Rampant bank and capital markets borrowing in France is alerting financial policymakers to the danger of French corporations taking on ever more debt to make acquisitions.
French M&A volumes reached their highest level since the 2008 financial crisis in 2017, with outbound volumes accounting for around two thirds of deals, according to Dealogic.
Out of about 20 key global markets, France was second only to Hong Kong in terms of the increase in private non-financial debt over the last two years, according to a January report from the Institute of International Finance.
France’s financial stability board, the HCSF, acknowledged this could be a problem in December when it proposed to cap systemic French banks’ exposures to the most indebted big resident firms, initially at 5% of their capital base. The French authorities are now in a consultation period until the spring to hammer out the details with the ECB, European Commission and European Banking Authority.
The rule could then be transferred across Europe, at least on a voluntary basis.
“Banks cannot have too high a concentration of their risk in these overly indebted corporations,” Banque de France governor François Villeroy de Galhau told French television channel BFM Business late last year. Finance minister Bruno Le Maire chairs the HCSF, and the Banque de France and markets regulator AMF are also members.
Today, systemic French banks do not have exposures that would breach the proposed threshold, so there will be no direct effect. It is designed more as a preventative measure.
This does not prevent a senior figure at one of the big French banks from reacting with anger at the move: “It came from nowhere. We don’t feel any major change in the level of indebtedness. Many firms have been deleveraging.”
In fact non-financial corporate borrowing has been consistently rising in France since the early 2010s and now stands at around 165% of GDP, according to ECB figures. That is higher than in all European countries except Belgium; the level in Germany is about half that.
Nevertheless, in common with all their European peers except those in Belgium and the UK, French firms are continuing to decrease their leverage ratio (currently 37%). Indeed, this is lower in France than in all European countries except Sweden.
The HCSF is of the opinion that overall corporate borrowing figures obscure the main source of their concern, as France’s small and medium-sized enterprises have lower rates of leverage than bigger corporations with access to bond markets.
Banque de France figures show total debt among SMEs has remained relatively stable since 2011 at about €500 billion. But borrowing by big corporations has shot up, surpassing SME debt around 2012 and reaching almost €700 billion in mid 2017. Mid-cap debt is also catching up at more than €400 billion.
While eurozone banks’ loan books stopped contracting around 2015, French and Belgian banks have the highest rate of corporate and retail loan growth in the bloc, about 8%, compared with about half that rate at German banks, according to Deutsche Bank. This is despite more rapid economic growth in Germany and Spain.
The HCSF took special note of the role of market borrowing, rising 48% since 2011, among big corporations. Those firms only increased bank debt by 9%. Mid-caps increased market borrowing by 150%, although they still rely more heavily on banks’ balance sheets.
Euromoney understands the HCSF is above all concerned about the rate of increase in debt of around 20 big corporations in total, particularly given the greater propensity of French firms to embark on debt-fuelled foreign buy-outs.
Recent French purchases abroad include a $24.7 billion purchase by commercial real estate player Unibail-Rodamco of Australia’s Westfield. Thales outbid a local rival with a €4.76 billion cash offer for Dutch cyber security firm Gemalto, also in December.
“Companies in France are performing well; they are in expansion mode and they feel supported in their ambitions,” says the banker. Market-friendly president Emmanuel Macron gives more confidence, she adds. “We have strong businesses. We go and conquer.”
Euromoney understands the French authorities are less concerned about household borrowing, due to a perceived greater emphasis by French banks on affordability over collateral. Unlike most other eurozone markets, the vast majority of mortgages in France are fixed-rate.
Even so, the HCSF further noted how a hot property market (albeit with regional variations) was spurring higher mortgage growth. It called for vigilance on banks’ ability to profit from this lending, as low rates bring ever more generous terms.
In contrast to all the other big eurozone markets, household debt has steadily risen this decade as a proportion of disposable income in France, although ECB figures show French household leverage is still below 100% of disposable income, unlike in Spain, Sweden and the UK.
“In 2016, it was clear that mortgages were driving French banks’ credit growth,” says Laurent Le Mouël, banks analyst at Moody’s. “In 2017, corporate loans picked up again too.”
Mortgage renegotiations have spurred retail loan growth, says Le Mouël: early repayment accounts make up about half of new mortgages in France.
He notes how mortgages have traditionally been low-margin business for French banks, offering an entry point for more lucrative products areas such as consumer loans.