Funded by cheap deposits and sheltered from foreign competition by tight government controls, the big banks of France long seemed immune to the cyclical ups and downs of the Anglo-Saxon financial world.
But these days, French bankers are confronting growing evidence that they are susceptible to the same kinds of problems dogging their U.S. and British counterparts. Both real estate loans and corporate credits have been souring, while heavy competition from mutual funds is squeezing profit margins.
The problems' extent became clear when the banks reported their 1991 results.
Weak Profit Reports
The venerable Banque Paribas, for example, posted its first-ever loss. Credit Lyonnais reported a 15% profit decline after increasing its loan-loss provision by nearly 50%.
Earnings at Banque Nationale de Paris and Societe General rose from the depressed levels of 1990 -- but failed to return to 1989 levels.
The malaise stems in part from a weak economy, bankers and analysts said. France's gross domestic product grew by a mere 1.2% last year, and only modest improvement is expected this year.
The sluggish economy has put a firm lid on loan growth; demand is falling, and bankers show a new sense of caution.
Not surprisingly, bankers are focusing intensely on the quality of existing loans, with weakness in the real estate market emerging as a chief worry.
While Jean Phillippe Delcroix, executive vice president of Paribas' European division, called the French real estate market "much more balanced" than those of North America or England, he warned that "the situation could deteriorate further, particularly in the Paris area."
Adds a senior French banker in New York: "French banks will probably have to reserve the same amount against real estate exposure in 1992 that they did in 1991."
Credit Lyonnais' Loan Woe
Credit Lyonnais, which expanded with singular zeal in the late 1980s, has encountered problems with a string of high-profile credits -- not only in France but internationally.
For example, the bank has an estimated $350 million exposure to Olympia & York, the crippled Canadian property concern. That is one of the heaviest O&Y exposures for any non-North American bank and probably will require "a sizable provision" this year, Sasha Serafimovski, European banking analyst at Morgan Stanley & Co., wrote in a recent report.
Credit Lyonnais also has been hit with steep losses on loans to the collapsed empire of the late Robert Maxwell. Closer to home, the bank is heavily exposed to VEV, a troubled French textile group, and La Cinq, a money-losing TV station.
While such episodes are grabbing the headlines, a greater long-term problem for French banks may be their dwindling base of cheap deposits. Over the past five years, depositors have been steadily shifting their money into tax-advantaged mutual funds with higher yields.
As a result, the difference between the average yield on assets at French banks and the average cost of funds declined to 3.8 percentage points in 1991, from 4.2 points in 1990, according to the Association Francaise des Banques.
Money market mutual funds have proven especially popular, and banks themselves have promoted the funds avidly.
"The mistake, which the banks have acknowledged and are now trying to correct, was that they made the fees to get in and out of the funds too small," said Jacques Bouhet, general manager in the United States for Societe Generale.
Despite all the challenges, many observers are guardedly optimistic about the prospects of the major French banks. The banks are now experiencing "a collective return to reason" after the growth binge of the 1980s, Mr. Serafimovski of Morgan Stanley wrote.
The banks have adopted more restrictive lending policies and taken decisive action to cut costs, he and others pointed out. With a better economy, profit improvement may follow. [Tabular Data Omitted]