French banks return to basics

19th May 2008, Comments 0 comments

Sobered by subprime crisis, major French banks are lining up to cut costs and shift their focus from high-risk activities back to traditional savings and loans.

19 May 2008

PARIS - Shaken by losses linked to the US subprime loan crisis, major French banks are lining up to cut costs and shift their focus from high-risk activities back to traditional savings and loans.

As financial market turmoil further slashed their investment profits, several banks last week announced plans to cap bonuses, cut costs and correct their business model to adapt to the new landscape.

Credit Agricole announced Tuesday a cash call of EUR 5.9 billion (USD 9.2 billion) on shareholders, after racking up losses of EUR 4.5 billion over six months from exposure to the subprime crisis.

In addition to a new cost-capping strategy, France's biggest retail bank launched a strategic review of its businesses with an action plan to be unveiled in September.

Credit Agricole's investment banking arm Calyon is to shift its focus to traditional business lines rather than higher-risk securities - steered by a new director, Patrick Valroff, whose background is in consumer loans.

Investment bank Natixis, whose first quarter earnings plunged 88 percent due to exposure to the subprime crisis, announced it would cut costs by EUR 400 million by 2009, chiefly in its investment operations.

The bank said it would cut back dealings with external providers and job losses would follow at the group, which employs 24,000 people in all.

Meanwhile for retail banking giants BNP Paribas or Societe Generale, which have emerged relatively unscathed, the subprime crisis appears to vindicate their business model balanced between retail and investment banking.

BNP Paribas for example describes itself as a "real economy bank", shielded by its core savings business from shocks in any one financial sector or area of the world.

"The current crisis shows the pertinence of the French model of universal banking," said the economist Olivier Pastre, arguing that savings acted as a "security" for French banks.

"If Societe Generale was organised like Bear Stearns, there would be no more Societe Generale," he said. The US investment giant had to be bailed out by the Federal Reserve in March a bid to staunch a credit meltdown.

Leading US and European banks have been hit with heavy losses after a wave of US defaults and home foreclosures undermined the value of billions of dollars' worth of mortgage-backed securities.

The crisis has led to a global credit squeeze as banks have become increasingly cautious about lending, raising fears of a sharp economic slowdown after a series of boom years when money was cheap.

Many banks have posted huge losses as a result, with Swiss banking giant UBS the worst hit so far, having taken writedowns of about USD 37 billion and asking shareholders for fresh funds.

[AFP / Expatica]



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