The economy will take time to recover from the coronavirus pandemic, warned the Banque de France on June 9. At this stage, the major French banks are preparing themselves by significantly increasing their provisions. But will this be enough to enable them to withstand the crisis?
Banque de France forecasts a 10% fall in GDP in 2020
The forecasts announced by the Banque de France are fairly close to those of the government. The Banque de France anticipates a decline in GDP of around 10% in 2020, due to the confinement caused by the Covid-19 pandemic, whereas Bercy is counting on a fall of 11%. According to the central bank, this uncertain year will be followed by a 6.9% rebound in 2021. We would therefore have to wait until 2022 to see activity similar to that at the end of 2019.
For the time being, the French government is attempting to absorb the shock by setting up a short-time working scheme, as well as various forms of aid and public loan guarantees for businesses. Since the end of March, more than 500,000 companies have benefited from a state-guaranteed loan (PGE), and 85 billion euros have already been distributed to those with sales of less than 1.5 billion euros, according to Bpifrance. Faced with the crisis, banks have never been so much in demand.
More than 1.5 billion euros in additional provisions
The 4 major listed French banks had a difficult first quarter. Société Générale, weighed down by its corporate and investment bank, posted a loss of 326 million euros. BNP Paribas and Crédit Agricole posted comfortable profits (1.3 billion and 908 million euros respectively), albeit each down 33%. The same is true of BPCE.
To cope with the Covid-19 crisis and their rising cost of risk, banks have set aside over 1.5 billion euros in additional provisions. These provisions do not correspond to an actual increase in payment incidents, but to an estimate of future defaults.
Equity derivatives hit hard
March's historic volatility had a severe impact on the capital markets activities of French banks. While US banks saw their equity-related revenues soar in the first quarter, this was not the case for French banks, where they plunged by -1.4 billion euros. Thecancellation of dividend payments contributed to the sharp fall in the value of equity derivatives.
These setbacks have prompted some banks to review their strategy. Société Générale, for example, will "simplify its offer", while Natixis is looking into the use of equity futures in derivatives. BNP Paribas, on the other hand, has no such plans.