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Retail banking in France needs to be thoroughly redesigned


The 2020 results of banks in France largely support the long-term trends in retail banking in the country.

With this in mind, it should prove interesting to analyse the figures over the past five years to evaluate the impact of the breakdowns at work. This will help to understand the marked decrease in the relative weight of retail banking in the results of the six largest French banks, whether it makes up a significant proportion of their income (Mutualistes, Banque Postale) or a much smaller one (BNP Paribas, Société Générale).

The fall in revenues of around 1 % per annum for all banks combined is the main driver of these developments. Within net banking income (NBI), it is of course the interest margin that is declining, partly because of low interest rates, and partly because of commercial

This decrease in margin materialises in a much higher decrease in gross operating profit in retail banking, with a fall of 5 % per annum since 2014. As the cost of risk is decreasing significantly, however, the fall in net profit is limited.

In addition to this macroeconomic context, French retail banks are suffering from the specificities and practices of the French market.

Mortgages, for example, as the “harpoon” product of the customer relationship, have always generated particularly low margins for banks in France. This proved to be highly detrimental during the waves of early repayments from 2015 to 2018 and ended up costing the system several billion euros in NBI for individual gains in market share that were practically non-existent.

To compensate, the banks have all sought to expand their outstanding amounts: those linked to mortgages have increased by 28 % since 2014, passing from €833 billion to €1.071 trillion. Questioning the profitability of this choice is all the more pertinent given that French banks often use brokers for mortgages (40 % of volumes), despite some of the densest agency networks in Europe.

The other major supply of credit, consumer credit, generates structurally higher margins. The outstanding amounts are approximately five times smaller than for mortgages (€188 billion in September 2019), and the market is dominated by the specialised entities of BNP Paribas, Crédit Agricole and Crédit Mutuel (80 % market share between them).

But consumer credit has seen growth rates of 3 % per annum since 2014, and it forms a major part of the strategic plans of all banks. It regularly sees innovative new products, such as the recent split payments innovation, and competition is expected to grow in this business area in the years to come.

In terms of savings, the two regulated products, Livret A and PEL, which are specific to the French market (but correspond approximately to instant savings and home ownership savings accounts), represent over €540 billion in savings at the end of September 2019. The rates that they offer, however, are more of a hindrance than a help to French banks in the current economic context.

Indeed, home ownership savings represent a specific difficulty for retail banks, with its even higher interest rate. It has passed from 2.5 % to 1 % since 2014, but this has not stopped the outstanding amounts from climbing €60 billion over the same period, putting a further strain on the NBI of the banks that collect them, with an average rate of 2.65 %. Here again, the banks do not all follow the same policy.

Therefore, whilst the six main French banks suffer in varying degrees when it comes to retail banking, they do not all have the same strategies. Those banks with the strongest networks may be able to choose between products and volumes, but those with less extensive networks must further diversify and more closely monitor the profitability of each activity.

The symptoms may vary, but for banks to get back their profitability, the remedies that they must employ are probably the same: continue to better segment and personalise offers, and invest so as not to be left behind by neobanks in terms of customer experience. They might also choose a different way of functioning for mortgages. This already seems to be the case since the beginning of the year.

Article from Les Echos – 25 February 2020