(Bloomberg) -- After a couple of years to forget for French banking, the likes of BNP Paribas SA and Societe Generale SA are hopeful their shares can narrow the gap to peers in 2025.
On Monday, Finance Minister Eric Lombard told local radio he’s planning to cut the interest rate the government forces banks to pay to consumers on a special kind of deposit known as Livret A.
The move, which reflects slowing inflation, would give a lift to bank earnings. Lowering the rate by 0.5 percentage points could push up pretax profit at SocGen’s French retail unit by 7% and by 5% for the corresponding division at BNP Paribas, Jefferies analysts estimated in a note in November.
The rare piece of good news contrasts with the lagging share performance compared with European peers, many of whom have gotten a much larger boost from higher interest rates over the past couple of years. Political turmoil in France, triggered by President Emmanuel Macron’s decision last summer to call snap elections, has exacerbated the situation for the country’s lenders.
SocGen and BNP are both down since the beginning of 2022, the year the European Central Bank started hiking after almost a decade of negative interest rates. That share price development lags far behind a gain of close to 50% for the Euro Stoxx Banks Index over the same period.
A substantial part of the previous underperformance is linked to barely rising net interest income at France’s largest banks. By comparison, the metric is likely to have risen more than 40% at their largest peers over the past three years, Bloomberg calculations show.
The two-speed European banking sector - between France on the one side and countries like Italy, Spain or Portugal on the other - has to do with a quirk in the country’s rules that limits the benefit French banks get from higher interest rates.
But the expected cut to the Livret A rate, which is based on recommendations by the Bank of France, could help to reverse that.
“We are on the other side of the cycle now,” said Deutsche Bank Research analyst Sharath Kumar. “This environment appears ripe for the French banks to outperform European banks in 2025.”
The Livret A rate has been at 3% since early 2022 and a cut would be the first decrease in five years. French consumers were keeping €427 billion ($445 billion) on those accounts at the end of November, according to La Caisse des Depots.
Investors have already begun to take a more positive view on SocGen as a turnaround under Chief Executive Officer Slawomir Krupa seems to finally take hold. The lender’s shares have rebounded more than 30% from a low in early August as signs have mounted that the worst for its domestic business is over.
“2025 should be a better year for French banks,” said Olivier Sampieri, a senior partner at Boston Consulting Group. Lenders will benefit from the fixed rates of loans made over the past few years, “while many of their Europeans peers with a higher share of floating-rate loans on their balance sheets will rather lose out now that interest rates are falling,” he said.
Still, it’s likely that France’s political and economic uncertainty will continue to weigh on the country’s banks. The situation has negatively affected how investors perceive French stocks more generally, including banks, and it has also eroded business sentiment and investments.
That is likely to crimp loan demand and hence bank revenue.
The country has seen a succession of prime minister who have so far failed in their repeated efforts to narrow a widening budget deficit, which has disconcerted bond investors.
The spread between the yields on France and Germany’s 10-year debt has been hovering around 80 basis points, compared with less than 50 basis points before Macron called for snap elections in June.
Several French bank including BNP Paribas and Credit Agricole SA received a rating downgrade from Moody’s Corp. last month as a result of the situation.
The country’s latest prime minister — Francois Bayrou — is seeking to finalize this year’s budget by the middle of next month. Uncertainties remain about the balance his government will want to find between tax increases and public spending cuts.
France’s “delicate political situation” may result in higher funding costs and slower growth for banks, KBW analyst Andrew Stimpson said.
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