French banks beat second quarter forecasts, but retail suffers

By Maya Nikolaeva

PARIS (Reuters) - France's biggest banks posted better-than expected earnings in the second quarter as their diversified business models helped mitigate the pressure from low interest rates and weak markets.

Their relatively strong performances helped ease some investor concerns that have hit bank stocks this week in the wake of regulatory "stress tests".

Europe's banking index (.SX7P) was up 1.8 percent on Wednesday, paring losses on Monday and Tuesday.

But for Societe Generale (SOGN.PA) and Credit Agricole (CAGR.PA), reporting on Wednesday, and BNP Paribas (BNPP.PA) which published results last week, French retail banking came as a weak spot. Drops in revenue there ranged from 3 to 10 percent as mortgage borrowers negotiated lower rates and fee income fell as customers shied away from weak investment markets.

SocGen's earnings are more exposed to French retail than BNP Paribas's or Credit Agricole's, when looking at the contribution to net income. SocGen outperformed its peers with a 3 percent decline in French retail revenue versus a 3.6 percent fall in BNP and a 10 percent drop at Credit Agricole.

Investors' focus is turned to Credit Agricole's efforts to turn around its troubled retail unit LCL.

Group finance chief Jerome Grivet said LCL had made progress with its transformation plan, involving a reduction in the number of branches and a push on cross-selling products, such as insurance contracts, with other business lines.

SocGen said it had closed 43 branches in France so far this year and launched an online consumer loan application system as part of its plan to boost investments in the business.

Foreign and financial services businesses helped French banks cope with the tough retail market at home, with Credit Agricole also benefiting from its asset management operations.

All three banks also booked hefty windfalls in the second quarter from the sale of their stakes in VISA Europe, with SocGen gaining most.

BETTER THAN EXPECTED

SocGen, France's second-largest listed bank, reported net income for the quarter of 1.46 billion euros ($1.64 billion), up 8.1 percent on a year ago. Its shares were up 3.2 percent at 1045 GMT.

Net income for Credit Agricole rose 25.8 percent to 1.16 billion euros, lifting its shares 1.8 percent.

BNP, France's biggest bank, reported higher than expected second-quarter net income last week, as stronger corporate and institutional banking (CIB) revenues and a lower cost of risk offset weakness in retail.

French banks are cutting costs and reviewing portfolios to shed low-yielding assets while trying to focus on operations that consume little capital in a bid to improve profitability.

Bank profitability around the world has been hit by near-zero interest rates, Britain's shock vote to leave the European Union, mounting regulatory costs and hefty capital requirements.

A string of elections, such as in the United States this year and in France and Germany next year, are likely to add to the uncertainties surrounding SocGen's global markets and investment banking business, CEO Frederic Oudea said.

(Reporting by Maya Nikolaeva and Yann Le Guernigou; Editing by Andrew Callus and Mark Potter)