French banks set to lose out on rising rates due to loan repricing rules

French banks risk falling behind European rivals and losing out on windfall profits from rising interest rates due to rules which hamstring their ability to reprice loans.

After a decade of depressed returns, rising inflation and ECB rate hikes have radically changed the fortunes of most of Europe’s biggest banks, driving up margins and lending income.

With the exception of Credit Suisse, bumper profits are expected of Europe’s top banks when they report fourth-quarter results in the coming weeks. Italy’s UniCredit and Switzerland’s UBS kick off the season on Tuesday.

But not all banks will have benefited equally from the interest rate windfall — a disparity that is set to deepen in the short term.

France’s lenders are suffering from the most significant setbacks.

The performances of banks like BNP Paribas, Crédit Agricole, Société Générale and BPCE are being curtailed by a mortgage market geared towards fixed-rate loans and a 200-year-old savings account designed to help restore France’s public finances after Napoleon Bonaparte’s wars.

Still popular today, rates on the widely used Livret A deposit accounts are linked to inflation and set by the government. They have now reached their highest level in 14 years at 3 per cent, and are set to increase further this year. 

The accounts squeeze banks’ margins by forcing them to pay out more to depositors, while limiting the benefit they get from rising rates on their loans portfolio.

These pressures are creating a two-speed European banking sector just as it starts generating interest from investors, including US ones.

“Higher interest rates are definitely the main driver of the European bank sector,” said Credit Suisse banking analyst Jon Peace. “For French banks, the earnings upgrades have so far lagged the broader industry.”

Prospects for the industry in Europe have improved since the beginning of 2023, especially as concerns over recessions begin to fade, including in major economies such as Germany. Economists from Goldman Sachs and JPMorgan have recently reversed their expectations for a contraction in eurozone output in the first quarter.

That in turn could lessen the need for banks to notch up large charges to cope with the risk of defaults, after they began to cut provisions last year as the hit from the coronavirus lockdowns of 2020 faded.

“The drop in [European] gas prices has suddenly eased fears about any recessions to come,” said Jefferies analyst Flora…