French banks have just published their results for the second quarter, and the media deem them globally “good”. They don’t seem too finicky... We had already discussed the substance matter in a December 2017 article titled "French Banks Are Much More Dangerous than American Banks".
But in this article I would like to underline the bad loans – loans that will not be reimbursed, or partially only – a time bomb in the banks’ balance sheets. According to the economist Jean-Pierre Chevallier, BNP-Baribas has a tendency to underestimate their weight. Using unpublished accounting records, he estimates that on top of the €39.902 billion of NPLs (non-performing loans), one must add €13.929 billion in potential losses on relatively safe loans, bringing up the total to €53.831 billion, or 7.4% of the total outstanding loans. This is starting to look worrisome. And if one recalculates the bank’s leverage, we see it at 35.45 (or 1 euro in cash for 35 euro in liabilities), an astounding ratio (Lehman Brothers’ leverage was at 32 before its resounding crash of September 15, 2008).
This alarming situation isn’t an isolated one – and it seems to be getting worse, as explained by L'Agefi. Indeed, French banks are feeling pressure from low interest rates, which reduce their net margin (the difference between the rate charged on loans and the rate at which it gets refinancing). And this daily economics paper acknowledges they compensate for the now low margins by increasing credit volume: credit volume has increased by 5.8% in the second quarter at BNP-Baribas, by 10% at LCL for business loans, by 33.8% (!) for businesses and 2.5% for individuals, with BPCE and Société Générale remaining unchanged. How can one explain such an increase in business loans when the GDP growth remains anemic? It seems obvious that there is a real risk for French banks to issue more credit too easily and, thus, see the number of bad loans increase...
On a side note: banks also compensate for the lower margins by raising their fees – at Société Générale, they represent 42% of the bank’s revenues with retail banking, and over 50% in the regional branches of Crédit Agricole! Those regional branches are as much tax collectors as they are credit issuers... This situation exposes them to competition from the neo-banks as people get fed up with paying high banking fees.
To sum it up, what constituted, up to now, worries in Italy, Spain, Portugal and, of course, Greece, risks happening in France as well. Bad loans, or non-performing loans, along with the risks they entail for the banking system, constitute a new danger that has to be seriously taken into account.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.