Stable outlook for French banks, no fallout from sub-prime, says Moody’s

The outlook for the French rated banks remains stable, reflecting their relatively ample capitalisation and diversified business models as well as the supportive and efficient regulatory environment, said Moody’s Investors Service in its new Banking System Outlook for France.

Moody’s has not, so far, taken any rating action on a French bank as a direct consequence of the sub-prime crisis and the resulting credit crisis, although it does not rule out taking such action if necessary as the situation continues to develop. A prolonged crisis or a contamination to other business segments could potentially alter the rating agency’s view on some financial institutions, in France as elsewhere.

Moody’s views France as a high-support environment and believes that the financial authorities would undoubtedly extend support to any of the large banks in the system in case of need.

“Support for banks has been demonstrated in a number of instances in the past. With the additional advantage of a diversified business model, French banking groups are relatively well positioned. Therefore, to the extent that a prolonged crisis leads to negative rating actions on the BFSRs of some banks, the impact on their deposit and debt ratings could be more muted,” said Stephane Le Priol, a Moody’s Vice President – Senior Analyst and author of the report.

The number of licensed banks in France has been steadily falling in recent years, from 573 in 1995 to 411 at end-2006. However, this still high figure belies the true nature of the French banking sector, which is a highly concentrated market dominated by a few large players. Moody’s report explains in detail all of the key categories of banking institution, their leading players and the most recent developments affecting the profile of the industry.

The large French banking groups have developed significant financial market and asset management activities in recent years, which suffer from the crisis. The three largest groups already announced their third quarter sub-prime-related impairments and provisions for their corporate and investment banking divisions. Moody’s believes that the potential losses remain within manageable limits, based on the information received so far. In addition, given their relatively ample capitalisation, at present none of the large French banking groups has a major solvency issue even with Moody’s most severe stresses. Moody’s would obviously review its scenarios if further market turmoil were to impact French banks harder.

Moody’s recognises that the crisis will also have a negative impact on French banks’ profitability, which may take some time before it recovers to the record levels reached in 2006 and the first half of 2007. The announcements of impairments and provisions will probably be revised upwards in the coming quarters.

“Nonetheless, France‘s banks are in a better shape to face a downside in the cycle than they were in the previous crisis,” Le Priol explained.

Although French banks will have to rethink certain elements of their business mix, Moody’s believes that changes to the overall business model will be relatively marginal. The global business model based on extreme diversification and universal banking has proven its efficiency in providing banks with a safety cushion in a crisis environment and, in the third quarter of 2007, retail activities and financial services compensated for the poorer performances of corporate and investment banking and asset management divisions.

“In the longer term, the credit crisis may even have some positive impact for French banks: a general re-pricing of credit risk may signal the long-awaited end of the steady and unsustainable erosion of credit margins for both individual lending and corporate lending in France,” said Le Priol.