The ax fell, unsurprisingly. This Thursday, the rating agency Moody’s placed under negative surveillance the entire French banking sector, whose outlook was previously “stable”. This decision follows the alert already issued a week earlier by Moody’s analysts, as well as those of DBRS Morningstar, about the inexorable deterioration in asset quality for banks, as the coronavirus epidemic inflicts a brutal halt to the economy.
“The scale and growth of the economic and commercial upheavals triggered by the pandemic will increase the pressure on the operating environment and the performance of French banks,” justifies Moody’s in a note published on Thursday.
According to a first estimate made by INSEE on the economic consequences linked to the current health crisis, economic activity as well as the total consumption of French households stand at around 65% of their usual level. In total, the decline in GDP this year, initially expected of 1%, will be much more significant, warned the government.
Sweden and Switzerland alone survivors
French banks are obviously not the only ones concerned. In total, Moody’s downgraded the sectors of five other European countries: Belgium, Denmark, the Netherlands, Italy and Spain – the last two paying the highest price for the moment. victims of Covid-19. Germany and the United Kingdom were already on negative watch. For the moment, only Sweden and Switzerland remain in a “stable perspective”, among the ten main European banking systems observed by the rating agency.
Banks are at the forefront of helping the economy cushion the shock of the spread of the coronavirus epidemic. In France, they have adopted a six-month moratorium on the repayment of business loans. Since Wednesday, they also provide loans guaranteed up to 90% by the state to all companies that request it, for a total guarantee envelope of 300 billion euros.
Decrease in financial ratios
Despite massive government support, “which will help stem a potential wave of bankruptcies,” Moody’s expects bank assets to deteriorate, while SMEs, which “employ more than 50% of the workforce,” works in France “and represent half of the loans on the corporate market, are” the most vulnerable to the crisis “. French banks are also likely to suffer from their exposure to the oil sector, while black gold prices are at their lowest.
Moody’s is also concerned about the likely decline in the financial ratios of French institutions, given the rise in risk on loans. But recognizes that banks still have room, with ratios well above the minimum required by regulators. Profitability should also suffer, while margins will remain limited, particularly in credit, and “costs will remain on the rise”, despite the efforts made in recent years.
Analysts, however, remain optimistic about the ability of the French banking sector to support the economy during the crisis and to “provide sufficient liquidity to businesses to cope with the crisis”. The measures taken by the European Central Bank and the Banque de France will help to withstand the pressure, says Moody’s.