Credit risk, a source of concern for banks

So far, companies have held up well despite a tense environment marked by inflation, soaring energy prices and supply difficulties, which have worsened since Russia's invasion of Ukraine. But the spectre of recession and the gradual decline in companies' cash flow levels are increasing the credit risk weighing on banks.

2022, the year of all dangers for companies?

In 2020, the onset of the Covid-19 pandemic prompted banks to revise their credit risk provisions upwards. After this explosion, 2021 was the year of the rebound: banks achieved historic performances.

Last year, the 5 leading French banks - BPCE, Société Générale, BNP Paribas, Crédit Agricole and Crédit Mutuel Alliance Fédérale - saw their cost of risk fall: by 78.8% year-on-year at Société Générale, by 70.5% at Crédit Mutuel Alliance Fédérale, by 48.8% at BNP Paribas, by 40.5% at BPCE and by 39.5% at the Crédit Agricole group.

The wave of company failures and job cuts feared since the start of the health crisis has finally been averted in 2021, thanks to the "whatever it takes" policy. But the difficulties are mounting, and companies are now facing an uncertain economic climate, marked by the war in Ukraine, inflation and supply difficulties.

While they have managed to hold up so far, their cash flow is dwindling and will not enable them to withstand the shock indefinitely.

Cash flow down, corporate debt up

Companies not only have to contend with increasingly expensive raw materials, but also with ever longer lead times.

To be able to continue paying their suppliers, they need to be able to rely on sufficient cash flow. However, cash flow diminishes with each passing month, especially for small and medium-sized businesses, for whom it is more difficult than for large companies to pass on cost increases in sales prices in order to maintain a sufficient margin.

According to Bpifrance's latest business survey, 53% of VSE-SMEs with a government-guaranteed loan have used up most of the amount granted, and 35% have used up almost all of their loan.

Meanwhile, corporate debt reached an all-time high on May 31, totaling 1980 billion euros, according to recent data from the Banque de France. The level of debt is all the more worrying given that interest rates continue to rise, and the average cost of corporate financing, currently at 1.86%, has almost doubled since the end of last year.

Against this backdrop, banks are expecting a rise in business failures, and prudence would dictate that they increase their provisions to meet the cost of risk. These measures should be taken at the end of July, when the half-yearly results are published.