Crédit Agricole expects 'massive' mortgage renegotiation levels to stabilize

Crédit Agricole SA, France's biggest retail banking group, is expecting the rate of mortgage renegotiations to stabilize in France as market rates remain stable or rise over the coming months, bank executives said Feb. 15.

French borrowers have been renegotiating mortgages on a large scale to take advantage of low interest rates as the ECB maintains a loose monetary policy to encourage investment and thus boost economic growth.

The low interest rate environment has been eating into banks' margins and earnings. For example, Crédit Agricole reported fourth-quarter 2016 net income group share of €291 million, down from €882 million in the year-ago period, attributable in part to a €491 million goodwill impairment charge on Crédit Lyonnais SA, or LCL, resulting from low interest rates and "massive" renegotiations of home loans that depressed the unit's value.

"This is a one-off negative impact that hides all the positive impact of new flows of new loans based on new liabilities," CEO Philippe Brassac told an analysts' call following the bank's 2016 earnings publication. "It is not an easy situation for all retail banks in France or in Europe, but it is absolutely not a dangerous situation."

LCL borrowers renegotiated a total of €11.9 billion of mortgages in 2016, including €5.2 billion in the last quarter of the year and €4.4 billion in the third quarter. Renegotiations had totaled just €4.0 billion in the three prior quarters.

However, CFO Jérôme Grivet said he expected the trend to stabilize because the 10-year swap rate is starting to rise and consumer rates on loans at the end of 2016 had risen slightly to 1.38% from 1.3% previously.

French 10-year government bonds, already at low levels, fell sharply in the summer of 2016 in the wake of the Brexit vote and hovered around 0.1%, according to data from S&P Capital IQ, an offering of S&P Global Market Intelligence. But they have been rising steadily since the end of 2016 and stood at 1.06% on Feb. 14, compared to 0.68% as of Dec. 30.

"If the level of interest rates, markets rates, continue to stabilize or to grow a little bit, we are going to see hopefully ... a continued increase in the level of customer rates, and this is going to significantly slow down the wave of renegotiation," Grivet told analysts. However, he did acknowledge that it was very difficult to predict what direction rates might take.

Brassac said mortgage lending was key to the bank's retail strategy, noting that it allowed the bank to cross-sell a number of different products, including mortgage insurance. In addition, higher levels of customers taking advantage of low interest rates to borrow at the moment could produce greater revenue streams in the future, he said.

"We are in a good situation in terms of competition with our peers," he said.

Fourth-quarter revenue rose year over year to €4.58 billion from €4.29 billion. Gross operating income increased to €1.60 billion from €1.38 billion a year earlier.

For full year 2016, the bank recorded net income of €3.54 billion, up from €3.52 billion in 2015. The result included a €327 million gain on the sale of Visa Europe shares as well as a €1.25 billion charge for nonrecurring impacts as the bank has sought to simplify its ownership structure.

Unlisted parent entity Crédit Agricole Group reported fourth-quarter 2016 net income of €671 million, down from the year-ago €1.56 billion. For the full year, net income group share declined to €4.83 billion from €6.04 billion in 2015.