The Governor of the Banque de France, François Villeroy de Galhau, called for an increase in the number of mergers between European banks during the presentation of the annual report of the Autorité de contrôle prudentiel et de résolution (ACPR). The profitability of European banks, which is half that of American banks, was singled out for criticism.
Merging for greater profitability
In his speech presenting theAPCR report, François Villeroy de Galhau, Governor of the Banque de France, emphasizes the French banking sector's relatively low level of profitability in 2019. "The European banking sector does not have excessive or ironclad profitability, particularly compared with American banks," he says in his introduction to the report.
The market share of the top 5 U.S. banks exceeds 40%, while that of the top 5 groups in the euro zone barely reaches 20%. Return on equity (RoE) is a measure of the annual return on the equity capital made available to a company by its shareholders, and is therefore used to assess the effectiveness of investments.
RoE is the ultimate measure of banking sector performance. It is 11% in the United States for 2019, compared with an average of just 5.6% in the eurozone, which "weighs on the stock market valuation of European banks", according to François Villeroy de Galhau. In France, it is 6.5%, in Spain 7% and in Italy 5.2%.
And yet, "the size effect is an asset".says the Governor of the Banque de France, who is keen to encourage the development of cross-border mergers. On the regulatory front, however, mergers are made difficult by a certain lack of synergy, not to mention political reluctance.
Banks face the challenge of the economic crisis
In addition to the economic and health crisis, which has caused the top four banking groups to see their revenues fall by 5% in the first quarter of 2020 compared with the first quarter of 2019, François Villeroy de Galhau has added two reasons for low profitability: low rates and digitalization.
In his view, low interest rates, "which are now here to stay, are putting pressure on banks and insurers to be profitable." What's more, digitalization is placing banks in an uneven playing field with other economic players, especially the Big Techs.
The Governor of the Banque de France assures us that the APCR is keeping a close watch on the banking sector, asserting that "more than ever, a competent supervisor and a resilient financial system are two imperatives in the face of the crisis."