Rising interest rates and commercial banks in France
It will have escaped no one's notice that we have just entered a period of inflation. What is the reason for this and what are the consequences ? A look at the economic phenomenon of inflation.
A context favorable to the rise in interest rates
After the major efforts made by institutions to limit the effects of the crisis since 2020, a backlash was feared. After several quarters of increases, the financial markets have experienced sharp declines (the CAC 40 has lost 1400 points since January). Inflation is reaching levels not seen in decades (8% in the United States and a forecast inflation of 6.8% in France according to INSEE). In addition, the cryptoasset market has experienced unprecedented losses. Non Fungible Token, after a meteoric success at the end of 2021, collapsed, as well as crypto-currencies. Finally, the war in Ukraine has worsened the situation, leading to a significant increase in the price of certain products and energy, shortages, and could still have effects in the future.
This situation has and will have major consequences, one of the main ones being the increase in interest rates. There has always been a correlation between inflation and high interest rates. At the peak of inflation in the late 1970s, central bank rates were 15%. Today, in Europe, it is the European Central Bank (ECB) that sets the key rates. But the logic has not changed: the FED has already raised its rates by about 1.5% since January. In Europe, if the expectations of commercial banks have already led to an increase in interest rates offered to customers (between May 2021 and 2022, personal loan rates have increased by an average of 0.18%), key rates remain stable. However, a press release from the Board of Governors announced a 0.25% increase on July 1, another in September, and others in the near future.
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A particular exposure of French commercial banks
The net banking income of French commercial banks is mainly due to interest rate margins. It is therefore natural that changes in interest rates should have an impact on their results and behavior.
Interest rates, particularly those applied to real estate loans, have quickly become call rates, allowing them to capture customer flows and other outstanding balances. Capturing bank flows is now one of the priorities of banks, which are increasingly setting up dedicated services. An increase in the cost of refinancing therefore has an impact on them and forces them to modify their operations.
Rising interest rates : an ambiguous short-term effect on banks
It is clear that the rise in interest rates is a negative indicator for borrowing customers, since even before the rise is implemented in Europe it is already having an impact on their costs. Is the opposite true for banks? The answer is nuanced. Since interest rates are used as a factor of bank penetration, commercial banks cannot afford to pass them on in the same proportions as the ECB. The risk is therefore that they will charge higher rates, but not enough to cover the additional cost of their refinancing, this phenomenon being reinforced by the increase in the interest rate on savings accounts such as the Livret A, which is currently at 1%.
Another ambiguous effect of this increase is that low rates allow for a significant volume of investment. However, households and companies are sensitive to the increase in their expenses, and a rise in the cost of credit would limit their number. Practice will show in the coming months whether this decrease in volume will be compensated for by the rise in rates, but in the short term the banks may be worried about their 2022 objective.
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Higher interest rates favourable in the long term ?
After this transition period, it seems that rising interest rates will be a growth factor for banks from 2023 onwards. Experience has shown that the higher the rates, the higher the bank's return. But their behavior could be altered in the event of a sustained rise. Based on what can be observed at present, we should distinguish two types of institutions among the large groups. Those, such as Société Générale, that will quickly raise their rates to increase profits in the short term, and the others, mainly mutuals, that will keep rates low in the short term to continue to capture flows before gradually passing on the rate increase.
Moreover, in a context where approximately twelve million French people live below the poverty line, consumer credit and personal loans have become a means of financing increasingly used by individuals, and are likely to develop further, which, correlated with the rise in rates, could make them one of the main sources of profit for banks in the near future.
