"The French banks hit by the crisis are expected to be hit again in 2008, as the crisis is not over," says Eric Dupont, Senior Director at Fitch's Financial Institutions group. "Moreover, the loss of revenue in corporate and investment banking divisions (CIB), due to the distressed activity in structured finance, is likely to pose a problem for certain banks. In addition, Fitch does not forecast any upturn in domestic retail banking for 2008. On the other hand, non-structured CIB activities continue to perform well, credit defaults remain very low, and international retail banking and specialised financial services show regular and strong growth. There also exist a number of specific issues that could influence the 2008 forecasts significantly, such as the 'post-fraud' life at SG, the fortunes of the monoline insurer CIFG, and possible M&A activity."
The severe decline in performance at most banks in 2007 was due to the impact of the financial crisis, and the necessary subprime-related write-downs/provisions since H207 (EUR11.8bn in total) in the banks' respective CIB and asset management (AM) divisions. In one particular case (SG), the fall in net income was also attributable to a massive fraud-related proprietary trading loss. Only two groups (CMCEE and LBP) have not been significantly impacted by the US subprime crisis. Only four banks managed to increase operating income in 2007, and the worst performers lost up to 14% of their revenue compared with 2006. A breakdown of 2007 revenue indicated a saturated domestic retail market, the volatility of CIB revenue and successful diversification into foreign markets and in activities generating more recurring revenue. Cost to income ratios deteriorated very significantly and, in some cases, exceeded 100% in H207. Three groups (BNPP, CMCEE and LBP), were particularly resilient in this unfavourable environment, with BNPP and LBP posting a 6% and 9% rise in net income in 2007, respectively, and CMCEE maintaining its cost to income ratio below 60%.
