03 December 2013

Fitch: French banks' 2014 strategy updates to focus on core units

French banks' new strategic plans are likely to extend their focus on core franchises, balance sheet strengthening and streamlining. Fitch predicts that any external growth plans would be highly selective and limited to small bolt-on acquisitions.

A number of strategic updates are on the way in 2014. In recent years the large French banks have been cleaning up their balance sheets and strengthening funding, liquidity, capital and leverage. This is a key driver for Fitch's stable outlook for the sector, even though there are challenges for revenue and asset quality from the weak economic growth and low interest rates.

The focus on core franchises means the banks should be able to continue attracting more customer deposits to reduce their loans to deposit ratios further. This should help them increase stable funding sources, important under Basel III. Liquidity buffers are already above short-term wholesale funding, but not all assets are recognised for Liquidity Coverage Ratio (LCR) purposes. Fitch expects some banks to reach a 100 per cent LCR by end-2013 and the rest to achieve this by end-2014.

The strategy of focusing on core businesses should enable banks to develop synergies from cross-selling and integrating business lines. They should also be able to optimise operating and funding costs, all of which would help offset revenue pressure. Banks are likely to look for opportunities to grow profitable lending, but Fitch believes they will still manage risks tightly. Any M&A activity is likely to be small-scale while there is uncertainty in the operating environment.

Fitch believes the French banks are likely to increase their already healthy capital ratios, retaining sound earnings while low demand and deleveraging limits risk-weighted asset growth. Capital should continue to benefit from the disposal and run-down of legacy structured finance investments. The banks are well placed to meet Basel III capital and leverage requirements. Fitch would not expect them to have capital shortfalls, even after the ECB's asset-quality review and European Banking Authority stress tests in 2014.

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