MOODY’S REPORTS: FRENCH BANKS CONTINUE TO PERFORM WELL DESPITE TOUGHER CAPITAL MARKETS THANKS TO STRONG FRANCHISES AND EARNINGS CAPACITY
The generally stable outlook for French banks reflects their ongoing good financial performance overall despite the depressed state of the capital markets thanks to their solid domestic franchises and stable revenue-generation capacity, says Moody's Investors Service in its most recent Banking System Outlook for France. The key challenge for the banks going forward will be maintaining their relatively good revenue generation and asset quality in the difficult operating environment, the report notes.
“Although the decline of global equity markets since late 2000 has been negatively impacting brokerage, asset management, private banking and investment banking activities, thus leading to lower quarterly results, domestic loan loss provisions have remained close to the low levels of 2000,” says Alexandra Sleator, Senior Vice President and author of the report. “Only those banks that carry exposures to riskier geographical regions, industrial sectors or distressed companies have posted a noticeable – albeit manageable – rise in credit expenses”, she adds.
Overall, Moody’s views French banks’ asset quality as sound thanks to tighter credit risk management and a greater recourse to risk transfer. However, any further material slowing of the French economy is likely to weigh on asset quality, the report warns. “That being said, in sharp contrast to the previous downturn, the banks’ stronger earnings generation capacity allows them to absorb credit losses without undue difficulty,” Sleator notes.
As regards operating profitability, the banks’ cost management efforts of recent years afford them a greater flexibility in the current circumstances. Additionally, Moody’s views positively the fact that those banks with substantial investment banking operations are currently actively restructuring these operations, closing locations and shedding staff in preparation for tougher times. “Nonetheless, overall operating efficiency remains negatively affected by excess capacity and government interference,” the report observes.
Moody’s expects the majority of French banks to continue to generate good and stable profits. The resilience of the performance indicators reflects their solid domestic retail operations, well-diversified revenue sources, sound credit origination practices and improving cost containment. “While the French banking system is only marginally more profitable today than it was a decade ago, we believe that the present revenues are comparatively more stable because they emanate from entrenched domestic franchises and that expenses – whether operating or credit-related – are better managed,” the report concludes.
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