French banks' significant and increasing amount of customer deposits and growing proportion of long-term debt provide a solid foundation for their funding, Fitch Ratings says. They have also reduced their reliance on short-term and volatile funding sources. We expect these trends to continue as the banks strengthen their funding to maintain investor confidence and in response to regulation.
Higher customer deposits, combined with deleveraging plans to reduce overall funding needs, enabled the loans/customer deposits ratio of the large French banks to fall to below 130% at end-2012 from around 145% in 2008. French banks have paid particular attention to decreasing their reliance on US dollar funding, so deleveraging has focused on such activities as corporate and investment banking, and specialised finance businesses. The banks have also lengthened the duration of their wholesale funding as their market access improved during 2012.
French banks have made limited use of volatile funding sources. US money market funds have reduced their exposure to French banks by over 60% (dollar basis) since end-May 2011. But they account for less than 2% of the major French banks' total funding. The banks are starting to increase their use of US MMF funding, but this will remain permanently lower because of the banks' adjusted business mix.
The banks' focus on stable funding sources (customer deposits, long-term wholesale funding and equity) is important to meet Basel III's net stable funding ratio. Deposits are also treated more favourably under the liquidity coverage requirement because the outflow assumptions under a stress are not as harsh as for short-term unsecured wholesale funds.
French banks increased their deposits by around EUR 60bn in 2012. Deposit growth in France benefits from households' high savings rates and low indebtedness. Customers have accumulated high non-bank savings and are transferring some into deposits as banks are offering more attractive rates than dwindling returns on life insurance and money market mutual funds.
French banks have not entered into a deposit war and we do not expect them to do so. We believe the recent drop in rates for tax-free regulated deposits to 1.75%, from 2.25% in February, helps mitigate the risk. Regulated deposits act as a reference point for saving deposit rates, so funding costs for deposits should fall.
One possible risk for banks is that the recent deposits, particularly ones from corporates, are not as stable. However, most demand deposits are still unremunerated, providing a cheap and stable funding base. Moreover, deposits have proved extremely resilient over the last five years despite the financial crisis, a worsening economy and a large rogue trading incident.
Link to Fitch Ratings' Report: French Banks’ Funding is Resilient