OREANDA-NEWS. French cooperative banking groups continue to build up capital through strong retention of earnings despite tough conditions for their core domestic retail banking business, says Fitch Ratings. Credit Agricole, Groupe BPCE and CM11-CIC represent around 60% of the French banking sector.

We believe the cooperative status of these groups is key to their ability to build up capital because they are not subject to excessive market pressure to deliver high returns, which helps them contain dividend and member payout ratios. CM11-CIC's shares are not quoted on any stock exchange and only minority stakes are quoted in the BPCE and Credit Agricole groups. Only 28% of shares in Natixis, Groupe BPCE's specialised financial services subsidiary, and 43% of shares in Credit Agricole S.A., Credit Agricole's central body, are quoted.

French banks, like many European peers, are finding it hard to boost revenues due to weak credit demand and low interest rates, as is the case. The domestic loan book of most French banks has been stagnating for two years, reflecting weak economic prospects in France.

Net interest margins have held up well as banks reduced funding costs, but this trend is unlikely to continue because households are fiercely lobbying to reduce rates on their fixed-rate housing loans. Housing loans represent around 40% of total domestic lending in France and a high proportion of them are now repricing downwards. Banks are also finding that they have limited flexibility to reduce remuneration rates on deposits. This is because interest rates paid on widely held Livret A savings deposits are still higher than market rates. Livret A rates, which act as a benchmark for rates on other savings products and deposits, were recently cut to an annual 0.75% from 1%.

France's cooperative banking groups generated an operating return on average equity of 9%-10% over the past four years. This is low compared to similarly rated peers and usually below peers rated 'A+' or higher. But these performance indicators reflect modest risk appetites and relatively limited cyclical earnings volatility at the cooperatives.

Additional information on the French cooperative groups is in our report, "Peer Review: French Cooperative Banking Groups" published today, and available from www.fitchratings.com.