Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

France's banks largely weathered the financial crisis thanks to their sleepy, yet dependable, consumer units which helped them to absorb losses from their trading operations.

Agricole's Pain
The French lender's stock has dropped 37% in the past year
Source: Bloomberg

Interest rates at record lows and growing competition are making the retail business less attractive -- and it's time for the country's lenders to cut costs in a more aggressive, less French way.

Credit Agricole's quarterly results on Thursday show making money from consumer banking in France is getting tougher. Earnings at LCL, the retail arm, fell 32 percent. Borrowers are shrewdly paying off their existing debts and replacing them with cheaper loans that are less lucrative for lenders -- squeezing net interest margins.

The LCL business faces the weakest revenue growth of all the bank's divisions over the next few years -- and the highest cost-to-income ratio by division, according to Credit Agricole.

Consumer Cost
Credit Agricole expects LCL will still have the highest cost-income ratio of all its businesses by 2019
Source: Company reports

With rivals Societe Generale and BNP Paribas also facing rising revenue pressure, cost cuts are France's key challenge now. But that's an area where French banks don't have a very good track record, as Bloomberg Intelligence's Jonathan Tyce points out. Between 2007 and 2014, bank staff fell by a paltry 3.2 percent in France -- compared with declines of 20 percent in the U.K., more than 25 percent in Spain and almost 18 percent in the Netherlands.

A Good Crisis
France's banks eliminated far fewer staff between 2007 and 2014 than rivals in other countries
Source: Bloomberg Intelligence

In fairness, it's harder to slay geese when they lay golden eggs. Credit Agricole, BNP and Societe Generale's return on tangible equity from consumer banking is about 16 percent, compared with 8 percent at the group level, according to Barclays analysts. It's also harder when the geese are protected by rigid labor rules: Opposition to overhauling the country's employment law is so strong that President Francois Hollande's government was forced to use an emergency measure this week to push through a proposed overhaul.

Growth and investment in technology may be one way to soften the pain of branch closures. Credit Agricole is talking the fintech talk, earmarking 200 million euros ($228 million) for investment in start-ups. It's also opened up its technology to outside developers. 

But the need to deliver the savings is paramount. Credit Agricole thinks it can wring more saving out of the consumer business than any other division as it tries to make 900 million euros of annual savings by 2019. Success there will determine whether the bank will succeed in achieving its goal of cutting its cost-to-income ratio to less than 60 percent in 2019 from around 67 percent in 2015.

The cost and digital pushes will come at a cost: almost 6 billion euros. Restructuring will take time. Even Societe Generale says it will take until 2020 to close a fifth of its branch network. With pressure on revenue rising and regulatory headwinds mounting, investors will want to see tangible results sooner.

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

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