French banks have just published their results for the second quarter, and the media deem them globally “good”. They don’t seem too finicky… We had already discussed the substance matter in a December 2017 article titled “French Banks Are Much More Dangerous than American Banks”. 

But in this article, I would like to underline the bad loans – loans that will not be reimbursed, or partially only – a time bomb in the banks’ balance sheets. According to the economist Jean-Pierre Chevallier, BNP-Paribas has a tendency to underestimate their weight. Using unpublished accounting records, he estimates that on top of the €39.902 billion of NPLs (non-performing loans), one must add €13.929 billion in potential losses on relatively safe loans, bringing up the total to €53.831 billion, or 7.4% of the total outstanding loans. This is starting to look worrisome. And if one recalculates the bank’s leverage, we see it at 35.45 (or 1 euro in cash for 35 euro in liabilities), an astounding ratio (Lehman Brothers’ leverage was at 32 before its resounding crash of September 15, 2008).  

This alarming situation isn’t an isolated one – and it seems to be getting worse, as explained by L’Agefi. Indeed, French banks are feeling pressure from low-interest rates, which reduce their net margin (the difference between the rate charged on loans and the rate at which it gets refinancing). And this daily economics paper acknowledges they compensate for the now low margins by increasing credit volume: credit volume has increased by 5.8% in the second quarter at BNP-Paribas, by 10% at LCL for business loans, by 33.8% (!) for businesses and 2.5% for individuals, with BPCE and Société Générale remaining unchanged. How can one explain such an increase in business loans when the GDP growth remains anemic? It seems obvious that there is a real risk for French banks to issue more credit too easily and, thus, see the number of bad loans increase…