Fitch Ratings expects further difficulties at the corporate and investment banking (CIB) units of France's leading banks to continue to compress revenues, while escalating loan impairment charges, already noted in Q408, will pose a growing problem for the sector in 2009. This is one the conclusions published in a special report.

Some of France's leading banks are significantly involved in CIB and 2008 results across the board have generally been lower than previous years, as securities write-downs and other crisis-related losses have taken their toll. Despite this, a massive recapitalisation of the sector has, to date, been averted and nationalisation of the banking system is so far not in prospect.

"The outlook for the French banks is mixed, with Credit Agricole leading the way with the best prospects, and Natixis facing a rough ride as it continues to struggle with trying to offload large portfolios of troubled structured assets" says Janine Dow, Senior Director with Fitch's Financial Institutions team.

Credit Agricole (rated 'AA-' (AA minus)/Stable) benefits from its dominance of the domestic retail market, where it controls a 25% share of deposits. It also has good revenue diversification, substantial amounts of capital (around EUR68bn) while there is evidence that management's efforts to restructure Calyon, its wholesale and investment bank, are paying off with continued de-leveraging of problematic structured assets.

The Outlook for BNP Paribas (BNPP, 'AA'/Negative) and Societe Generale (SG 'AA-' (AA minus)/Negative) is clouded by the poor prospects for these banks' large CIB units where results have been badly impacted by the global financial market crisis. SG's sizeable exposures to central and eastern Europe (CEE) and Russia, where retail loan portfolios represent some 10% of total consolidated lending at end-2008, are also expected to see further impairments and BNPP is still grappling with its attempted takeover of Fortis' Belgian banking and insurance businesses.

Prospects for boosting revenue generation at Groupe Caisse d'Epargne (GCE), Groupe Banque Populaire (GBP) and their jointly owned (70%) subsidiary, Natixis, (all rated 'A+' Stable Outlook), remain challenging. Natixis's portfolios of troubled assets, currently being wound down, are still substantial and further write-downs are expected to continue to represent a drain on the resources of its strategic shareholders. Plans to merge GCE and GBP around one single central body, and the appointment of new senior management, are encouraging, as is the French government's decision to inject EUR5bn of Tier 1 qualifying instruments into the combined GCE/GBP. "Fitch sees a long road to recovery at Natixis and slack revenue generation at the regional networks, as the economic recession in France begins to take its toll on jobs, consumer confidence, house prices and the SME sectors," says Ms Dow.

Only Banque Federative du Credit Mutuel (rated 'AA-' (AA minus)/Stable), the issuing vehicle for Credit Mutuel Centre Est Europe (CMCEE), Credit Mutuel's (CM) dominant sub-group, has managed to keep its ratings intact since the crisis broke in July 2007. Its 2008 results were nevertheless poor, reflecting sharply reduced operating income due to mounting funding costs, securities write-downs and fee compression plus steep rises in impairment charges. Last year was one of expansion for this group, having acquired Citibank's consumer finance business in Germany and 51% of Cofidis, a French consumer finance operation. Nevertheless, the timing of expansion into the consumer finance sector may prove to be flawed since impairments are on a rising trend.