French banks performance in 2012

In a challenging economic environment for 2012, characterised by a 0.6% drop in Eurozone GDP, the French largest banking groups benefited from the stabilisation of markets following decisive actions by the European Central Bank (ECB) introducing Very Long Term Refinancing Operation (VLTRO) and Outright Monetary Transactions (OMT). In 2012 the top 6 French banking groups generated an aggregated profit after tax of EUR 8.4 billion, sharply down, as compared with EUR 14.5 billion in 2011, owing to several exceptional items such as significant divestments from Greece. Setting exceptional items aside, Net Banking Income (NBI) was 2.4 % down and profit after tax dropped by 6.3 % in line with what was observed at foreign banking peers. 2012 was characterised for French banks by a steady decrease in interest margins in a protracted period of low interest rates, a slight reduction in fees and commissions due to a slowing economy, a deterioration of cost-to-income ratios and –putting aside the 2011 write-off of the Greek debt– an uptick in the cost of risk. The subdued economic environment is urging banks to improve cost efficiency; in 2013 they are launching new plans to cut costs. As far as risks are concerned, after a temporary reduction in 2011, past due loans slightly increased in the second half of 2012 reaching 1.9% of total loans. Doubtful loans have remained stable at 4.3% of gross loans since mid-2010 and the coverage ratio of specific provisions over doubtful loans has slightly increased, reaching 54.3 % at end 2012, so that French banks compare relatively well with European peers. Yet, in order to address lasting uncertainties on asset quality of European banks, it is essential that banks, under the control of their statutory auditors, keep a watchful eye on the early identification and the classification of non-performing loans, the prudent valuation of assets and the rigorous recognition of provision impairments. Concerning balance sheet adjustments, although French banks total assets increased in 2012, loans -including foreign claims- slightly decreased. Moreover the volume of liquid assets and deposits with the European Central Bank has been rising, as banks are building liquidity buffers in a still volatile market environment also in anticipation of the implementation of the liquidity coverage ratio (LCR). This situation is nevertheless weighing on interest margins. Deleveraging plans, which accelerated during the summer 2011 crisis, gradually reduced funding needs especially in US dollars, whereas funding has been refocused on the most stable resources in order to reduce short term wholesale funding. Loan-to-deposit ratios have been decreasing in a more balanced direction thanks to growing customer deposits. The solvency of French banks has significantly improved. The top 6 banks strengthened their Core Tier 1 by EUR 15 billion in 2012. Risk weighted assets declined as exposures shifted towards less risky counterparties. The largest French banks have confirmed their target to reach CRD4 fully loaded Common Equity Tier 1 (CET 1) ratios above 9% by the end of 2013.