France's sleepy retail banks ripe for cost cuts

PARIS Fri Nov 2, 2012 7:04am EDT

A part of the logo of the BNP Paribas bank is seen on the rooftop of their Paris headquarters April 26, 2012. REUTERS/Mal Langsdon

A part of the logo of the BNP Paribas bank is seen on the rooftop of their Paris headquarters April 26, 2012.

Credit: Reuters/Mal Langsdon

PARIS (Reuters) - French banks' nationwide networks of branches are coming under scrutiny as ripe for cost cuts, ahead of the lenders' quarterly results due next week.

Investors will also be looking closely at fixed-income revenues from investment banking and whether any of the big French lenders will try to grab market share from Swiss rival UBS's (UBSN.VX) worldwide retreat from this business.

French retail banks have packed a powerful profits punch over the past two years - buoyed by fee income on savings products, a boom in mortgage lending and archaic interbank levies.

But a slowing economy, tougher regulations and low interest rates have slowed or even halted revenue growth, putting pressure on banks to cut costs in a bid to boost profit.

This is a Europe-wide trend but one that matters especially for heavyweight French banks like BNP (BNPP.PA), Societe Generale (SOGN.PA) and Credit Agricole (CAGR.PA), which have relied on their domestic retail business to offset the impact of roller-coaster financial markets on their investment banks.

French retail banking accounted for 17 percent of BNP's total revenue, 32 percent of SocGen's and half of Credit Agricole's in the second quarter.

"The outlook for revenue growth is looking a lot tougher these days," one French retail-bank executive said. "I don't know how revenues will grow given the crisis, incoming Basel III regulations, falling fee income and falling interest rates."

Another put it more bluntly: "Our fee income is dropping all the time. Every time we think it can't fall any further, it does," he said. "We're going to have to cut costs."

French banks will likely be forced to scale down their retail branch networks to save money, Credit Suisse analyst Maxence Le Gouvello said in a recent research note to clients.

While France is considered to be a safe economic haven in the mould of Germany rather than recession-wracked Greece, its 2 trillion euro economy posted no growth over the last nine months while the jobless rate is at record highs.

Basel III rules designed to crack down on risk are also making lending more costly, aggravating a slump in demand from the euro zone crisis, bankers say.

As for traditional "cash cow" products like life insurance, their success has been crimped by low interest rates - and by the banks' own moves to redirect customer funds into accounts that count toward regulatory liquidity targets.

BRANCH CLOSURES

The job of working at a French bank branch, which for years has been as simple as taking client savings and plonking them in tax-free deposit books or life insurance, looks set to get tougher.

While waves of job cuts aren't yet on the agenda, the likelihood is that banks will have to shutter branches and employ fewer staff.

Annual revenue per branch in France is around 2 million euros ($2.59 million), behind the UK's 3.1 million pounds ($5.00 million) and only slightly ahead of Spain's 1.5 million euros, said Jean-Baptiste Bellon, a consultant to the financial sector.

By collectively closing some 1,700, or 10 pct, of their branches, BNP, SocGen and Credit Agricole could boost annual pretax retail profits by up to 9 percent, or 674 million euros ($873.48 million), according to research by Credit Suisse.

"The banks have become sleepy," said Bellon. "Revenues have steadily grown at a higher rate than France's economic output but that link is about to break."

BNP and SocGen saw domestic retail revenues flatline in the first half of 2012. They are expected to report no growth or a fall in third-quarter results on November 7 and 8.

Investors will also be focusing on the banks' investment banking divisions, after rivals including Deutsche Bank (DBKGn.DE) and Morgan Stanley (MS.N) reported strong revenue from fixed-income business.

France's largest bank BNP could see particularly strong fixed-income and trading results, Deutsche Bank analyst Flora Benhakoun said in a recent report. BNP is in a stronger position than other French banks because it is close to completing efforts to shrink its balance sheet.

No. 3 bank, Credit Agricole, whose retail business eked out 5 percent revenue growth in the second quarter, will be hit by a one-time 2 billion euro loss for the sale of its Greek Emporiki unit when it reports results on November 9.

($1 = 0.7716 euros) ($1 = 0.6195 British pounds) (Editing by Erica Billingham)

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