Happy Times for French Bankers

Retail's a boon, but margin pressures are creeping in

Looking for a bright spot in European banking? Try France.

Wednesday's forecast-beating rise in quarterly profit from Societe Generale followed rival BNP Paribas, which also posted a surprise earnings increase this week. That's a blessed relief from the industry trend of crushing profit declines caused by a grim start to the year in financial markets and a mighty squeeze on margins from rock-bottom interest rates.

French Exception

BNP and SocGen shares have outperformed European peers over the past week

Source: Bloomberg data

Yes, there were plenty of one-off gains flattering profits, but French consumer banking -- which brought in as much revenue at SocGen last year as trading and advisory -- was a highlight.

This seems counter-intuitive. The French economy is a laggard in Europe and the country's struggling to close its budget deficit. Recent attempts to reform France's notoriously rigid labor laws have come up short. The country hardly seems like a haven from the gloom that saw Deutsche Bank, UBS and Barclays all record falls in quarterly profit.

Yet French banking tends toward contrariness, doing well when the outside world does worse. The country's households have a high savings rate and consumer spending has been pretty robust. Cheap oil and borrowing have offered extra comfort.

SocGen increased its French loans and deposits in the first quarter and wooed savers into insurance products and private banking. BNP also expanded deposits and said loan issuance picked up at the end of the quarter (although net interest income slipped year-on-year and meant the bank posted a worse revenue performance than SocGen).

An even bigger benefit came from a drop in provisions against bad loans, down 17 percent at BNP's French consumer bank and 22 percent at SocGen's.

Less Risky

French banks booked fewer losses against domestic retail loans in Q1

Source: Company reports

That's not only a French story, of course. The ECB firehose of monetary stimulus and cheap cash has damped the pain of loan losses across the euro area. But the extra cushion is another crutch for a French banking system that already has fewer fires to fight than Spain and Italy, which are laboring under a bigger pile of non-performing loans.

Solid Performer

Ratio of non-performing loans to total gross loans at major European economies

Source: World Bank

Unfortunately, this French exception is almost certain to fade. Margin pressures are creeping in, pushing banks to either expand loans further or cut costs. Despite an encouraging quarter, banks will probably keep opting for the latter. That makes sense. France has a higher number of branches per million inhabitants than Belgium, Germany or the Netherlands, according to Barclays analysts, meaning there's plenty of room to prune.

But cutting costs in retail banking is a slog, leaving plenty of time for revenues to suffer. And SocGen and BNP still have a long roster of challenges ahead -- from bolstering balance sheets to cutting costs in corporate and investment banking. Despite the strong start, France is still an improbable savior.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lionel Laurent in London at llaurent2@bloomberg.net

    To contact the editor responsible for this story:
    James Boxell at jboxell@bloomberg.net

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