French banks, unlike their European rivals, are vowing to hang on to a broad array of businesses and even grow market share, a strategy backed by long-term investors but penalized by the market.
For while most European banks are battling sluggish economic growth and super low interest rates by cutting costs and retreating to their “core”, French lenders have decided the time is right to push the frontiers.
However, their pursuit of a so-called universal banking model has so far not won stock market approval, with shares in France’s three biggest banks, BNP Paribas (BNPP.PA), Societe Generale (SOGN.PA) and Credit Agricole (CAGR.PA), all trading at a discount to European peers.
Where they do have strong support is from the political establishment who believe France needs to punch above its weight in global financial services to support French companies’ overseas business in Francophone countries and beyond.
French Economy Minister Emmanuel Macron said in December “we have strong banks, based on a universal model, which is envied by many…and they (banks) were less affected by the crisis than others because they are more solid”.
This ability to pursue a variety of activities and geographies relies on a relative stability of revenues in the domestic retail network, which traditionally has been a cash cow for French banks, and their focus on large corporate clients.
And bonds formed at France’s prestigious universities means bank and company executives, central bankers and government officials often have a broadly shared viewpoint.
Another proponent of the need for French banking’s omnipresence is Societe Generale’s Chief Executive Frederic Oudea, who has argued that Europe needs “major banks” to finance the economy and to back consolidation of its large corporations.
“Of course, it is not a matter of returning to the banks pre-crisis race for balance sheet size…but rather one of ensuring that there will still be some European banking institutions capable of meeting the needs of international clients operating around the world,” Oudea said in an opinion piece posted on his Linkedin account.
So while at the height of the 2010-12 euro zone crisis French banks had to cut their balance sheets by selling assets as investors fretted about their exposure to countries like Greece and their funding models, this cull was short-lived.
“French banks are those who have least changed their business models,” said Yohan Salleron, who owns BNP Paribas shares in his portfolio at Mandarine Gestion.
The French Banking Federation has lobbied in Brussels to preserve the “universal model”, which some say could be at risk from a European Union plan to split banks’ trading activities into a separate legal entity.
Another reason French banks may not have faced more investor pressure to shrink is their solid base of long-term stakeholders, in the form of state participation and cross-shareholdings, which can act as a deterrant to activists.
The Belgian government owns 10.25 percent of BNP Paribas, while French state bank Caisse des Depots has 3 percent of voting rights in Societe Generale.
Other investors are skeptical because French banks have lower capital ratios than most European peers, although they set more ambitious targets after last year’s European Central Bank asset quality review and stress tests.
“Every bank has its stack of problems and the problems of the French banks are simpler compared to some others, it’s about costs and building up capital,” said Jerome Legras, head of research at investment firm Axiom AI.
The French banks argue that they have already done the pruning that others are only now doing, giving them a head start over rivals like Deutsche Bank (DBKGn.DE) or Credit Suisse (CSGN.VX) which announced thousands of job cuts and plans to slim down their investment banks last year.
Though French lenders have recently announced savings plans to offset regulatory and compliance costs, as well as cutting some investment banking activities, they have not made massive job cuts or sold underperforming assets such as SocGen’s loss-making Russian business or BNP Paribas’ Italian activities.
Rather than cutting, SocGen said in February that its costs could grow by up to 2 percent in 2016, while BNP said that the cost base in its corporate and institutional division would be stable in 2019 versus 2015, despite measures to boost savings.
That has put pressure on short-term profitability.
“Given the outlook for falling revenues, we instead think costs must be cut in absolute terms,” analysts at Berenberg said in a note, calling the growth strategy at BNP Paribas and SocGen “poorly focused and self defeating”.
SocGen’s share price fell 13 percent on the day it warned about profitability targets. Analysts at Kepler Chevreux said when banks are willing to protect their businesses at the expense of a higher payout or building up capital, it is perceived as “shareholder unfriendly”.
But some shareholders are thinking longer term.
“I prefer to bet on stability, even if this is not going to work for French banks in the short term. I think they have a more prudent approach, which can satisfy investors over the longer term,” Mandarine Gestion’s Salleron said.
($1 = 0.8988 euros)
(Additional reporting by Alexandre Boksenbaum-Granier and Michel Rose; Editing by Alexander Smith)