S&P: crisis hurt French banks in 2007

“The size of French banks' corporate and investment banking divisions leaves them exposed to a potential worsening of the financial market in 2008, in segments beyond the limited areas which were affected in 2007,” said Standard & Poor's credit analyst Elisabeth Grandin. “Their business diversification and sound domestic activities, however, give them a cushion to offset continued poor CIB performance and limit the potential decline in net profit.”

Standard & Poor's has taken several negative rating actions on French banks in the past few months, largely reflecting the effects of the turbulence and potential corporate and investment banking (CIB) exposure.

The total identified effect of the current financial market upset on the six largest French banking groups has reached €11 billion, and has triggered a 20% decline in net operating income after cost of risk.

Exposure to US subprime-related collateralized debt obligations of asset-backed securities and to “monocline” insurers in particular has materially altered the 2007 results of Crédit Agricole, Société Générale, Groupe Banque Populaire, and Groupe Caisse d'Epargne. This exposure also affected BNP Paribas results, but to a much lesser extent. Residual exposure appeared prudently covered as of year-end 2007, although we do not rule out further write-downs in 2008.

“We believe that, for most French banks, 2008 results will be subdued,” said Grandin.

Banks will have a hard time increasing organic profit, given the more difficult domestic and international economic environment. We expect CIB activities to suffer in 2008, with the difficult market conditions starting to affect business segments other than US structured credit and negative basis trades with monolines. Nevertheless, the magnitude of the write-downs posted in 2007 offers potential for a relative rebound in revenues.

While we do not expect any specific exposure to have an impact similar in 2008 to that of the subprime related losses in 2007, French banks are exposed to the knock-on effects of the credit squeeze on a variety of other asset classes. The groups with large equity derivatives operations are more exposed to a prolonged slump in equity markets, however.

When we consider potential stress scenarios for French banks, uncertainties can also come from their large retail banking and specialized financing activities in emerging markets. Our central scenario for 2008, however, predicts a marked but short recession in the US and an economic deceleration in Europe, including in France, but not a global recession.

“We expect economies of emerging countries to remain resilient in 2008,” said Grandin. “In this environment, we believe that French banks' retail banking soundness and business diversification should result in profitability ratios noticeably lower than their 2006 peak, but remaining overall adequate and closer to their 2003-2004 levels.” (press release)