Faced with intense competition and the need to reprice their assets at higher rates, French banks appear to have eased credit standards materially since January 2024, according to the latest eurozone bank lending surveys. With interest rates declining, easing credit standards contribute to the increasing demand for housing loans and will likely translate into lending growth over the coming months. We expect that the easing of credit standards will be short-lived and that it will not lead to a mispricing of credit risk. Yet it highlights French banks' struggles to escape the intense competition in the housing loan segment, which remains at the core of their universal banking business model.
What's Happening
Similarly to many other European countries, housing loan origination in France has been depressed over the past two years as higher interest rates reduced the demand. Since September 2023, annual growth in outstanding housing loans has turned negative and reached -1.2% in August 2024, compared with an average growth of 0.6% in the eurozone. Unlike other eurozone banks, French banks have materially loosened their credit standards lately. The net percentage of French banks reporting a net easing (as opposed to a tightening) was -33% in second-quarter 2024--a historical low--and -11% in the third quarter.
Housing loan origination is limited by regulatory rules, which cap the ratio of housing debt servicing to income, and the duration of housing loans. Banks are allowed to deviate for a portion of their new loan origination and are increasingly making use of this, according to recent statistics from the French regulatory authority. In our view, this shows large mutual French banks' willingness to increase mortgage lending.
Why It Matters
In our view, the net easing of credit standards illustrates that housing loans in France are subject to fierce competition, which can result in aggressive pricing. Although two banks--Credit Agricole S.A. and BPCE--account for about 50% of the French housing loan market, the strong competition largely results from French banks' universal banking model, which centers on housing loans. Banks' track record confirms that this collateralized, fixed-rate lending poses low credit risk but is priced at very low margins.
The competition for housing loans reflects the broader competition for French retail customers. While the universal business model increases revenue diversification over the long term and strengthens creditworthiness, it also disproportionally ties banks' client acquisition endeavors to housing loans. We reflect this feature of the French banking system in our Banking Industry Country Risk Assessment of France and our ratings on French banks.
What Comes Next
We expect housing loan growth for French banks will increase to 2%-3% in 2025, from about 0% this year, and return to levels that prevailed before the period of extremely low interest rates. Margins and net interest income from domestic activities should gradually improve as French banks reprice their assets and pressures on funding costs gradually abate. Household income benefits from the currently favorable French labor market and various safety nets, which continue to support overall credit quality. As lending rates decrease, French households will regain purchasing power, which will spur the demand for housing loans and enable French banks to normalize their credit standards.
The fierce competition in the French retail market is unlikely to abate any time soon. Competitive pressures are manageable for banks with a strong presence outside of the French market, such as BNP Paribas and Credit Agricole, or banks with a compelling and at-scale universal banking model, including Credit Mutuel, BPCE, and Credit Agricole. Yet smaller and less diversified banks could struggle to deliver sustainable returns. Notably, Societe Generale has recently lowered its targets for retail net interest margins.
Related Research
- French Banks Face Increased Volatility Amid Policy Uncertainty, July 10, 2024
- Banking Industry Country Risk Assessment: France, July 10, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | Nicolas Charnay, Paris +33623748591; nicolas.charnay@spglobal.com |
| Nicolas Malaterre, Paris + 33 14 420 7324; nicolas.malaterre@spglobal.com | |
| Secondary Contacts: | Francois Moneger, Paris + 33 14 420 6688; francois.moneger@spglobal.com |
| Mathieu Plait, Paris + 33 14 420 7364; mathieu.plait@spglobal.com | |
| Philippe Raposo, Paris + 33 14 420 7377; philippe.raposo@spglobal.com | |
| Clement Collard, Paris +33 144207213; clement.collard@spglobal.com |
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