The profitability of the French banking sector remained relatively stable in 2019, "still at a fairly low level", said François Villeroy de Galhau at the presentation of the ACPR's annual report.
Low interest rates weigh on bank profitability
The Governor of the Banque de France, François Villeroy de Galhau, points out that banks' average return on equity reached 6.5% in 2019. This low profitability impacts the stock market valuation of European banks and shows that "the European banking sector does not have, compared in particular with American banks, an ironclad excessive profitability".
Several factors explain this situation, including low interest rates. To remain competitive, banks are focusing on diversification, rate increases and restructuring. However, mortgages remain their flagship product, enabling them to acquire new customers and sell them consumer credit, insurance and savings products. The growing importance of digital technology in the financial sector is another factor likely to explain this low level of profitability. Tech giants are now taking over some traditional banking activities. " Competition is welcome, but it must be fair", says the Governor of the Banque de France.
French banks' financial solidity strengthened
The Banque de France notes that French banks have continued to strengthen their financial structure. They are now more resilient to the downturn in economic activity than they were before the banking and financial crisis of autumn 2008. However, François Villeroy de Galhau insists on the need to "remain vigilant and monitor the conditions for recovery, by continuing to regularly assess the impact of the economic crisis on financial institutions". This will mainly take the form of "monitoring the overall quality of the loan portfolio against the risk of bankruptcy".
More and more mergers?
The Chairman of the Supervisory Board of the European Central Bank (ECB) recently emphasized the importance of banks carrying out merger operations at a time when the pandemic is eroding their profitability. Earlier this year, he expressed his support for a simplification of the regulatory framework surrounding this development. Andrea Enria, for example, is in favor of "facilitating the granting of liquidity exemptions at the individual level, to the extent possible within the current legislative framework".
For the time being, the situation remains complex for banking professionals. On the one hand, the ECB is encouraging them to merge in order to minimize the impact of low rates on profitability, while on the other, the regulatory framework is not favorable.