French banks stable following US attacks, says Moody's

International rating agency Moody’s said the credit quality of French banks will remain stable despite the uncertain economic climate in the aftermath of the September 11 attacks in the US. “The French banking sector continues to rank among the strongest systems in Europe, with an average bank deposit rating of Aa3/Prime-1,” said Moody's analysts in a report.

“The negative impact of the US tragedy of September 11 and the less benign medium-term prospects for the economy both at home and globally mean that income growth is likely to remain depressed well into 2002,” said Alexandra Sleator, senior credit officer and author of the report. “However, French banks’ performance to date shows the strong resilience of their revenue bases owing to solid customer franchises and a well-diversified mix of business activities revenues.”

In terms of credit risk, Moody’s said that, while asset quality indicators will decline in future, data so far shows no sign of “impending doom” in banks’ domestic or international portfolios. French banks’ future asset quality should benefit from generally risk-averse balance sheet management, substantial cushions of general provisions and improved cashflow generation, thus reducing French banks’ vulnerability to credit risk. The large losses sustained during the financial crises of 1997-1998 led many French banks to reduce their trading risk limits, and market risk management has been tightened.

Moody’s also said that operating efficiency – while still lagging due to continued excess capacity and government interference – has improved in recent years in the wake of banking consolidation. “Even though some asset quality deterioration seems inevitable going forward, sounder origination practices in recent years should somewhat protect credit quality going forward. French banks have also reduced their sensitivity to credit risk due to enhanced earning capacity and reserve build up,” Sleator added.

Moody’s believes there is potential for some of the players to build up their investment banking capabilities. The report highlights that French banks benefit from a well diversified earnings mix by business and by geography, allowing their revenues to show greater resilience than those of some of their European peers.

Moody’s also expects in-market consolidation to continue with the remaining independent banks joining the bigger groups. Cross-border transactions appear likely only over the medium term as French groups seek to establish more of a European footprint, said Moody’s.