A Black Hole For French Banks

Painful mergers, restructurings, and cost cuts lie ahead

Seated in his office in the 18th-century headquarters of Compagnie Financiere de Paribas, Management Board Chairman Andre Levy-Lang seems nervous discussing the outlook for France's flagship investment bank. With good reason. When Levy-Lang kicks off the 1995 reporting season for French banks on Feb. 28, Parisian financiers expect him to report a loss of up to $800 million, the result of the banking and financial conglomerate's lending and investing mistakes.

Levy-Lang declines to comment on Paribas' results. But he may have even bigger problems ahead. With Paribas' market capitalization down to $6 billion--half its book value--"we could be taken over," Levy-Lang admits. Shareholders who have seen the value of their stock drop 30% in just over a year, he adds, "ought to be very angry, very dissatisfied."

With $275 billion in assets, Paribas is the basket case du jour of French banking. And Paribas isn't the only French bank where trouble is brewing. It is emblematic of an industry that is the sick man of European finance and is ripe for a painful round of mergers, restructurings, and cost cuts (table).

An overhaul is certainly needed. With lenders around the world hunkering down to improve returns, the French are behind the pack. Even the best French banks produce returns on equity of about 8%--half that of many U.S. and British competitors. Says Mark Hoge, banking analyst at CS First Boston in London: "French banks are in crisis and will be in crisis for years."

RATINGS DROP. Even as problems mount, many lenders still seem unable to escape the legacy of state ownership or maneuver around portfolios of underperforming industrial holdings. And hanging above them all is a market strangled by high interest rates, overregulation, and government intervention--plus a four-year-old property crisis that may cost $200 billion in losses by the decade's end.

Amid such distress, French banking revenues fell again in 1995 after tumbling 8% in 1994, the first decline in 50 years. Standard & Poor's Corp. downgraded its ratings on a quarter of France's banking groups in 1995 and expects more this year. The slippage, which began in 1992, is increasing the industry's funding costs and causing customers to defect to other countries' higher-rated banks for derivative deals.

Some observers consider this Japanese-style banking mess should have been fixed long ago. When government officials and executives shook hands last spring on a plan to take $27 billion in problem assets off the books of state-owned Credit Lyonnais, financiers believed the bailout would mark the end of the disasters bred by Lyonnais' rapid expansion and its U.S. and European lending excesses of the 1980s.

Then the rot spread. First came France's biggest postwar banking collapse, the failure last summer of Banque Pallas-Stern, with $3 billion in assets. When the French central bank couldn't persuade investors to fund a rescue package, the collapse dealt a blow to an industry that had boasted of its ability to skirt recession and real estate woes.

FACING REALITY. Another watershed came this winter, when Credit National decided to merge with Banque Francaise du Commerce Exterieur. The new bank will have assets of $70 billion and represents what S&P analyst Scott Bugie calls "the first merger of consequence" in France since Banque Indosuez was formed in 1975. Now the troubled state-owned insurer, GAN, is looking to sell its majority stake in Groupe CIC, France's seventh-largest banking group, perhaps to Societe Generale, whose assets total $280 billion. And on Feb. 19, Banque Indosuez agreed to sell its 75% stake in London fund manager Gartmore PLC to Britain's National Westminster Bank PLC for $726 million.

Gartmore's sale will deny Indosuez a steady flow of cash it needs to even out volatile trading revenues. That's the price Indosuez is having to pay for years of losses from sour real estate investments. Just weeks ago, its parent, Compagnie de Suez, announced plans to rein in Indosuez' global investment banking ambitions and slash costs. Now Paribas is expected to start facing reality, as well. Some analysts believe Paribas will sell a real estate development unit and is preparing to write down as much as $500 million from the value of its 30% stake in Compagnie de Navigation Mixte, a diversified holding company.

Paribas should wind up better focused on its international investment banking franchise. But at home, it and other lenders still face unrelenting competition from mutual and cooperative banks such as Credit Agricole, as well as the expansion-minded post office. So bank executives likely will face more ire than thanks from stockholders for some time. "If there isn't enough movement, shareholders will lose patience," says Levy-Lang. They're losing patience with a lot more than Paribas. And they face a long wait before France's overextended lenders fully mend their ways.

    Before it's here, it's on the Bloomberg Terminal.