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

French banks are a less risky proposition today than at the start of the year, thanks to the election of Emmanuel Macron and an improving economy. But it will take a while before growing confidence translates into significantly better business.

Less Risky
Societe Generale's credit-default swaps have tightened in recent months
Source: Bloomberg

The perceived creditworthiness of France's top banks -- among them Societe Generale SA, BNP Paribas SA, and Natixis -- has improved dramatically. An expanding economy has propped up their domestic operations, with loan impairments falling and businesses borrowing more money.

Loan-loss provisions at Societe Generale's French retail bank
Source: Company filings

Societe Generale, France's third-biggest bank by market value, said on Wednesday loan losses at its domestic consumer arm had fallen to the lowest since at least 2014, while lending to small businesses jumped by 10 percent. There is, according to CEO Frederic Oudea, a "better level of confidence" in France.

What's the catch?

Firstly, those trends didn't stop Societe Generale's profit falling by almost a third due to swelling litigation provisions.

Secondly, it's getting harder to make money from French retail banking, which has long been a cash cow thanks to juicy fees and high savings rates. Revenue at Societe Generale's domestic arm fell to the second-lowest level since at least 2014.

Income is being dragged down by persistently low interest rates, which are encouraging customers to renegotiate existing debts. The cost of running a branch network isn't being cut fast enough to compensate. Squeezed margins aren't just a French issue, as Commerzbank AG's quarterly loss demonstrates, but it's a sign that the boost in economic confidence is no growth panacea.

There's also the sense that windfall of falling loan impairments won't last forever. The quality of French banks' loan books is set to stabilize, according to Moody's. With profit under pressure, banks are pulling other levers to raise cash and boost balance-sheet strength: in June, Societe Generale listed a stake in ALD, its auto-leasing business.

Whether these banks can grow revenue -- a headache that extends beyond consumer banking and into corporate advisory and trading -- will decide whether investors stick with shares that have by-and-large outperformed European peers over the past six months.

French banks have rebounded since the election, though the effect is petering out
Source: Bloomberg

Bloomberg Intelligence's Jonathan Tyce thinks Societe Generale's domestic and investment-banking revenue needs to improve -- though the absence of volatility in financial markets may make the latter difficult. If Macron pulls off planned reforms to labor markets and the tax code, that might make French firms more confident and willing to spend, but we aren’t there yet.

BNP Paribas, Societe Generale and Credit Agricole trade at a discount of about 15 to 25 percent to their book value, according to Bloomberg Intelligence. That's a skinnier markdown than Deutsche Bank AG or Barclays Plc -- but it's still more than Spain's Banco Santander SA and Italy's Intesa Sanpaolo SpA.

Market-friendly election results and economic performance have helped improve valuations this year. But there seem to be few quick-fix solutions on offer: the firms are too large to attempt easy mergers; cost cuts will take time; and they need to walk a balance between boosting capital and paying dividends. Even Macron's helping hand can't do everything.

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

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