French banks’ performance in 2017

In 2017, the six major French banking groups reported robust performances in a gradually improving macroeconomic environment that was nonetheless marked by continuing very low interest rates and market volatility that was also at historically very low levels. ? In 2017, the six main French banking groups recorded a 0.5% increase in net banking income (NBI), which amounted to EUR 146.4 billion. This apparent stability was accompanied by significant disparities between both banks and business lines. For example, income from retail banking and corporate and investment banking increased quite modestly, up 0.5% and 0.8%, respectively, whereas income from asset management and insurance rose sharply by 9.6%. ? LNet interest income from retail banking activities continued to decline both in France and internationally due to the continuing very low interest rate environment. The increase in outstanding loans and the dynamism of fees and commissions (which were up overall by 6.2% year-on-year) were not enough to offset the low income margins (net interest flows were down 2.3% in 2017).? Due to a 2.7% increase in operating expenses, which outpaced NBI, the cost-to-income ratio again deteriorated at end-2017 to 69%, thus positioning French banks very close to the median for major European banks (69.4%). ? The cost of risk dropped by 18% in 2017 to its lowest level since 2007 and as a proportion of total assets dipped by 2.7 basis points (bps) to 0.11%. However, litigation costs had a significant negative impact in 2017 whereas in 2016 profit was boosted by the Visa Europe disposal that generated a capital gain of nearly EUR 3 billion. ? Operating profitability improved resulting in a 3.6% growth in pre-tax income. Net profit remained stable (up 0.3%) as did return on assets (RoA), which was unchanged at 0.36% and therefore well below the median for European banks, which improved sharply compared with 2016 to 0.43% (up 17 bps). This represents a marked departure from the situation that could be observed since 2012. Return on equity (RoE) declined slightly year-on-year by 0.2 percentage point (pp) to 6.3% but was still higher than the RoE of comparable major European banks (5.9%). The major French banks continued to improve the quality of their balance sheets and their prudential ratios while preparing for compliance with new regulatory requirements. ? The aggregate total assets of the five major French banking groups were down 3.3% year-on-year to EUR 6,282 billion at end-2017. This was mainly due to the reduction in the size of the banks' trading books and in assets available for sale (down 17% overall). These changes were offset by a 14.9% increase in cash and cash balances at central banks and a 9.6% growth in non-financial corporation loans and receivables. On the liabilities side, customer deposits other than from credit institutions rose by 3.2% and total equity (group share) grew by 2%. ? The quality of the loan portfolio continued to improve, with the impaired loan rate falling again in 2017 by 45 bps to 3.45%, mainly driven by outstanding loans to households and non-financial corporations. This improvement was due to growth in total outstanding loans while the total value of impaired loans contracted. Since 2015, the coverage ratio for impaired loans has remained stable at 56%. ? The average Common Equity Tier 1 (CET1) solvency ratio of the six French banking groups further improved by 50 bps to 13.8%, driven by both a 3.4% increase in CET1 capital (EUR 306 billion at end-2017) and a 0.4% reduction in risk-weighted assets (EUR 2,221 billion at end-2017). The median CET1 ratio of the French banks, driven by the mutual banking groups, was slightly higher than that of the sample of major European banks (14.1% compared with 13.9%). Although none of the banks had applied IFRS 9 at end-2017, the groups anticipate a negative impact of between 10 bps and 30 bps on their CET1 solvency ratio upon its initial application due to an increase in provisions for credit losses. ? French banks slightly improved their liquidity ratios compared with 2016. At end-2017, the average liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) of the six groups stood at 131.7% and 107%, respectively. ? Lastly, the French global systemically important banks fully met the new total loss absorbing capacity (TLAC) requirements, which will come into effect in 2019. Despite the considerable progress made by French banks in strengthening their balance sheets and financing structures since the crisis, supervisory vigilance in a number of respects remains essential. ? Changes in operating expenses remain an area to watch and a significant challenge. For the six French banking groups, they have increased for the second consecutive year despite numerous transformation plans since 2013. Nevertheless, the average cost-to-income ratio of the French banking groups is similar to the median calculated for the major European banks with international reach. ? These transformation plans are intended to respond to the key challenges of cost reduction, the digital revolution and the emergence of new players. Consequently, banks are reviewing their business models, streamlining their networks, improving the outsourcing of support functions, investing in IT system adaptation and further acquiring or multiplying partnerships with Fintechs. Certain developments are likely to create new risks, particularly in terms of business continuity, cybersecurity and data handling, and will have to be regulated. ? The continuing low interest rate environment could undermine the rebound in net interest income and could also lead institutions to take greater risks in certain sectors. Thus, in order to maintain bank resilience in a context of steady growth in large corporations' debt since 2005, the Haut conseil de stabilité financière (High Council for Financial Stability – HCSF), in accordance with the provisions of Article 458 of the Capital Requirements Regulation (CRR), decided in May 2018 to apply a targeted measure for the exposures to highly indebted large corporations. ? The finalisation of the Basel III Accord on 7 December 2017 is a major step forward. It aims to guarantee the right balance between reducing risk-weighted asset variability and preserving risk sensitivity. The full implementation of the Basel III reforms package is therefore essential for financial stability.