Banks: in France the magic potion of the rate hike is slow to take effect

Posted on Nov 12, 2022 8:57 AMUpdated November 13, 2022, 10:11 am

The promise was kept. The rise in interest rates, triggered last spring by the European Central Bank (ECB) to fight inflation, has indeed benefited European banks: after the results of the third quarter, interest income – almost everywhere in the Old Continent – has this new situation.

In all banks? No ! They certainly had a good quarter in France. But on the whole, they have not benefited as much as quickly from this new monetary climate. This is demonstrated by the decline in the net profit of Crédit Agricole SA and BPCE, unlike the entire European banking sector.

In particular, the fact that banks lend at a fixed rate in France, preventing institutions from directly passing on the increase to their customers.

Lower interest margins

In BPCE, in Crédit Agricole regional banks, but also in Société Générale, net interest income fell in retail banking in the third quarter. BNP Paribas is an exception, with interest income on the rise in France, although it is settling in Italy and Belgium.

“Our margins remain under pressure given the specificity of the French market compared to other countries”, commented Sébastien Proto, Deputy Director General of Société Générale, in charge of the networks, warning that the lag will still last several months.

Intense competition in the market may also explain a smaller increase in margins in France, where all major banks have seen their outstanding loans rise again, despite a more uncertain economic situation.

The cost of the resource

Another French specificity, while they cannot directly transfer the rise in interest rates to their stock of loans, the banks have seen in a few months the remuneration they must serve on the Livret A go from 0.5% to 2%.

A particularly heavy burden for mutual networks, the main distributors of this savings product. In nine months it cost the Caisses d’Epargne and the Banques Populaires almost 400 million euros.

“For a bank like ours that has a lot of fixed rate loans and where we have multiple Livret A accounts, the positive impact of rates will be slower. But it is more to come than to come, “explained Philippe Brassac, the head of Crédit Agricole SA, on Thursday during the presentation of the quarterly results.

The height of the good student

Ironically, French banks find themselves penalized by strategies that have hitherto proved quite effective. Faced with low interest rates, they have tried to desensitize themselves to credit as much as possible and to diversify their model to offer insurance, savings and even alarm systems.

“Now that rates are rising, investors tend to prefer simpler banking models that are directly linked to rates,” explains Jérôme Legras, director of research at AXIOM AI.

This is what has benefited Spanish banks, such as Caixa or Bankinter, whose prices have risen by 32% and 25% respectively since the beginning of the year. Driven by rate hikes, rival Santander saw its net interest income rise 7% in Europe in the third quarter compared to the previous quarter.

Penalized on the stock exchange

On the other hand, these banks that lend at variable rates are now in the crosshairs of the Spanish government, which is determined to impose an exceptional tax on them, given the profits made.

The same kind of explanation is found in Germany. “Commerzbank, less diversified and more focused on local customers, benefited from the rate hike more than Deutsche Bank”, which nevertheless performed well, Jérôme Legras points out. Deutsche Bank stock lost 12% of its year-to-date value as Commerzbank rose 10%.

As for French banks, their lower sensitivity to the interest rate environment is costing them dearly on the equity market. From 1uh January, BNP Paribas, Société Générale and Crédit Agricole SA lost between 17% and 25% of their value.

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