Big is better, or so French bankers believe.
One of the clearest messages to come out of the French national assembly's inquiry into the Crédit Lyonnais collapse is that the heads of major French banks have spent the past couple of decades obsessed about the size of their operations. The definition of success at a government ministry, say cynics, is having control of the largest budget, and both the civil servants who ran the state-controlled banks and the ex-civil servants who run the newly privatized banks tend to treat their charges in the same way.
Crédit Lyonnais was not alone in pursuing a growth strategy. Rival commercial banks such as Société Générale (SocGen) and Banque Nationale de Paris (BNP) struggled to keep up, as did mutuals such as Crédit Agricole. Evidence of their efforts is still visible. Ranked by revenue, Crédit Lyonnais, SocGen and BNP are among the 12 largest banks in the world.
The appetite for size shows few signs of disappearing. SocGen's acquisition of Crédit du Nord contributes to the rationalization of the French banking sector, but the bank has been slow to persuade analysts that there is more to this acquisition than simply putting more branches, employees and assets under the SocGen flag. Société Générale chairman Marc Viénot says the bank has no intention of closing Crédit du Nord branches or sacking employees.
Bad to mediocre
Likewise, asked to explain what has happened since its acquisition of Banque Indosuez late last year, a Crédit Agricole spokesman says everything of importance happened when the investment occurred in November. Little rationalization has taken place since.
The large branch networks and high staff numbers of French banks hide dismal profits. Chairman Jean Peyrelevade likes to call Crédit Lyonnais's 1996 profits of Ffr202 million ($32.6 million) "the turning-point". Most of the large banks have returned to profit in 1996 and the first half of 1997. This is welcome, but it is not an indicator that French financial institutions are enjoying healthy growth. Crédit Agricole, the largest and most profitable of the big five, made $1.5 billion in 1996 compared with HSBC's $4.9 billion and Citicorp's $3.8 billion. When senator Alain Lambert presented his report on the health of the French banking system last November he was quite clear about the extent of the problems facing the sector. "It is," he said, "a crisis without precedent which, contrary to appearances, is not over." Many still agree. "The performance of France's biggest banks has gone from very pathetic to pathetic," says John Leonard, a banking analyst at Salomon Brothers in London.
The more one looks at performance indicators, the more problems emerge. The French Bankers' Association (AFB) has calculated that in 1996 average return on equity for its member banks was just under 8%. In the UK this was 20% and in the Netherlands 12%. Moreover, much of the ROE that French banks do make comes from operations abroad. Their activities in France are even less profitable than their overall operations. SocGen, Crédit Commercial de France and Crédit Agricole, with domestic ROEs of 13%, 12% and 11% respectively, are among the most profitable domestic banks. But their numbers are dismal compared with the 24% ROE on domestic operations generated by even struggling UK bank NatWest.
French bankers, their advisers and analysts, the government, politicians and the Banque de France have all come up with theories to explain the sector's problems. Indeed, one central bank official says: "It is not wrong to say that reform is more talked about than acted upon. Everyone in Paris has their theory of how to solve the problems of French banks."
The French economy is still recovering from the recession of the early 1990s. According to the OECD, growth in 1996 fell to about 1%. Inevitably, the low growth figure hides a similarly low demand for lending. Sustained low demand has brought competition over margins the like of which French banks have never experienced before. The central bank has responded by imploring the banks to act together to maintain margins. In a circular letter last year, Jean-Claude Trichet, governor of the Banque de France, asked the banks not to offer interest rates more than 60 basis points below the rate for government bonds (OATs). The central bank has not named names but claims several banks are offering rates below that to retail customers. Possible offenders are easy to spot. In June, for instance, one SocGen special offer carried an interest rate of just 4.9% for 18 months. At the beginning of July the OAT stood at 5.58%.
Banque de France deputy governor and chairman of the banking commission Hervé Hannoun says that the low rates are "imprudent and dangerous" and "are not sufficient to ensure the recovery of financial institutions and to allow the banking sector to compete on equal terms with its foreign competitors". Hannoun believes the practice of offering low rates is on the increase and is discussing ways to punish offenders; sanctions may even include removing banking licences.
Competition is focused on retail banking, where the natural winners are mutuals such as the Caisses d'Epargne and Crédit Agricole. They already have market shares of close to 20%. Société Générale, historically the most successful commercial bank in this area, has a market share of only around 7%. Crédit Lyonnais and BNP have smaller shares still.
The commercial banks argue that the mutuals have an unfair advantage because of structural distortions in the market caused by government interference and regulation. One of the mutuals' most important perks is a concession that allows the Caisses d'Epargne, along with the post office, to operate a government-subsidized tax-free savings account called a Livret A. (Another savings bank, Crédit Mutuel, operates a similar, but much less popular, account called a Livret bleu.) The accounts are popular; more than 48 million are held. If this system were abolished, most customers would shift their accounts to commercial banks. "I do not doubt that if the Livret A were abolished Société Générale could make a 20% return on its domestic banking activities," says Ziad Sarkis, managing director of the Mitchell Madison Group consultancy. Given the low profit levels of Caisses d'Epargne, less than 6% last year, the loss of this revenue would be a blow.