cycle. For second-tier players--Crédit Agricole Corporate and Investment Bank, Natixis S.A.,
and Crédit Mutuel-CIC--which are now operating downsized activities, we see the benefits coming essentially from
diversification and franchise.
We view the funding and liquidity position of French banks as adequate, combining the benefits of stable domestic
customer deposits and diversified funding sources with an average reliance on wholesale markets. This reliance has
declined over the past three years, after a decade of deterioration when assets grew much faster than customer
deposits. As for European peers, French banks have also greatly improved liquidity management in the face of
market and regulatory constraints. We expect this trend to continue in the coming years as the stricter Basel III
regulatory framework comes into force.
The Outlook For The Ratings Is Generally Stable After A Moderate Decline In
Creditworthiness
The ratings on France's large banking groups are relatively high
Standard & Poor's ratings on France's large banks are relatively high and our overall outlook for the ratings is
stable, except for two notable exceptions. This generally reflects stabilization in their financial profiles since the
onset of the financial crisis in 2008.
Although most of our outlooks on French banks are stable, two highly rated groups, BNP Paribas and Crédit
Agricole, have negative outlooks. For Crédit Agricole, the negative outlook reflects the possibility that the
still-difficult conditions in the banking markets where it operates could hurt its creditworthiness more than we
currently expect. Our negative outlook on BNP Paribas reflects in particular the uncertainties we perceive about the
impact of fragile capital market conditions in Europe and the possibility that the group might fail to steadily
improve its capital position in the next two years.
At 'A+' on average, the long-term ratings on large French banks are on a par with those of the highest rated in
Europe (see chart 1). The comparison is even more favorable taking into consideration the fact that the long-term
ratings on large French banks--except for BPCE group--do not include notches of uplift for extraordinary
government support.
We added notches to the stand-alone credit profiles (SACPs) of the systemically important banks that encountered
severe troubles in 2008-2009--that led us to lower their SACPs--to reflect the potential for further extraordinary
government support. Examples of such banks are Commerzbank, Dexia, and RBS.
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The creditworthiness of large French banks has deteriorated on average by one notch from a mid-2007 peak,
ranging from no change in the ratings for Crédit Agricole to a two-notch decline in the long-term rating for the
former Caisse d'Epargne group (now BPCE group) and a three-notch decline for the French division of Dexia group.
The ratings on smaller French banks have also declined comparably, often because of deterioration in the
creditworthiness of their corporate or insurance parent.
Table 1
Rating Trends For French Financial Institutions
2002
Large banks
Banque Fédérale des Banques Populaires*
2006
2007
2008
AA-
AA-
A+
2009
2010
BNP Paribas
AA-
AA
AA+
AA+
AA
AA
BPCE*
--
--
--
--
A+
A+
Caisse Centrale du Crédit Mutuel*
A+
A+
AA-
A+
A+
A+
Caisse Nationale des Caisses d'Epargne et de Prevoyance*
AA
AA
AA
A+
NR
NR
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Table 1
Rating Trends For French Financial Institutions (cont.)
Crédit Agricole S.A.*
AA
AA-
AA-
AA-
AA-
AA-
Dexia Credit Local de France
AA
AA
AA
A
A
A
HSBC France
AA-
AA
AA
AA
AA
AA
AA-
AA-
AA-
A+
A+
La Banque Postale¶
Société Générale
AA-
AA
AA
AA-
A+
A+
Average large banks
Allianz Banque
AA-
AA-
AA-
A+
A+
A+
--
--
A+
A+
A+
A+
Banque Accord
A-
A
A
A
A
A
Banque PSA Finance
A-
A-
A-
A-
BBB
BBB
Banque Solféa
A+
A
A
A
A
A
Caisse Centrale du Crédit Immobilier de France (3CIF)
A+
A+
A+
A+
A
A
Cofidis S.A.§
--
A-
A-
A
A
A
Crédit Logement
AA
AA
AA
AA
AA
AA
Groupama Banque
A-
A-
A
A
A-
BBB+
RCI Banque/DIAC
BBB+
A-
A-
BBB+
BBB-
BBB
Société des Paiements Pass (S2P)
--
--
--
--
A
A-
Socram Banque
BBB
BBB+
BBB+
A-
A-
A-
Smaller financial institutions with ratings independant or not
equalized with large groups' ratings
A-
A-
A-
A
A-
A-
Total average
A
A+
A+
A+
A
A
Ratings on Feb. 8, 2011. *For cooperative groups, the rating on the central bodies (such as Crédit Agricole S.A. or Caisse Centrale du Crédit Mutuel) reflects the
creditworthiness of the entire cooperative group. ¶Since 2010, we have uplifted the ratings on La Banque Postale, which we consider a government-owned entity whose
ultimate shareholder is the French state, according to our GRE criteria we previously equalized the ratings with those on parent La Poste. §Cofidis was purchased by
Crédit Mutuel at the end of 2008, leading to an upgrade. Source: Standard & Poor's.
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The ratings on French banks factor in a limited amount of extraordinary support
Although we do not apply uplift to most SACPs on French banks for extraordinary government support, we do
consider that the French government has provided industrywide support to its domestic banks and have factored this
into the ratings.
We classify France as a "supportive" country and the eight banking groups as "systemically important," under our
criteria. This means that, as for its Western European peers, we would expect the French authorities to implement
rescue measures for systemically important banks if they get into difficulty.
At the peak of the crisis in late 2008, the French government didn't need to take direct specific measures to help
banks, like assuming or guaranteeing troubled assets or nationalizing or purchasing stakes, except for Dexia Crédit
Local. However, banks actively used France's state-guaranteed funding mechanism (SFEF), put in place to address
the tight conditions on the funding markets, between October 2008 and October 2009. French banks issued a total
of €67 billion under the SFEF. In addition, the five largest groups all together issued €20 billion in hybrid capital
instruments and preferred shares to the French government and redeemed most of them in 2009. France also
strongly supported the merger between the Banque Populaire group and the Caisse d'Epargne group that resulted in
the creation of BPCE in 2009. The €3 billion in preferred shares that BPCE issued, and partly redeemed in 2010,
included a conversion clause into equity that could have resulted in the state becoming a shareholder. We have
viewed the SFEF mechanism and the provision of preferred shares--without conversion features--as industrywide
supports that helped to maintain confidence in the French banking system. We factored this support in French
banks' SACPs. In contrast, for BPCE, we include in the long-term rating one notch of uplift above its SACP to reflect
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our view of the extraordinary specific support the French state extended to the bank in the face of a difficult merger
and the difficulties encountered by its wholesale subsidiary Natixis S.A. (A+/Stable/A-1).
Results Should Be Significantly Higher In 2010 And Then Stabilize Or Increase
Moderately In 2011
Core earnings have been improving since the second part of 2009 and should continue to do so at a
moderate pace for full-year 2010
We expect 2011 results on average to be comparable or even slightly higher than 2010's under our current central
scenario of moderate economic recovery and limited interest rate increases, with a slight increase in revenues,
contained overhead expenses, and a slight decline in cost of risk. And the results for 2010 should be significantly
higher for 2009 particularly because of dynamic domestic retail revenues and declining cost of risk (see table 2).
Profitability ratios for the industry have not rebounded to their precrisis peak and, in our view, are likely to remain
under this threshold in the future (see chart 2).
Table 2
Interim 2010 Results For The Largest French Banks
First nine months of 2010
First-half 2010
Crédit Agricole
Société
Générale
BPCE
BNP Paribas
CM5-CIC
La Banque
Postale***
(Mil. €)
Reported revenues
25,752
19,561
17,407
33,560
5,483
2,741
Adjusted revenues*
25,770
19,340
17,400
33,464
5,483
2,741
Of which domestic network**
13,492
5,736
9,617
4,987
N.A.
2,741
Of which CIB strategic activities
4,384
5,871
2,296
9,310
N.A.
0
Of which write-downs and
discontinued activities
(298)
(42)
206
0
N.A.
0
10,348
7,235
5,700
13,834
2,236
557
4,127
3,060
1,215
3,640
636
29
1,339
645
740
342
N.A.
29
Net operating income before cost of
risk*
Cost of risk
Of which domestic network
Of which CIB strategic activities
299
79
182
223
N.A.
0
Of which write-downs and
discontinued activities
308
419
44
0
N.A.
0
6,221
4,175
4,485
10,194
1,600
528
Of which domestic network
4,363
1,411
2,654
1,374
N.A.
528
Of which CIB strategic activities
1,601
2,407
902
4,197
N.A.
0
Of which write-downs and
discontinued activities
(685)
(461)
206
0
Reported aftertax consolidated
profit
3,661
3,307
3,045
7,280
1,112
379
10
18
15
11
16
7
7
3
13
9
16
7
4
7
9
6
N.A.
7
(12)
(28)
15
(16)
N.A.
N.A.
NOI after cost or risk*
% change versus the first nine months of 2009
Reported revenues
Adjusted revenues*
Of which domestic network
Of which CIB strategic activities
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Table 2
Interim 2010 Results For The Largest French Banks (cont.)
Of which write-downs and
discontinued activities
Net operating income before cost of
risk*
Cost of risk
(72)
(98)
(111)
(100)
N.A.
N.A.
8
4
114
3
32
32
(13)
(22)
(66)
(44)
(27)
34
Of which domestic network
(15)
(3)
2
(5)
N.A.
34
Of which CIB strategic activities
(64)
(91)
(86)
(90)
N.A.
N.A.
Of which write-downs and
discontinued activities
(40)
(30)
(96)
N.A.
N.A.
29
37
(588)
47
95
32
15
16
40
20
N.A.
32
Of which CIB strategic activities
(15)
(42)
(256)
(2)
N.A.
N.A.
Of which write-downs and
discontinued activities
(59)
(83)
(111)
(100)
N.A.
N.A.
Reported aftertax consolidated
profit
83
624
N.M.
63
94
32
NOI after cost or risk*
Of which domestic network
*Adjusted for changes in fair value of credit default swaps (CDS) used to hedge the corporate portfolio and of own liabilities. ¶Domestic network for Crédit Agricole
includes CLC (Crédit Lyonnais) and Caisses Régionales de Crédit Agricole (CRCA). Because Crédit Agricole doesn't disclose consolidated accounts quarterly, we have
estimated the nine-month 2010 contribution of CRCA to the group by using the cumulated financial accounts that Crédit Agricole S.A. discloses. The Crédit Mutuel group
doesn't disclose quarterly figures, so we used semiannual data for CM5-CIC, the largest member that accounts for more than two-third of group results. §For La Banque
Postale, our consolidated adjusted revenues include the contribution from CNP Assurances, which is not part of the domestic network. CIB--Corporate and investment
banking. CRCA--Caisses régionales du Crédit Agricole. NOI--Net operating income. Sources: Standard & Poor's.
The 2008 decline in profitability was more pronounced for the large French banking groups than for the other
players, reflecting impairments and write-downs linked to the U.S. subprime instruments, coupled with high trading
losses in capital market activities in the last quarter of 2008 (see chart 2). After that, the recession resulted in a surge
in cost of risk in the loan portfolio that worsened in 2009 and stabilized in 2010.
Core earnings rebounded in 2009, due to fewer write-downs on troubled assets, contained overhead expenses, and
better revenues--particularly coming from wider credit margins on lending to individuals and favorable capital
market conditions. For most large groups, and particularly for SocGen and Crédit Agricole, reported revenues were
distorted by noneconomic items: changes in fair value of own liabilities and credit default swaps (CDS) hedging the
corporate portfolio. We exclude such items from our definition of core earnings. Because these items were largely
positive in 2008 and negative in 2009, we see a more pronounced improvement in core earnings in 2009 than the
reported figures show. Such noneconomic items are less significant in 2010.
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Chart 2
Domestic retail profitability is likely to erode in 2011 after a good performance last year and resilient
revenues since 2008
We expect retail revenues this year to grow in general by up to 1% above inflation and in line with costs, in a
scenario of moderate economic growth and a limited increase in short-term interest rates. A limited decline in cost of
risk should allow for a slight increase in pretax income in 2011 for the industry. For full-year 2010, we expect retail
revenues to have increased by about 5%, with a slight increase from banking fees and an overall increase in net
interest income (NII). Contained overhead expenses and declining cost of risk should lead to double-digit growth in
retail banking pretax income.
Over the past three years, French banks have benefited from the resilience of their domestic retail market. French
retail revenues have generally risen an annual 2%-4% over the last decade, except for 2008 (see chart 3), when
revenues for some networks declined due to impairments in the investment portfolio of some regional cooperative
banks.
NII generated by commercial activities has rebounded sharply since the second part of 2009, with the resumption of
new lending activity, particularly mortgage loans, better margins on these new loans, and a substantial decline in
funding costs and deposit pricing, with the reduction in interest rates and issuing spreads. Given the excess of loans
over deposits, overall and in French banks' domestic activity, new loans originated in 2009-2010 were funded
largely by wholesale funding, allowing French banks to benefit from better funding conditions than in first-half
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2009, when they were at their worst. The sharpening of the yield curve in 2009-2010 contributed to better NII, even
if traditional French asset-liability management (ALM) practices to fund long-term fixed-rate loans with their stable,
quasi-free demand deposits smooth the impact of interest rates changes.
NII slowed in the second part of 2010 and we believe this trend is likely to continue in 2011 mainly due to the
increase in the regulated Livret A deposit rate that influences rates on other short-term indexed deposits. This is
adding to the renewed competition over prices, particularly for mortgage lending, in the context of increasing
funding costs.
Chart 3
Nonfinancial fees and commissions from payment services and packages are unlikely, in our view, to grow faster
than inflation this year and next. Over the past 15 years, these have become a significant source of regularly
increasing revenues. However, because clients already have most of the products they need and due to pressure from
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consumer associations, we consider these revenues have little room to grow.
Financial commissions linked to equity brokerage, the distribution of mutual funds, and, above all, life insurance
products have more growth potential. We expect such commissions to increase 5%-10% in 2011, in a scenario of a
gradual improvement in equity markets.
Ratios for the French banking industry have been traditionally higher than for peers but have improved over the last
decade and more modestly in recent years through continuous cost efficiency efforts (see chart 4). We expect this
trend to continue in the medium term with significant cost savings coming from projects by several groups, such as
the convergence of IT platforms for Crédit Agricole and merger benefits for BPCE; and a likely stabilization in the
number of branch openings. A significant improvement in cost to income is unlikely in 2011 given revenue pressure
and the short-term costs of the projects mentioned above. One exception might be La Banque Postale, which we
believe will lower its very high ratio in the years ahead. Its revenues are set to increase as its commercial offering
widens with a gradual end to regulatory constraints.
Chart 4
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CIB activities should be less volatile but less profitable than in the past due to downsizing of activities and
more capital and liquidity constraints
For 2011, we factor in our ratings an expectation of an overall slight increase in CIB revenues because of an increase
in financing and corporate finance.
Each of the five largest French groups carries out some CIB activities, representing close to 10% of underlying
revenues for Crédit Mutuel, 15% for Crédit Agricole and BPCE, and 25%-30% for to BNP Paribas and SocGen.
The results for the CIB divisions have generally been mixed since 2007. BNP Paribas has clearly outperformed the
others over the period, but even it did not avoid a loss in 2008 (see chart 5).
The magnitudes of losses posted by Crédit Agricole Corporate and Investment Bank (AA-/Negative/A-1+; CACIB,
the Crédit Agricole's CIB subsidiary) and by Natixis (BPCE's wholesale subsidiary) led their respective parents to
downsize the CIB businesses. Both groups discontinued several complex capital market activities that generated
losses in the financial crisis, reduced geographic scope, and prioritized client-driven activities and financing, as well
as brokerage for CACIB. BNP Paribas and SocGen didn't significantly alter the mix of CIB activities and overall
strategy but reduced their capital market positions and reinforced their client-driven orientation.
Corporate finance, where French banks hold a strong market position in Europe, improved over 2010 and we
believe it is likely to continue to do so in 2011, after generating relatively stable revenues over the past three years.
Corporate financing represents 25%-30% of CIB revenues for SocGen and BNP Paribas, and a larger share for
Natixis and CACIB, and a relative stable revenue source over the last three years. This segment was barely profitable
for most players in 2009 and early 2010 due to high cost of risk and lower credit demand. However, results
improved over the course of last year, with the big drop in cost of risk, reflecting the good resilience of large
European corporates.
Capital market revenues, usually much more volatile than other income sources, might grow slowly in 2011, after a
large drop last year from their 2009 peak. In the first nine months of 2010, capital market and related revenues
dropped sharply. We expect the last quarter of 2010 to be similar to the first nine months. Capital market revenues
might suffer from the uncertain environment in 2011, particularly in Europe. The higher capital and liquidity
requirements linked to upcoming regulatory changes--Basel 2.5 in 2011 and Basel III starting in 2013--are likely to
curb the growth potential of CIB revenues until 2013 because they will induce banks to contain risk-weighted assets
and to reduce or reorganize some activities to reduce their consumption of liquidity. The discontinued activities
inherited from the financial crisis should have a marginal impact on results in 2011, after a moderate one in 2010, in
contrast with the large losses of 2008-2009.
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Chart 5
Other business lines are generally likely to continue to provide a recurrent source of revenue and a
diversification benefit
We expect French banks to continue to bolster their revenues from other business lines in the coming years, ranging
from average diversification benefits for BPCE and Crédit Mutuel to substantial contributions for BNP Paribas.
Good diversification by business and market and a resilient domestic market, where banks have been able to extract
recurrent and relatively high risk-adjusted returns, have generally helped French banks face the financial and
economic crisis better than many European peers--despite the large cost of troubled assets in some cases.
Beyond domestic network banking and CIB, the large French banks operate a variety of other businesses lines: asset
gathering (asset management, private banking, insurance, securities services), specialized finance (consumer lending,
leasing and factoring) and retail banking abroad (see chart 6). Retail banking abroad is larger for BNP Paribas
comprising businesses lines in the Benelux and Italy, but is much smaller for BPCE and Crédit Mutuel.
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Chart 6
Insurance activities have remained a good contributor to results over the last three years, and are particularly
significant for Crédit Agricole (see table 3), Crédit Mutuel, and La Banque Postale. Private banking and security
services have been hit by the financial crisis in some instances but have remained an overall adequate contributor to
French bank profits. Specialized financing businesses have also remained positive thanks to improved credit margins
in consumer finance that have absorbed the much higher cost of risk. The diversification benefit of asset
management or international retail banking activities is more of a mixed picture. Asset management was a source of
losses for SocGen in 2007-2009 and lead to a strategic joint venture with Crédit Agricole which in contrast
performed well in this business during the crisis. Despite some moderate quarterly losses in some of their subsidiaries
in 2009-2010, retail banking abroad has been a good source of diversified profit for BNP Paribas and SocGen over
the cycle. Crédit Agricole recorded a relatively good performance at its Italian subsidiary, but large losses in Greece.
Table 3
Profitability By Business Line For Three Large French Banks
Comparative profitability ratios are adjusted
to exclude noncore items
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Table 3
Profitability By Business Line For Three Large French Banks (cont.)
Société Generale
(%)
Total growth in revenues
Total growth in revenues (recurring)
French retail banking
BNP Paribas
Crédit Agricole
9M10/9M09
3.0
2009
23.0
9M10/9M09
9.3
2009
52.0
9M10/9M09
7.0
2009
19.0
(8.0)
14.0
7.3
38.8
4.0
7.0
7.0
2.0
14.0
1.0
6.0
8.0
BNL Banca Commerciale
N/A
N/A
2.0
7.2
N/A
N/A
BNP P Fortis
N/A
N/A
109.6
0.0
N/A
N/A
Specialized services
14.0
4.0
24.0
11.0
9.0
23.0
5.0
(5.0)
3.4
2.2
2.0
(3.0)
Corporate and investment banking recurring
(28.0)
76.0
(10.0)
81.0
(12.0)
30.0
Asset management and private banking
(21.0)
(10.0)
18.0
15.5
29.1
1.3
N.A.
N.A.
21.0
(2.7)
13.0
(7.0)
9M10
63.0
2009
66.0
9M10
58.7
2009
57.3
9M10
60.0
2009
61.0
Total cost-to-income ratio (recurring)
62.0
59.0
58.7
56.6
59.0
59.0
French retail banking
64.0
66.0
65.6
73.0
56.0
58.0
BNL Banca Commerciale
N/A
N/A
57.6
59.8
N/A
N/A
BNP P Fortis
N/A
N/A
70.9
74.8
N/A
N/A
Specialized services
52.0
56.0
47.0
52.0
44.0
46.0
Retail banking abroad
56.0
57.0
63.1
58.9
66.0
68.0
Corporate and investment banking
58.0
40.0
53.0
49.0
58.0
50.0
Asset management and private banking
89.0
87.0
76.4
76.2
62.5
62.0
Insurance
N.A.
N.A.
54.7
56.6
27.0
32.0
9M10
21.6
2009
9.6
9M10
30.5
2009
22.1
9M10
24.1
2009
18.9
Total NOI after cost of risk /revenues ratio
(recurring)
23.9
24.8
30.5
24.0
26.5
24.7
French retail banking
24.6
20.8
27.6
24.6
33.4
28.8
BNL Banca Commerciale
N/A
N/A
42.4
40.2
N/A
N/A
BNP P Fortis
N/A
N/A
29.1
25.2
N/A
N/A
Specialized services
14.2
5.7
18.0
9.4
22.7
17.8
Retail banking abroad
16.8
15.8
36.9
41.1
(13.8)
(2.5)
Corporate and investment banking
(recurring)
41.0
50.7
45.1
40.7
36.5
36.3
Retail banking abroad
Insurance
(%)
Total cost-to-income ratio
(%)
Total NOI after cost of risk/revenues ratio
Asset management and private banking
11.0
11.5
23.5
23.8
37.5
37.9
Insurance
N.A.
N.A.
45.3
43.4
72.8
68.3
Note: We have excluded changes in fair value in own debt and in the credit derivative portfolio booked in corporate and investment banking from total revenues for all
banks and from CIB revenues for Société Générale and Crédit Agricole. We have adjusted recurring revenues and NOI after cost of risk from impacts of the write-downs
linked to the financial crisis and losses from ceased activities. We have not included all business lines of the three groups, only those most comparable with each other.
*Data for Crédit Agricole are those of the Crédit Agricole group, with S&P estimates made for quarterly data by business line in 2010, based on data reported by Crédit
Agricole S.A., the central body of the group. NOI--Net operating income. N.A.--Not available. Source: Standard & Poor's.
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Asset Quality Has Improved Noticeably Now That Banks Have Covered Sensitive
Exposures And The Worst Of The Recession Is Over
Under our expectations of slow economic recovery, we expect cost of risk for French banks to decline slightly in
2011 after a drop in 2010 from its 2009 peak. Even the 2009 level is moderate relative to that of European peers,
reaching an average 106 basis points to average net loan book for the eight largest banks (see chart 7).
Chart 7
In 2007 and in the first nine months of 2008, write-downs linked to the financial crisis that reflected a mix of credit
risk and market risk accounted for rising cost of risk. In 2009, additional write-downs and rising impairments on
the loan portfolio in most activities drove the rise (see chart 8). The sharp fall in 2010 resulted from declines in the
CIB divisions, as credit impairments remained elevated in retail-oriented activities.
French banks benefit from overall good asset quality, in particular in their domestic market. The pockets of risk that
the economic recession revealed--such as at Crédit Agricole's Greek subsidiary, in SocGen's Russian activities, and in
BNP Paribas' Ukrainian exposure--appear overall manageable relative to the groups' respective loan portfolios and
earnings generation. In addition, French banks avoided some exposed countries or segments, such as commercial
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real estate in Spain or Ireland.
Chart 8
Total doubtful loans for large banks increased sharply in absolute terms and in proportion to gross loans in 2009
(to less than 4% from less than 3% at year-end 2008 on average), and we expect the growth to have continued in
2010, but at a lower pace. The deterioration was particularly strong for banks such as BNP Paribas, SocGen, and
Crédit Agricole that are active in corporate banking, in consumer lending, and with large international retail
activities in South and Central Eastern Europe, regions that were strongly hit by the 2009-2010 recession.
Despite high new impairments, the coverage of doubtful loans declined strongly in 2009-2010, with the recognition
of new doubtful credits. The proportion of gross doubtful loans in French banking is traditionally higher than those
of peers (remaining at about 3% of domestic gross loans even at the bottom of the cycle). This reflects the length of
the recovery cycle in France, as well as the comprehensive regulatory definition of doubtful loans. We consider
French bank doubtful loans as adequately covered, taking in consideration the frequent existence of collateral on
their corporate commitments. For international comparison, we pay more attention to moderate cost of risk over the
cycle than shares of nonperforming loans as an indicator of the sound asset quality of French banks.
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Domestic loan books continued to grow and remain of good quality
We expect French domestic credit to the nonfinancial sector to rise by about 4% to 5% for 2010 and at a
comparable pace in 2011. Credit growth declined sharply in 2008-2009, but remained positive in nearly all quarters
particularly because of a resilient lending activity to individuals (see chart 9). New lending fell sharply in 2009, but
growth in outstanding loans remained supported by lower prepayments. Because of lower demand and a more
cautious underwriting policy, loans to large corporates and small and midsize enterprises and public authorities
underwent a few quarters of negative growth. Corporate lending has been recovering gradually since mid-2010,
while lending to individuals, particularly mortgage lending, boomed over the year because of historically low interest
rates.
In contrast to international commitments, domestic nonperforming loans increased moderately between March 2007
and March 2010 in absolute terms and were stable as a proportion of loans to 3%, a level that remains far below
the record 8.2% reached in the last recession in mid-1995.
Chart 9
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Exposure to the most troubled European economies is significant, but manageable
The large French banks have some significant exposure to European sovereigns in their trading and banking books,
with a concentration on the debt of France and other members of the eurozone. They also carry out some large
lending activities in some South European countries, in particular Italy, with limited involvement in Portugal and
Ireland. We consider that related exposure, in particular loans to the resilient Italian private sector, is either of
moderate risk, or manageable, such as for Greece.
French banks' sovereign debt portfolio, which was disclosed as part of the Committee of European Banking
Supervisors (CEBS) stress test exercise in July 2010, also includes some large exposures to Italy and Belgium, which
reflects their large subsidiaries in those two countries (see table 4). We see French banks' exposure to
speculative-grade debt (for example, that of Greece and Romania) as manageable. French banks could be hurt by an
aggravation of the South European sovereign debt troubles through a further decline in the fair value of the
sovereign debt held in their trading books. However, the latter amounts are moderate, with most of the exposure
held in the banking book. We are currently assessing the credit implications of the proposed European Stability
Mechanism (ESM) on the rating of the Hellenic Republic (Greece; BB+/Watch Neg/B). Specifically, we believe that
assigning "preferred creditor" status to future official lending via the ESM could be detrimental to the ability of
nonofficial holders of sovereign debt to be repaid (see "Greece 'BB+' Sovereign Rating Placed On CreditWatch
Negative On Unveiling Of European Stability Mechanism Plan," Dec. 2, 2010). If such risk increases, we cannot
rule out that French banks might have to post some impairments in their Greek sovereign exposure held in banking
books. We estimated such amounts as limited in relation to their overall earning capacity.
French banks are also exposed to South European countries through loans to their local economy, directly or
through local subsidiaries (see last column of table 4). The most preeminent example is Crédit Agricole, which holds
limited Greek government debt in its trading and banking book but has a significant exposure to the Greek economy
through its subsidiary Emporiki Bank of Greece S.A. Other French banks also have exposures in their corporate
activities, particularly in shipping where we understand their loans are generally adequately collateralized. Emporiki
has already posted substantial impairments in its loan portfolio and has sharply contained new loan production,
therefore the likelihood of sharply rising credit impairments above the current level appears unlikely. In addition, we
consider that Crédit Agricole has the capacity to absorb further years of current losses from Emporiki.
French banks' largest European credit commitments are loans to Italian counterparties. We see the credit risk of the
Italian private sector as low to moderate, and we don't consider such commitments as an area of vulnerability for
French banks.
French banks, in particular SocGen, Crédit Agricole, and BNP Paribas are significant lenders to the Egyptian
economy through their local subsidiaries and corporate finance operations. However, related amounts are moderate
in relation to their total international commitments (see table 4). The same applies also to commitments to Tunisia.
We will continue to monitor the risks generated by the political uncertainties in Egypt in the coming weeks, but
based on our assessment of the current situation, we consider unlikely that they represent a material source of losses
for the three aforementioned banks.
Table 4
French Bank Exposure To European Sovereigns And International Commitments
Data on March 30,
2010
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Table 4
French Bank Exposure To European Sovereigns And International Commitments (cont.)
(Mil. €)
Belgium
Czech Republic
France
BNP
Paribas
18,669
BPCE
282
Société
Générale
1,301
Crédit
Agricole
3,240
Total
23,492
Sovereign rating*
AA+/Negative/A-1+
French bank
consolidated
international
commitments
197,590
163
181
6,782
2
7,128
A/Positive/A-1
25,088
18,087
34,903
15,105
25,407
93,502
AAA/Stable/A-1+
Germany
4741
81
490
731
6043
AAA/Stable/A-1+
210,096
Greece¶
5005
1540
4225
854
11624
BB+/Watch Neg/B
52,302
214
382
1789
504
2889
4791
1158
2436
350
8735
559
524
464
929
2476
A/Watch Neg/A-1
36,960
Italy
23196
7493
5149
12347
48185
A+/Stable/A-1+
353,036
Netherlands
12598
246
297
2233
15374
AAA/Stable/A-1+
101,890
2526
456
404
1478
4864
A-/Watch Neg/A-2
30,952
Of which trading
book
Of which
banking book
Ireland
Portugal
Romania
121
3
3015
110
3249
BB+/Stable/B
10,540
Spain
3021
384
901
2286
6592
AA/Negative/A-1+
146,894
U.K.
665
26
867
1125
2683
AAA/Stable/A-1+
254,807
Tunisia
N.A.
N.A.
N.A.
N.A.
N.A.
BBB/Watch Neg/A-3
3,724
Egypt
N.A.
N.A.
N.A.
N.A.
N.A.
BB/Watch Neg/B
11,198
Others
6599
1466
3487
1850
13402
1,166,082§
Total
95950
47585
42487
52592
238614
2,601,159
TAC at year-end
2009
62369
35330
32199
58508
188406
154
135
132
90
127
Total sovereign to
TAC (%)
*Ratings on Feb. 7, 2011. ¶Data on Dec. 31, 2009. §Of which €421 billion on U.S. counterparties and €115 billion on Japanese ones. TAC--Total adjusted capital. Sources:
Standard & Poor's, Banque de France Autorite de Controle Prudentielle (CEBS stress test communication) on the sovereign debt exposure for the four largest French banks
that participated to the CEBS stress tests, and Banque de France for international consolidated commitments. These are sorted by country of the final counterparty, and
correspond essentially to loans to the local economy.
A sharp reduction in troubled assets from the subprime crisis
The five large banks were significantly exposed to troubled assets or transactions linked to the U.S. residential
market and to the financial crisis. Related exposure has sharply declined through large write-downs, disposals, and
in some cases changes to underlying parameters--such as the higher valuation of corporate collateralized debt
obligations since the market low in March 2009. We consider that related exposure should now have a marginal
impact on French bank results in the two coming years, with limited future write-downs but also the limited
possibility of write-backs on some asset classes.
Funding And Liquidity Remain Sound And Should Remain A Strategic Priority As
Markets And Regulators Keep Close Watch
We consider that French banks have adequate funding and liquidity under our criteria and have substantially
enhanced the management of their liquidity risk over the last three years. We view positively their efforts to adapt to
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the new Basel III framework and in particular their objective to reinforce longer-term resources.
The funding structure of large French banks deteriorated in the decade before mid-2007. Liquidity wasn't seen as a
scare resource and banks didn't hesitate to actively use their balance sheets or engage in off-balance-sheet
commitments such as conduits. French banks now see liquidity and funding as a strategic issue and have worked to
improve their management and funding structures. We believe this trend will continue in the coming years with
banks trying to limit their funding needs and looking at how they can redirect customers' savings, now invested in
money market funds and in life insurance, onto the banks' balance sheets as deposits.
French banks benefit from stable domestic customer deposits fueled by strong client loyalty and a high household
savings rate. For some banks, international activities are in general sources of customer funds, in particular in their
retail divisions abroad. French banks also benefit from diversified funding sources and good access to international
markets, and a deep and transparent domestic money market that allows them to issue short- to medium-term
certificates of deposit as a substitute for the interbank markets. French banks had a limited use of securitization as
originators before the financial crisis and have generally not been affected by the collapse of that market. Except at
the end of 2008, they have made moderate use of central bank funding. Since mid-2007, they have strengthened
their stress test assumptions and liquidity contingency plans. They have built larger buffers of eligible assets to the
European Central Bank (ECB) and the U.S. Federal Reserve, treated as contingent liquidity sources in case of market
disruption. The €67 billion of state-guaranteed debt raised in 2008-2009 through the SFEF was welcome, but the
mechanism was stopped in October 2009 as banks regained market access on their own.
On a less favorable note, French bank funding is hurt by its presence in wholesale-funded businesses such as
consumer lending, more dynamic growth in domestic lending than in deposits, and the competition of
off-balance-sheet and regulated saving products in the domestic retail market (see chart 10 and box). This leads to a
deficit of deposits compared to loans, on a consolidated basis, and in domestic retail activity. Nevertheless, the
aggregate loan to deposit ratio for the large banks was about 130% at year-end 2009, within the European norm,
and has shown some improvement over the past two years.
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Chart 10
Another point is that the debt that French banks raise in the market is shorter than that of their eurozone peers (see
chart 11). On the other hand, market debt represents a smaller proportion of liabilities than for instance for Italian
or German banks.
In their asset-liability management, French banks traditionally allocate stable retail customer deposits to the funding
of fixed-rate long-term housing loans. The additional resources they raise on the market are essentially short to
medium term (two to four years) to match their shorter-term corporate loans.
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Chart 11
Over the last two years, French banks have increased the length of their issued debt through public placements and
also active use of covered bond instruments. French covered bonds have remained attractive for investors and
originating banks alike. For banks they are a comparatively lower-priced, longer-term market resource. They
accounted for about 20% of new medium-term issuance in 2010, versus an estimated 5% in 2007, but this growth
should be seen in context. Banks reduced their overall issuing needs in 2009 and in 2010, as tougher funding and
liquidity management, particularly in wholesale activities, combined with lower credit demand.
French banks are starting to adapt their liquidity management and funding to Basel III requirements, specifically the
liquidity coverage ratio (LCR) that will be introduced in 2015 and the net stable funding ratio in 2018. The CEBS
impact survey published in December 2010 showed that the average LCR ratio for the large European banks in the
sample was 67%, and 87% for the smaller ones. Despite its methodological limits and preliminary nature (there are
still large uncertainties about the final calibration of such a ratio), the exercise illustrates the regulatory challenges
ahead for French banks. However, we assume that owing to their strong franchises and diversified range of
businesses, and given the time before implementation, French banks can preserve their currently adequate funding
and liquidity position while adapting to this new framework. We are not expecting fundamental changes to business
models, but liquidity will likely become an increasing constraint that could weigh on profitability, for instance by
pushing banks to issue longer maturities.
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Our Ratings Incorporate Basel III's Provisions For Better Quality Capital
The capital positions of large French banks are now weaker than those of European peers despite a sharp
improvement in 2009 and even though they entered the financial crisis with stronger capitalization, according to
regulatory (see chart 12) and our own measures of capital. As for most large banks in Europe, capital is a neutral to
negative rating factor for most French banks. However, we expect the capital position of French banks to strengthen
in the coming years due to sound earnings generation and modest dividend payout ratios, particularly for largely
cooperative groups such as Crédit Agricole or BPCE.
Chart 12
RAC ratios for most French banks, except for Crédit Mutuel which are higher, are just at or below the average in
our study of 75 large banks. Based on data on June 30, 2010, we estimate that the average RAC ratio before and
after diversification of France's five large groups was 6.3% and 8.1%, compared with 6.8% and 7.9% for Europe's,
and 6.9% and 8% for 75 of the world's large banks (see table 5). The relative position of these French banks
declined from their position in our previous study published in November 2009, when they were slightly above the
average. This is essentially because the other banks have improved their RAC ratios more than French banks
through declines in risk-weighted assets and capital increases. In addition, the changes we made to our capital
criteria in 2010 ("Bank Capital Methodology And Assumptions," Dec. 6, 2010), in particular a more favorable
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weighting on corporate exposure, were positive for many international banks. But for French banks our criteria
changes were overall neutral, because we also determined that some of their hybrids did not have enough equity
content to be included in our definition of capital (see "Assumptions: Clarification Of The Equity Content
Categories Used For Bank And Insurance Hybrid Instruments With Restricted Ability To Defer Payments," Feb. 9,
2010) and we deducted their sizable tax loss carry forwards (TLCF) from our capital calculation. In the future, our
capital ratios for the large banks should mechanically increase along with earnings generation, which will reduce
TLCF. In addition, unlike some of their European peers, French banks have already reimbursed their capital
injection from the French state and are now free to retain earnings.
Table 5
RAC And Tier 1 Ratios Compared For Large French Banks
Standard & Poor's estimates for its risk-adjusted ratio based
on data on June 30, 2010.
RAC before diversification
benefit
5.3
RAC ratio after diversification
benefit
6.0
Tier 1 Ratio
10.8
Switzerland and Austria
5.5
6.4
12.9
Brazil
5.6
6.8
11.6
Germany
5.7
6.5
9.5
Canada
6.3
7.8
12.7
France
6.3
8.1
10.3
U.S.
6.6
7.8
12.2
U.K.
6.7
8.2
12.4
Nordic countries
6.7
8.7
9.7
Benelux
7.8
9.6
12.2
China, Hong Kong, and Singapore
8.3
9.0
11.7
Australia
8.5
9.9
9.3
Europe
6.8
7.9
11.1
Total
6.9
8.0
11.3
(%)
Japan
Source: Standard & Poor's.
We understand that the large French banks will be able to meet Basel III's higher ratios for regulatory capital with
retained earnings. Some large French banks reported that according to their pro forma calculations, they have the
capacity to reach a 7% common equity ratio by 2013 under the new more stringent rules. This is substantially
higher than our 5.8% estimate of the average pro forma Basel III common equity Tier 1 ratio for those banks at
year-end 2009 (versus 8.1% under current Basel II rules). All in all, we expect Basel III will lead to a significant
improvement in the capital position of the five French banks in the next two years, and our ratings reflect this
expectation.
Related Criteria And Research
Criteria
• FI Criteria: Bank Rating Analysis Methodology Profile, March 18, 2004
• Bank Capital Methodology And Assumptions, Dec. 6, 2010
• How Systemic Importance Plays A Significant Role In Bank Ratings, July 3, 2007
Standard & Poor’s | RatingsDirect on the Global Credit Portal | February 11, 2011
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• Assumptions: Clarification Of The Equity Content Categories Used For Bank And Insurance Hybrid Instruments
With Restricted Ability To Defer Payments, Feb. 9, 2010, Feb. 9, 2010
Research
• Basel's Global Quantitative Impact Study Exposes Large Banks' Regulatory Capital Shortfall, Dec. 20, 2010
• Despite Significant Progress, Capital Is Still A Rating Weakness For Large Global Banks, Jan. 18, 2011
• French Plan Is Supportive Of The Financial System, But Has No Direct Effect On Bank Ratings, Oct. 23, 2008
Additional Contact:
Financial Institutions Ratings Europe; [email protected]
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