French banks’ outlook raised to “stable” – Moody’s

Moody's Investors Service has changed the outlook for the French banking system to stable from negative, as the structural characteristics of the country's banks have contributed to their resilience during the crisis by helping them absorb losses and withstand related shocks.
Moody's decision to change the outlook on French banks reflects its view that these factors provide a sound foundation for a more stable performance in the future.
"Although not entirely without weaknesses, French banks have benefited from a favourable business mix and relatively healthy retail and commercial banking franchises," explained lead analyst Nick Hill. These attributes have particularly allowed France's retail-focused cooperative groups, which control more than two-thirds of the domestic market, to absorb losses from investment banking and structured credit exposure, he said.
The rating agency also believes that recent external capital increases, combined with balance-sheet de-risking and downsizing, should offer additional stabilisation by reducing asset quality risks and steadying income.
Moreover, although some banks have significant exposures to emerging markets, Moody's noted that these exposures are manageable as the bulk of their activities are inside the Eurozone.
Following the rating agency's stress tests, which were conducted on the balance sheets of most Moody's-rated banks in H2 2009, the rating agency concluded that French banks were able to withstand losses associated with a worse-than-expected economic scenario.
"With an aggregate loan allowance of EUR64 billion at year-end 2009, French banks have already provisioned above the level of losses that Moody's expects them to incur, and their current capital buffers are able to withstand further deterioration," said Hill. Although exposures to challenged European sovereigns — like Greece, Portugal, Spain and Ireland – are substantial, Moody's believes these to be manageable and notes that EU stress tests seem to corroborate its conclusions.
However, Moody's is not saying that the French system is entirely immune to a potential pronounced double-dip recession or a systemic crisis, neither of which are currently being forecast by Moody's. Similar to many other markets, the French banking system is affected by weak economic growth, high unemployment and more challenging wholesale-funding market conditions.
"However, French banks benefit from the policies of a proactive government, the country's social safety net and consumer protection rules that have contributed to French households being among the least indebted in Europe," said Hill. The banks' foreign exposures are substantial — especially among the large banking groups — but for the most part they have avoided the worst excesses of the bubble and the subsequent fallout.