French banks risk falling behind European rivals and losing out on windfall profits from rising interest rates due to rules which hamstring their ability to reprice loans.
After a decade of depressed returns, rising inflation and ECB rate hikes have radically changed the fortunes of most of Europe’s biggest banks, driving up margins and lending income.
With the exception of Credit Suisse, bumper profits are expected of Europe’s top banks when they report fourth-quarter results in the coming weeks. Italy’s UniCredit and Switzerland’s UBS kick off the season on Tuesday.
But not all banks will have benefited equally from the interest rate windfall — a disparity that is set to deepen in the short term.
France’s lenders are suffering from the most significant setbacks.
The performances of banks like BNP Paribas, Crédit Agricole, Société Générale and BPCE are being curtailed by a mortgage market geared towards fixed-rate loans and a 200-year-old savings account designed to help restore France’s public finances after Napoleon Bonaparte’s wars.
Still popular today, rates on the widely used Livret A deposit accounts are linked to inflation and set by the government. They have now reached their highest level in 14 years at 3 per cent, and are set to increase further this year.
The accounts squeeze banks’ margins by forcing them to pay out more to depositors, while limiting the benefit they get from rising rates on their loans portfolio.
These pressures are creating a two-speed European banking sector just as it starts generating interest from investors, including US ones.
“Higher interest rates are definitely the main driver of the European bank sector,” said Credit Suisse banking analyst Jon Peace. “For French banks, the earnings upgrades have so far lagged the broader industry.”
Prospects for the industry in Europe have improved since the beginning of 2023, especially as concerns over recessions begin to fade, including in major economies such as Germany. Economists from Goldman Sachs and JPMorgan have recently reversed their expectations for a contraction in eurozone output in the first quarter.
That in turn could lessen the need for banks to notch up large charges to cope with the risk of defaults, after they began to cut provisions last year as the hit from the coronavirus lockdowns of 2020 faded.
“The drop in [European] gas prices has suddenly eased fears about any recessions to come,” said Jefferies analyst Flora Bocahut. “For banks, the big debate was that everyone knew that they would benefit from interest rate rises, but it wasn’t clear how much of that would be offset by the recessions that were expected and a rise in provisions.”
The French banks will be able to offset some of the pain in their home market with business elsewhere, or in other divisions such as asset management, investment banking and car leasing.
But their French net interest income and margins — or the difference between what banks pay out to depositors and what they earn from borrowers — are coming under growing pressure, with the hit set to last until at least the second quarter of 2023, when the ECB is expected to start easing off its rate hikes.
“2023 will still be a difficult year, but all the indicators will be back to positive in 2024,” said one senior French banking executive.
In addition to their exposure to fixed-rate home loans, and unlike most other lenders in Europe, French banks are also constrained by a limit, set by the central bank, on the amount lenders can charge for mortgages.
By November, French average mortgage rates of 1.91 per cent were the lowest in the eurozone, ECB data showed, with the average in the bloc already at 2.88 per cent.
Société Générale, France’s third-biggest listed lender, is the most exposed to these pressures, with French net interest income accounting for about 15 per cent of its overall revenues, according to Jefferies. That compares to 9 per cent at larger peers Crédit Agricole and 7 per cent at BNP Paribas, the least geared towards household loans.
BNP said in November it expected an extra €2bn of revenues by 2025 from rising interest rates once the benefits kick in. The bank, which has a strong presence in Italy and Belgium among other European countries and a large corporate and investment bank, is expected to perform better in the fourth quarter than its French rivals, Credit Suisse’s Peace said.
Two of Spain’s midsized banks, Sabadell and Bankinter, have already given a glimpse of the upswing expected elsewhere in the shorter term, with surges of 25 and 47 per cent, respectively, in their net interest income in the fourth quarter.
Bankinter’s results were overshadowed, however, by higher-than-expected costs, in one reminder of other residual risks, including inflation pushing up salaries and other expenses.
Investors had remained largely cautious on the sector in 2022 — despite an uptick in profits, and the promise of large returns to investors through dividends and share buybacks — and some of the pressures from a simmering energy crisis in Europe remain a potential deterrent.
“The rate rises are an enormous change, a gift from heaven that had been awaited for a long time,” said Jérôme Legras, head of research at Axiom Alternative Investments. “But there are still macroeconomic headwinds. Banks remain banks, they’re more cyclical than companies in other sectors.”