When the concepts of shareholder value and corporate governance were virtually unknown outside US business schools, the country which above all epitomized the way things were done in continental Europe was France. Wielding a largely state-owned financial sector, French governments of both left and right have long been dirigiste. But even in France things are changing.
Privatizations were the first step. For much of the 1980s France’s biggest banks were state-owned, having been set up as state-owned entities after World War II or nationalized by the Socialist government in 1981. Over the past 10 years most have passed into private hands.
But this was privatization with distinctly French characteristics. In the late 1980s, the government of prime minister Edouard Balladur appointed selected henchmen at the helm of each of the privatized banks and companies and set up an intricate network of cross-shareholdings between the country’s largest financial and non-financial institutions. This noyau dur, or hard core, was created to protect France’s economy from foreign takeovers. Blocking minorities of up to 30% of shares are permanently held by other banks or companies whose government-appointed heads agree not to sell, a situation commonly referred to as “companies and banks holding each other by the barbichette [goatee beard is the best translation]”.
But recently this network has substantially broken down, giving France its freest economy ever. Things began to unravel when one of the companies at the heart of the system, insurance company UAP, started on a slide towards its Ffr2 billion ($335 million) losses in 1995. Some institutions, such as Elf-Aquitaine, responded by selling UAP’s shares; others, such as Banque Nationale de Paris, saw their stake diluted by AXA’s takeover of UAP and gradually started selling out. This set the ball rolling. Before long, company after company was selling its fixed shareholdings and a new, more clean-shaven French financial sector began to arise from the cuttings. In October 1996 Elf-Aquitaine sold its entire stake in Compagnie Financière de Suez and in March 1997 Axa-UAP itself almost wiped out its entire stakes of up to 12% of four major French companies: Banque Nationale de Paris, Elf-Aquitaine, Eurafrance and Gaz des Eaux.
Gouvernance des enterprises
The process was pushed along by a minority but a growing minority of institutional shareholders, in particular UK and US pension funds. Suddenly corporate governance (or, more accurately, the French translation acceptable to the assiduous guardians of the French language at the Académie Française: gouvernance des enterprises) entered the French vocabulary. And now this imported concept is becoming a part of the business culture: the French equivalent of the UK’s Cadbury report into corporate governance, the Viénot report, was published within the past two years and companies are tripping over each other to meet its requirements. As one industry spokesman says: “France has been looking for years for a means of forcing accountability on capitalism; now perhaps we have found it.”
No institution better reveals the new spirit of dynamism unleashed by this philosophy than Banque Paribas. In recent years Paribas has revived its flagging fortunes, principally by returning to its specialist roots in investment banking and selling its retail-banking businesses.
The turnround in fortunes has coincided with a change in ownership. Locked into France’s system of cross-ownership until the early 1990s, following a short and unhappy experience under state ownership, Paribas became a publicly quoted company in 1987 and now has around 30% of its shares held by foreign institutional investors. Paribas’s sale of Crédit du Nord gained it 1% in tier-one capital in Cooke ratio terms and the staggered sale of Banque Paribas Belgique is expected to boost solvency by an additional 0.5% by 2000. This has enabled Paribas to turn a Ffr4 billion loss for 1995 into a Ffr4.4 billion profit for 1996.
Retail innovation
But crucially, Paribas’s success has been achieved not by abandoning the retail sector altogether but by pursuing a more specialized type of retail involvement: the provision of consumer credit, leasing and construction loans through its subsidiary, Compagnie Bancaire. (Last November Paribas announced that it would be taking full ownership of Compagnie Bancaire by buying out minority interests.) Profits from consumer credit (distributed by Compagnie Bancaire’s credit-card business, Cetelem, through France’s leading savings institutions, direct sale and point-of-sale lending) have been particularly strong and the success has been exported.
Within France, Compagnie Bancaire has responded to a highly competitive environment by forming partnerships with other banks. This has meant that despite having only 100 branches in France, the firm has access to 20% of all branches in the banking sector through its cooperation with Crédit Lyonnais, Banques Populaires and Caisses d’Epargne.
Abroad, Compagnie Bancaire has set up operations in 13 countries. Partnerships have also been at the heart of Compagnie Bancaire’s European strategy. Paribas’ head of finance strategy, Christine Marcellier, believes that a key reason for the success of its subsidiary has been that expansion has focused entirely on the retail market rather than, as often happens, retail expansion being dragged along on the coat-tails of a bank-wide strategy for expansion in response to the forces of globalization.
But most French banks are being driven to look abroad by the needs of their corporate customers rather than in pursuit of new retail customers. This has, after all, been the driving force for internationalization ever since the development of large banks in the early part of the 20th century. As a spokesman at Banque Nationale de Paris says of its link with Germany’s Dresdner Bank: “Where our corporates go, we have to follow.” The two banks aim to provide a one-stop service for corporate clients in all countries where they have a presence.
But as Paribas has found, simply working to keep the business of traditional customers is no strategy for growth. As local or industry-specific advantages are stripped away, French banks have to cultivate new niches. Crédit Agricole, for example, would not be the leading bank it is today had it stuck to its core market in the agricultural sector. As a representative of Schroders’ Paris office says: “If you don’t have a USP [unique selling proposition] then your business relies on the quality of your people and your technology.”
Points of difference
It is exactly this awareness of the value of a targeted approach that has ensured the success of Compagnie Bancaire. Notably, it was the first organization in France to provide reliable widespread point-of-sale consumer lending, backed up by accurate risk-assessment techniques and historical databases. As a result, the firm has cashed in. The first to provide this particular service in France, Cetelem, fashioned its own point of difference and then searched out other markets where it could fulfil a similar role.
But other financial institutions in France are rapidly losing their point of difference as state subsidies fade away. The retail accounts of the postal network, La Poste, and Caisse d’Epargne accounts are the clearest examples. With the impending withdrawal of the state from the financial affairs of the Caisses d’Epargne, this network of institutions is certain to lose some of the tax-free status that had made it so attractive to customers and allowed it to build up Ffr65 billion of capital. La Poste, meanwhile, is still under state control and offers financial products at subsidized prices, mainly as tax-free savings accounts. La Poste is also plugged directly into the government’s finances through its Caisses des Dépôts, which gives it access to cheaper funding. But all observers conclude that these subsidized accounts must be eliminated after Emu takes place. If not, it is impossible to see how the French government could prevent citizens of other countries from enjoying the benefits of its own subsidies.
So how will the French banking sector react when all its state-donated advantages are gone? The likeliest answer is that the wholesale sector and retail sector will respond in different ways to the new environment. In the commercial sector, it is possible that Paribas could leap ahead of its competitors because of expertise developed in recent years through heavy involvement in France’s comparatively deep and liquid capital markets through participation in the Eurobond markets in particular.
The wholesale banking sector has been assisted in its drive for modernity by the development of the Matif futures exchange. The deal being negotiated between the French and German stock exchanges an attempt to create a serious Paris-Frankfurt axis under Emu to rival London as a financial centre is just one illustration of the advantage France may enjoy in the wholesale sector.
But at the small end of the wholesale sector there may be problems. France’s smaller and middle-size companies still look mainly to banks for credit. But they have generally been squeezed out of the borrowing market by, on the one hand, retail customers that benefit from some state subsidies and, on the other, large corporates that can dictate terms to the banks or can disintermediate the banks by going directly to the capital markets. French banks lack expertise in dealing with this segment of the market. Many have made mechanical use of computer-generated risk assessments with some unfortunate results, as the French taxpayers’ bill for bailing out Crédit Lyonnais shows.
The prognosis for the retail sector is not very encouraging either. State involvement in the French banking sector, in its different forms, is coming to an end. Outright discouragement of foreign institutions taking over French companies and especially banks has already been successively weakened in recent years. And now the provision of state subsidies to financial institutions, enabling them to offer products at uncompetitive prices, looks indefensible with the advent of a single currency. But while foreign banks might be expected to bring a breath of fresh air into this long-cosseted sector, new players may still find the French retail market heavy going.
The sorry experiences of both NatWest and Barclays in attempting to expand into the retail French banking sector illustrate just how hard a market this is to penetrate. Partly this is because of the benefits state involvement has brought to the domestic players. But additionally, there are certain features of French banking which are not replicated in other countries. Foreign institutions which do not provided certain services in France can expect customer defections. Customers have, for example, come to expect the right to use their cash cards in the ATMs of any bank or savings institution. In the end, Barclays only managed to reach a level of stable profits by targeting high-end customers, and found that there were not so very many who would pay for the extra quality of service provided. Foreign takeovers of French banks are also hard to foresee in the immediate future because of the low level of profitability of the targets.
Cultural barriers
But could there be another way for foreigners to woo French banking customers after Emu? Although the free supply of financial services between member states has been allowed since the 1987 Single European Act, this freedom has barely been used. Could it be that the single European currency will change all that? Since an account in euro will be the same wherever it is held, the potential for cross-border supply of financial services will be immense. But foreign suppliers would still face cultural barriers in providing banking services to French customers.
As one international French banker says: “Even after the introduction of the euro I would still want my bank statement in French and French people in my bank at the end of the telephone.” In addition, the first direct banking operation in France, run by Compagnie Bancaire and modelled on HSBC’s highly successful UK operation, First Direct, has not proved a great success. This suggests that some country-specific attitudes are likely to persist, eased only by time and not solely by the introduction of a common European currency.
One reason for the lack of success of telephone banking in France may be that for years retail customers have been able to carry out a range of on-line banking services with all the main banks using France’s unique Minitel computer network. The Caisses d’Epargne, for example, claim to have 1 million cheque-account customers who access their accounts through Minitel.
So perhaps outsiders should be as wary of the French banking market in future as they have been in the past. But meanwhile, within France, change is pressing ahead in the form of a shareholder revolution. As corporate governance becomes a force for change rather than a buzzword and as the state retreats from the banking sector, more bank chairmen will begin to care about their share price. The first step for many is to have a publicly traded share price which they can care about.
