19. Apr 2017 Scope research
French election outcome could be a game changer for the country’s banks, says Scope
In a brief comment published today, Scope Ratings considers that, depending on their outcome, the forthcoming French presidential elections could affect the funding costs and business strategies of French banks – at least for the short term.
A new report, published today as part of Scope Ratings’ “Q&A for the Thoughtful Bank Investor” series, highlights that the forthcoming French presidential elections, with their potentially transformational impact on both France and Europe, could represent a game changer for the large French banks, depending on their outcome. Not surprisingly, the credit markets are showing apprehension.
An electoral victory for either Emmanuel Macron or François Fillon – which are currently the two most likely outcomes, especially the former – would in Scope’s view be positive for market confidence and hence for the French banks.
At the same time, a presidential win by either Jean-Luc Melenchon or Marine Le Pen (or, even before that, the reality of a second round between these two candidates) is very likely to affect negatively France-related credit spreads for both public-sector and corporate debt (including banks). “This would be particularly inauspicious because, during the next few years, French banks will need to raise more non-preferred senior unsecured debt to build their MREL and TLAC cushions”, added Sam Theodore, Scope bank analyst and author of the report. More elevated funding costs are not likely to help profitability, which is not high to begin with.
In addition, a Melenchon win could impact unfavourably the large French banks’ efforts to adjust infrastructures and business models to the digital world. As customer preference is moving irretrievably towards the digital offer by the banks, a significant shrinkage in branch structures and back offices is a sine qua non (it has started already), with consequences on staff reduction – both front and back office. The report notes that if, with a left-wing or populist administration in place, the French banks are prevented from adjusting and reducing their excess capacity in accordance with the new business realities – which remains fully possible in France’s political environment, in which the social actors show very little interest to compromise – their cost structure and efficiency will continue to lag other European and global competitors.
The report also comments briefly on the potential impact of the French elections on the regulatory framework for banks, as well as on France’s plans to see a bigger position of Paris as an international financial centre in the aftermath of Brexit.
Download the full report: “A Potential Game Changer: Five Minutes on French Banks and the Presidential Elections”.
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