French Pin Hope on Alliances and |Universal' Status

French banks took a beating in 1990. Sliding domestic lending margins and savage competition for home market share spelled a plunge in profits.

But don't sound the death knell just yet. As universal banks that can engage in virtually any financial activity, generally well-capitalized French banks are hoping to improve profits by expanding their leasing, insurance, merchant banking, and mutual funds activities.

And through strategic alliances with banks abroad, they are aiming to nail down positions in international markets that would otherwise be difficult to crack.

"French banks are redeploying themselves internationally," says Olivier Robert de Massy, director of research at the Association of French Banks in Paris. "They are becoming more selective and focusing on Europe, especially southern Europe and Germany."

Vulnerability Reduced

Universal status - the ability to enter a wide array of businesses - makes French banks less vulnerable to downturns in any one sector, analysts said.

"That gives them an advantage in controlling the situation," said Scott Bugie, an analyst with Standard & Poor's-ADEF in Paris.

But the fresh emphasis on diversification comes on the heels of a hard year.

The largest French banks posted healthy increases in assets for the year ended Dec. 31. But after-tax profits at Societe Generale slid 25% to $450 million. At Banque Nationale de Paris, profits dipped 53% to $270 million, while those at Banque Paribas totaled $105 million, down 46%.

Lending margins at most French banks decreased by 50 to 100 basis points. The reason: A massive flight out of low interest savings deposits into higher paying money-market mutual funds. That forced the banks to use more expensive borrowing on money markets.

Societe Generale's chairman, Marc Vienot, estimated lending margins fell 42 basis points at his bank last year. Societe Generale's funding costs rose 76 basis points to 5.26% and lending rates rose only 34 points to 10.63.

French banks also took a heavy hit on their domestic and foreign lending and on securities trading.

|Dumb' Lending Detected

"What killed French banks in 1990 was dumb foreign lending: corporate lending in Britain and Australia, real estate loans in the U.S. and Britain, funny [lever-aged buyout loans] in Germany, and odd lending in the Middle East and North Africa," said Scott Bugie, an analyst with Standard & Poor's-ADEF in Paris.

Credit Lyonnais almost doubled provisions on loan losses to $700 million. Provisions at Paribas surged 40% to nearly $830 million, and those at Societe Generale rose at the same clip The profit picture is not likely to improve this year, said experts, including Paris-based banking advisor Herve de Carmoy.

While all of the major players are seeking to diversify, individual strategies differ from bank to bank.

Different Directions

Societe Generale is building up its worldwide leasing, futures, options, and asset-management businesses. Paribas is focusing on commodity finance, asset management, foreign exchange, treasury operations, and advisory services.

Banque Nationale is cautiously aiming to consolidate its domestic and international position, while aggressive Credit Lyonnais is racing to turn itself into a pan-European bank and a global capital markets player.

Credit Lyonnais also is chasing U.S. corporate lending. In addition, the institution this year acquired two Spanish banks and an Italian bank.

Also in the international arena, strategic alliances may prove a popular approach. Credit Lyonnais, for example, is planning to exchange a 10% stake with Commerzbank, Germany's third-largest bank.

The penchant for alliances by French banks implicitly recognizes their limitations in a global banking universe, bankers and analysts said.

"No French bank will ever be able to beat a German bank at middle-market lending in Germany," says Serge Bellanger, executive vice president for Credit Industriel et Commerciale in New York.

Looking inward, meanwhile, French banks are also aiming to reinforce their capital.

Working on Margins

Credit Lyonnais and Banque Nationale de Paris - two big, nationalized banks that have the most problems raising fresh capital - this year plan to open up 49% of their shareholding to private investors. The banks are also tightening international lending and boosting their lending rates.

"French banks are making sure they get their interest margins back up," says John Raymond, an analyst with IBCA Inc., a credit-rating agency based in London. "Competition on new lending will be a lot less cut-throat this year."

For example, French borrowers who were able to get 10-year mortgages in 1990 for as little as 8.5% are now paying between 10.5% and 11%, Mr. Raymond said.

"When French banks have found themselves racking up losses on their lending and they've started to price accordingly," said Rodney Schwartz, an analyst with Lehman Bros. International in London.

The corporate lending outlook may be yet another cause for optimism. Many French companies are again turning to banks after finding that borrowing on securities markets can be difficult and unreliable, analysts said.

Domestic Lending Surges

As a result, lending by French banks to domestic corporations shot up 22% last year to nearly $212 billion, according to the Association of French Banks.

"French banks have excellent prospects in the corporate sector," said the association's Mr. de Massy.

But despite the brighter outlook, the road to increased profitability holds some obstacles. One involves operating costs, which shot up 11% last year after a 6.1% rise in 1989.

Experts, including Mr. de Carmoy, added that with prospects for sluggish growth this year in the French economy - no more than 1.5%, according to the OECD - the country's banks are more concerned about avoiding losses than raising earnings.

Table : France's Top Five Ranked by assets; dollars in millions Year ending Percent World 12/31/90 12/31/89 change rankCredit Agricole Mutuel $305,206 $242,312 26.0% 7Banque Nationale de Paris 291,873 231,769 25.9 8Credit Lyonnais 287,330 211,006 36.2 10Societe Generale 219,983 176,020 25.0 18Banque Paribas 111,555 82,272 35.6 43

PHOTO : SERGE BELLANGER, executive vice president of Credit Industriel, and banking advisor Herve de Carmony.

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