Given how little cash small businesses tend to keep in reserve, the speed at which banks are able to dispense government-backed emergency loans will be vital to an economy’s ability to weather Covid-19 lockdowns. In France banks are confident that they have moved more quickly than peers in the other big European economies, including Germany.
By mid-April, according to France’s state development bank, BPI, the banks had pre-approved 150,000 applications for government-guaranteed loans. Spanish development bank ICO counted 44,000 a few days earlier. By contrast, Germany’s KfW had only counted about 10,000 applications, about 9,000 of which would have gone through banks’ credit checks. British banks had approved little more than 6,000 loans, according to trade body UK Finance, and Italy’s equivalent scheme had only just launched.
France mainly stands out in terms of numbers, however, because (like Spain and Italy but unlike Germany and Britain) it has targeted the self-employed. Germany has a separate scheme of grants for them not involving the banks. Moreover, KfW may catch up with any lag to France’s volumes as it moved to guarantee 100% of loans for smaller firms after the Easter weekend. France still only guarantees up to 90%, leaving a bigger burden on the banks’ credit vetting.
Very few companies will benefit or take advantage of the situation and thrive in the current environment- Bertrand Cozzarolo, Societe Generale
By mid-April, BPI said banks have pre-approved €22 billion of loans, well ahead of the UK’s £1.1 billion, for example. The French scheme is also able to provide much bigger loans than the £5 million maximum in the UK.
French banks are much less reliant on their state development bank than is the case in Germany. For companies with turnover of up to €1.5 billion (which are still able to borrow up to three months’ turnover) all BPI does is provide the borrower with a code to give to the bank. KfW does a full credit check of its own on loans above €10 million.
Frédéric Oudéa, Societe Generale
Frédéric Oudéa, chief executive of Societe Generale and chairman of the French banking association, FBF, insists the banks are playing their part well in president Emmanuel Macron’s promise of €300 billion of guaranteed loans. He adds that the situation for French small and medium-sized enterprises is generally manageable, as the guarantees come on top of elements of government support such as payments for temporarily unemployed workers and deferrals of corporate and social security taxes.
“I think it’s fast enough,” he tells Euromoney. “We might not use as much as €300 billion: €300 billion is the total amount of loans to small companies in France, so it’s a big amount. Keep in mind that some sectors, some companies are not impacted. The impact will be bigger in some sectors – retail that’s not food, tourism, hotels and restaurants, tourism, airlines.”
Thierry Laborde, BNP Paribas’ head of domestic markets, thinks applications will eventually reach about €100 billion, at an approval rate of up to 90%. “I think the cash bridge will be sufficient,” he says. He adds, however, that France needs to follow Germany’s example of setting up a fund to recapitalize businesses (and BNP Paribas’ own €2 billion fund for private equity in France and Belgium could also potentially double in size to help with this).
SocGen has tried to speed up the process by delegating more decision making power to frontline staff, so the risk officer only gets involved with much bigger loans or firms with lower credit ratings. Rules on delegating such decisions apply for the uncovered portion, so a €10 million loan is treated like a €1 million loan, says Bertrand Cozzarolo, a banker supervising SocGen’s branches in France.
Thierry Laborde, BNP Paribas
Both these banks have sought to supplement their role in liquidity provision by making some of the biggest donations that banks have given in Europe in response to the coronavirus, with BNP Paribas following SocGen’s €50 million pledge in mid-April. SocGen has also said it will guarantee the salaries of its 140,000 staff around the world during the crisis and it will not use France’s other supports for businesses in order to relieve the burden on the state budget.
Meanwhile, the FBF has agreed to offer businesses and the self-employed a six-month interest payment holiday. It is a voluntary scheme, although borrowers have access to a state mediator if the banks refuse. SocGen has rolled that out automatically to 35,000 clients. “We assumed that the vast majority of those companies would at some point need that relief. Very few companies will benefit or take advantage of the situation and thrive in the current environment,” says Cozzarolo
This agreement on debt holidays is perhaps a sign of how the banking sector’s greater centralization in France makes coordination with the state relatively easy; most other countries have had to enact moratoria by law. FBF is the only body representing the banks publicly in France, while there are three such bodies in Germany.
But many in the sector worry less about French banks’ domestic retail and SME exposures and more about the large size of their global corporate and investment banks. In particular there are concerns over the banks’ decisions to double down on derivatives trading and structured finance. Good relations with the local regulator have facilitated this growth. Energy and, in recent years, aviation are mainstays of structured finance and those two sectors have been particularly badly hit by lockdowns, travel bans and the oil price crash.
Holdings of opaque so-called ‘level three’ assets are a particular concern in listed French banks as a result of this investment banking focus. In contrast to the general trend in investment banking on both sides of the Atlantic over the past five years, French banks have been more likely to increase their holdings of level three assets, according to Berenberg. French banks’ holdings of such assets are also generally harder to fathom as they trade them less frequently than peers.
According to the Institute of International Finance, at the end of 2019, French non-financial corporate debt rose to €3.8 trillion or about 160% of GDP – twice as much as the other big European countries. Most of the increase in recent years has come from big corporates borrowing in the capital markets, which Oudéa sees as a further burden on the banks if asset managers continue to see outflows.
The other questions for the big French banks come from their retail and SME operations outside France and especially those in Italy. Crédit Agricole has made a series of small bank acquisitions there over the past four years and BNP Paribas bought the sixth largest bank, Banca Nazionale di Lavoro (BNL), in 2007. Both banks are more exposed to Italian government bonds than most other banks in Europe, according to Berenberg, at 30% of their tangible net asset value.
According to Laborde, concern about BNL nowadays is misplaced. He says BNP Paribas’ exposure to business loans in Italy is relatively safe as it has focused more on large companies and exporters over the past decade, and its cost of risk there has recently been about the same as in France. “It’s a very different portfolio to the one in 2008 and 2009,” he says.