Category: Bank

Farewell message to BRED Group employees

Post author By Olivier Klein
Post date 31 May 2023
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Dear Colleagues,

As you know, I will be relinquishing my functions at BRED on 31 May.

We have been working together for ten years now. And how much progress we have made! We have written some wonderful chapters in BRED’s story.

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Ten years of success. We have posted historic results every year since 2012, continuously growing our NBI and net income. These results are not the fruit of chance; they are the result of the ongoing and renewed commitment of each and every one of you in implementing a strategy that has enabled us, year after year, to adapt to economic and social transformations, so that BRED always comes out on top. We addressed the challenge of the ramp-up of digital, not only through significant investments in tools to enable us to match the performance of our “pure player” competitors, but above all via the human aspect. We have invested in professional training, stepped up equal opportunities, and freed up our advisors by digitalising repetitive tasks in favour of a trustworthy and quality expert business relationship designed for the long-term.

I am extremely happy that our BRED has forged ahead with this new model, a model of banking without distance and a promise to our customers of a global close relationship that abolishes both physical and behavioural distances by combining the best of the human and the digital. Firmly focused on the future, this loyalty to the fundamentals of the banking business has underpinned our success. The results speak for themselves: Ten years of growth, with an 81% increase in our NBI and a 2.7x increase in our shareholders’ equity; ten years of performance, with a 2.8x increase in our net income; and ten years of continuous improvement in our efficiency, with a 13.1- point decrease in our cost/income ratio to reach an outstanding level of 54%. These results are not a self-congratulatory obsession – they are the real-lie illustration of how BRED, across its various businesses, has met the expectations of the market and successfully gained the loyalty of its customers. Our results have also been marked by the confidence granted to us by our members, the number of which has risen 47% in ten years. Bravo to us and to you. On the back of these results, profit sharing and incentives have also increased spectacularly, by a factor of 2.3 since 2012.

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Yet the climate has not always been favourable to us – far from it. In a low interest-rate environment for banks, we succeeded in outperforming. And how could I not mention the unprecedented situation we experienced during the pandemic? Amid a threefold, health, economic and financial crisis, our results testified to our resilience and the relevance of our trajectory, as well as our ability to succeed in the challenges having faced commercial banks for many years now.

This period considerably accelerated the major changes under way and required companies to reorganise quickly. It encouraged BRED to go even further in banking without distance and switch to 100% advisory banking. The solidity of our bank also enabled us to support the economic recovery of our country, and this is something we can be proud of.

The relevance of our strategy also extends far beyond our borders. In the last ten years we have pursued our international expansion and created new banks in dynamic countries, with the unwavering determination to provide expertise and added value commensurate with the highest international standards. We are now established and growing strongly in Cambodia, Laos, Fiji Islands, the Solomon Islands and Vanuatu; we are the number-one bank in Djibouti. Our international trade financing business launched six years ago in Switzerland and more recently in Dubai has proved an enormous success. These achievements can be seen directly in our performance, with international business contributing 16% of our NBI in 2022.

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More than results, I have experienced a magnificent human adventure by your sides. From my time at BRED I will always remember our incredible collective power during tough times, as well as more joyous times that we shared at regional conferences and across the entire BRED Group. A particularly special memory for me was our 100th anniversary celebration at the Grand Palais, an exceptional event in all senses of the word, and one that I will never forget.

I am thankful to have worked with motivated, passionate and committed teams and to have been part of absolutely remarkable achievements across the division in France, including in mainland France, Guadeloupe, Saint-Martin-Saint-Barthélemy, Martinique, French Guiana, Reunion and Mayotte. All our business lines have put in strong performances: our branches and business centres, and our Private Bank, rated as the best private bank in France in 2022. Our Corporate Banking Division has taken on true stature and succeeded on the strength of its know-how and technical expertise. Our trading desk was recognised in late 2022 as the best European bank for placing the short-term debt of major European issuers. Last but not least, our international banking business, which has undergone tremendous structuring and development. Our BRED has also been acknowledged for its CSR performance, gaining an extremely high-level Sustainability Rating (A1) from Moody’s.

Our Promepar, Cofilease, Prepar-Vie Assurance, Sofider, Adaxtra, Ingepar and Vialink subsidiaries continue to step up their development and the distribution of their wide-ranging offers. They have now been brought together at a new building in La Défense.

Bravo to all ! Ten years of success in which we have enabled BRED to always come out stronger while many groups have aimed to get by through substantial cost-cutting.

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As I say my goodbyes, I would also like to remind you that our banking profession is passionate, and even essential to the economy, regions, and people themselves.

I have made economics my life, because I see it as the queen of the human sciences. Economics tries to explain how people organise themselves to live, to form a society and seek to improve their lot. And from my passion for economics has come my passion for banks, the place where we can best observe and act on the economy.

A bank is above all a business, with a strategy, resources, objectives and a corporate purpose. To my mind, running a business is first and foremost a responsibility towards its constituent teams. Over these ten years, my unfailing question has been to ascertain whether everything has been done for BRED to move in the right direction, to be profitable on a lasting basis to protect jobs, so that working here is both an individual and collective achievement, and so that we take pleasure in our work and are proud of belonging to the bank. I have always endeavoured to be fair and ensure that everyone else is, because a fair business is a guarantee of job satisfaction and success. It is a business that provides equal opportunities – the same opportunities for everyone, regardless of their, gender religion, skin colour, social origin or educational background. And as I have said on numerous occasions, for me it is a question of combining efficiency and ethics, both with regard to employees and to customers and society. Both are necessary. Efficiency without ethics does not work for long, while ethics without efficiency cannot exist because there are no means to make it work.

I hope with all my heart that you share the idea that our work as bankers has meaning, that what we do is useful, because as commercial banks we are absolutely indispensable to the economy and to the individuals, thus to society as a whole. What a marvellous job we have! We support and facilitate the life and business projects of our customers, over the long term. We are a relational bank, an advisory bank, in the long term, with trust.

We are also the parties that match financing capacities with financing needs. To do so, we take on the credit, interest-rate and liquidity risks instead of leaving them to be borne by households and businesses who are unwilling or unable to take them. And at BRED, a cooperative regional bank, we are crucial to the regions in which we operate, both in France and internationally, as we are tied to them through convergent interests. There is a true osmosis between our territories and ourselves. If the territory is doing well, the bank is doing well. And if the bank is doing well, the development of the territory will go well. So the concept of CSR is even more real and concrete. Our bank is truly committed to each of these territories. First and foremost by doing our job well, which is essential. And through our investment in favour of equal opportunities, as well as culture, which are powerful drivers of social cohesion and, hence, well-being. In a highly globalised world, we have seen the emergence in recent years of an even stronger need for closeness, a need to which I feel that we respond.

For all these reasons, commercial banks, and BRED, are essential. And rest assured: we have a wonderful future ahead. Because our mutual and cooperative model enables a fruitful alliance of efficiency and ethics, I am convinced that we will be around for a long time to come. We prove this every day and in the long term, even though people have for years been announcing that traditional banks will give way to new competitors. But this position is often based on a false understanding of the essence itself of banking, the forecast demise of which is overly hasty. At BRED, despite the health, financial and economic crises, despite the emergence of low-cost online banks, despite cryptocurrencies, despite excessively low interest rates for an excessively long time and despite all the obstacles in our path, we have not reduced our workforce. On the contrary. Neither have we closed branches – again, on the contrary. Our results have not slipped; they have nearly tripled in ten years. We have come out strong because we are committed together with efficiency and conviction in a strategy that has succeeded and continues to deliver. And to remain strong, to continue to make headway, we need to make the necessary changes while safeguarding the essence itself of our banking profession. We need to maintain our momentum, our talent for overcoming obstacles, our fighting spirit and the pride we have in our profession, and in our bank. This is absolutely essential.

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We have experienced ten years of collective success. I am certain that you will continue to successfully write the story of our wonderful company, that you will stay your course through a rational management approach underpinned by the strengths and values of the BRED Group, namely value-added advice, close relationships with our customers, a proactive approach and entrepreneurial spirit.

And I am certain that you will find the same values with my successor, Jean-Paul Julia, recruited in 2015 to head Corporate Banking, and who then went on to become Chief Executive Officer of Banque Populaire Bourgogne Franche-Comté. Jean-Paul has extensive knowledge of BRED and its business lines.

In the coming years, I wish you as much pleasure and at least as much success as we had together.

Thank you all. Thank you for your determination, your talent and your sense of individual and collective success. Thank you to Stève Gentili and Isabelle Gratiant, and the entire Board, for having enabled me to bring together everything I admire in banking: retail banking, private banking, corporate and investment banking, capital markets banking, and international banking. And thank you for having unwaveringly supported the integrity of our bank, while ensuring benevolent and exacting supervision. You have made my adventure at BRED the most wonderful experience. We can be extremely proud of what we have achieved together.

Long live BRED. And long live you!

Bank Management

BRED 2022 activity report

Post author By Olivier Klein
Post date 23 May 2023
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It has a very special meaning to me because it marks the end of 10 years of commitment to BRED.

Year after year, despite an adverse environment for commercial banks, the BRED group has significantly increased its net banking income and the results of all its activities.

In retail banking, BRED has further developed its local relationships by reorganizing and modernizing its branches and deploying the most effective digital tools to improve proactivity, responsiveness and convenience.

At the same time, it has further improved its advisory capacity by investing heavily in training and skills. Today, it is a 100% advisory bank, providing advice and support for the life and business projects, large and small, of each of its clients. A bank that is loyal to its clients and useful to the economy of its territories, in France, East Africa, South East Asia and the Pacific.

A bank supported by 6,300 employees, in France and outside France (one third of them), in retail banking, corporate banking, trading room, trade finance, etc., who work daily to provide the best quality of service and advice to their clients.

I would like to thank them for their invaluable contribution to BRED’s transformation over the past ten years!

Bank Economical and financial crisis Economical policy

Central banks: towards a policy of “small steps”

Post author By Olivier Klein
Post date 17 May 2023
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The global economy is slowing. This will complicate the situation of highly indebted governments and private players. But in principle it should facilitate disinflation, thus slowing the rise in interest rates and possibly facilitating their subsequent decline. However, activity is holding up better than expected and labour markets continue to be tight – high employment rates and low unemployment rates – which is maintaining the level of core inflation. This is consequently accompanied by very low or even zero productivity gains.

Monetary policies are therefore set to continue with their interest rate hikes, albeit with great caution. And at least maintain this level of interest rates, for longer than was expected by the financial markets. There are many reasons for this necessary caution. The new financial conditions have tightened, which in itself results in a slowdown in credit and the economy. Interest rates are therefore higher, risk premiums (“spreads”) larger, lending conditions more stringent, liquidity less abundant, etc. Further monetary policy tightening is therefore not necessarily required. Small steps will now be key, with a study of all the available data between each decision, so as not to do too much or too little.

But above all, the vulnerabilities of the financial system as a whole are obviously what has made central banks very cautious. Of course, the recent signs of this instability had partially idiosyncratic causes. Silicon Valley Bank was poorly managed and under-supervised. The simultaneous increase in the number of cases and the resulting contagion nevertheless show the potentially systemic nature of these events. Long-term rates too low for too long have made many balance sheets highly vulnerable. On the liabilities side, because many companies and governments, and even individuals, both in advanced and emerging countries, were able to take on debt without apparent pain, up to the point of over-indebtedness with a normalisation of interest rates. On the assets side, because in order to seek a little yield in times of zero or even negative interest rates, end investors, either directly or through various asset managers, were encouraged to take more and more risks, whether by extending the maturities of the assets purchased, by a greater dissymmetry between the duration of assets and of liabilities, by accepting higher credit or equity risks, by increasing leverage, etc. The rapid rise in interest rates marked an abrupt break from this long period of rates that were too low (i.e. below the growth rate), during which these weaknesses accumulated. Today, the large global real estate bubbles appear increasingly vulnerable, and the fall of the equity markets will be even greater if they continue to ignore the gradual effects of the general tightening of financial conditions. And the risk of insolvency of many highly indebted players has risen sharply.

Central banks are very aware of this situation, such as the risks generated by a very tense geopolitical situation, leading to, among other things, a costly fragmentation of economic zones. And although on average banks are much stronger than during the big financial crisis, with shadow banking remaining much less regulated, monetary policy authorities will double down on caution, but will preserve their indispensable credibility in their fight against inflation.

Bank Economical and financial crisis

Economic and financial paradigm shift for the banking industry

Post author By Olivier Klein
Post date 23 March 2023
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A shift in economic and financial paradigm occurred as the pandemic ended. How does this change impact the banking business?

Today, inflation is back and not just temporarily. It implies a rise in interest rates, partly due to the spontaneous movement of financial markets to protect real investment returns – even if the markets seem to be overestimating the speed and intensity of the fall in underlying inflation – and even more so due to the change in monetary policy that has become necessary, with the rise in central bank key rates – which for the same reasons will probably be stronger and longer than that anticipated by the markets – and the slow but steady and programmed exit from ‘’quantitative easing’’.

These strong macro-financial changes deeply affect the environment in which banks operate. By the same token, they deliberately tighten the financial conditions (credit rates, lenders’ risk appetite, risk premiums, etc.) that all economic agents experience. And this, precisely in order to reduce inflation. It should also be noted that the financial markets, especially the stock market, seem to underestimate the effect of this tightening of financial conditions on the economy, which could later lead to a more brutal revision of valuations if this is not taken into account.

Let us therefore analyze the effects of this macro-financial paradigm shift for the banking industry.

First, liquidity.

During the euro crisis, banks lacked liquidity. In fact, American banks practically stopped lending to European banks. Then, when the eurozone crisis ended, thanks to the TLTRO, quantitative easing, etc., liquidity became overabundant and excess bank liquidity became expensive, due to the negative interest rate policy of the European Central Bank (ECB). The deposit facility rate (i.e. the investment rate for central bank money held by banks) reached -0.5%. The aim was for banks to avoid holding too much cash.

But the steady rise in the ECB’s key rates, and the gradual exit from quantitative easing in the euro zone in March of this year – the “quantitative tightening” – as well as the gradual end of the TLTROs, are changing the situation. The FED has started its quantitative tightening since June 2022.

This signals the end of abundant liquidity, but also of free money. And the end of magic money at the same time. As a result, the competition between banks to attract customer deposits to their balance sheets has increased, and the cost of customer resources has risen rapidly, while refinancing on the financial markets has also become much more expensive, especially since the central banks have raised their interest rates.

In addition, the last two-three years have shown strong growth in bank deposits due to government support to businesses and households during the pandemic – which was in turn made possible by the central bank’s financing of the induced public debt overhang – and because of the temporary fall in spending during the lockdowns. This phenomenon has disappeared. Continuing to grow loans, without further resorting to the financial markets, therefore requires each bank to adopt a more active policy of deposit collection. At the level of the banks as a whole, this is already mechanically increasing the cost of access to client resources, in addition to the effect of the ECB’s rate hike.

Second, the evolution of the net interest margin (NIM).

On the surface, this is a paradoxical topic. In the past, banks rightly explained that the interest rate effect on their NIM was negative when long rates approached short rates, which were themselves approaching zero. And indeed, this change in the interest rate structure has been costly for banks. The net interest margin rate has been roughly halved over the last ten years, with loan production rates and deposit collection rates approaching dangerously close to zero. What industry can withstand a halving of its margin rates?

Today, rates are rising and commercial banks have stated that their net interest margin will be temporarily affected again. So, would rate movements, whether up or down, particularly in France, be unfavorable to the banks? No. But, in fact, for about 12 to 18 months, the cost of deposits – particularly regulated passbook savings accounts, whose rates are set by rules that take into account changes in the inflation rate – rises faster than the return on loans. Why is that? Because, in France, for instance, many retail banks have more fixed-rate loans on their balance sheets than variable-rate loans, given the large amount of loans to individuals, professionals and SMEs, which are generally at fixed rates. As for TSEs and large companies, they borrow more at variable rates and manage their interest rate risk themselves.

Thus, the more regulated savings (Livret A, etc.) banks have on their liabilities list and the more mortgages (fixed rate in France with a 20-25 year term) they have on their assets list, the more the rise in interest rates worsens their NIM rate, and for longer.

However, at about 18 months, even for these banks, the return on assets rises faster than the increase in the cost of liabilities, i.e. their resources. Nonetheless, the interest rate effect will only be positive after this transition period if the interest rate structure is normal, i.e. if long rates are higher than short rates. An inverted rate situation, which is generally and fortunately not sustainable, is costly for bank NIMs. The reason is that, in this case, medium- to long-term fixed-rate loans are issued at rates that are lower than the cost of deposits, which are implicitly or explicitly (in the case of regulated passbook accounts) indexed to short-term rates and inflation.

Most retail banks with individual, professional and SME customers have therefore experienced a more difficult last quarter of 2022 and will experience a downturn in 2023. Over the course of 2024, their income statements should improve again, assuming a normal yield curve.

The volume effect on the banking NIM may also be less favorable, as lower growth and the effect of rising interest rates on loan demand may lead to a lower production of loans.

Finally, the cost of risk is making a comeback.

2023 will therefore be a year in which liquidity will be tighter and commercial banks will, on average, experience declines in their NIM rates. It will also most likely be a year of rising credit risk costs. In recent years, the cost of credit risk has been falling.

Long-term rates, which were very low, too low, for too long, have in fact led companies to survive when they would have disappeared if rates had been set at “normal” levels (equal to the nominal growth rate). This is what is known in the economic literature as “zombie companies”.

Moreover, the public authorities rightly supported companies during the pandemic to protect national production capacity and jobs, for example by distributing state-guaranteed loans (PGE) in France. Many of the companies that benefited from these loans would naturally have disappeared without this aid. The beginning of the repayment of these loans will undoubtedly lead some of them not to survive.

In addition, there is no doubt that, with interest rates rising and probably normalizing at around 4% over the cycles, these “zombie companies” will not be able to resist. The same goes for companies with too much leverage. Hence an unstoppable and normal rise in the cost of risk for banks in the future.

The year 2023 will therefore mark a probable decline in results for retail banks. And inflation, which affects the overheads of all companies, will not be reflected in the same way in bank pricing. But if the economy does not go into recession – they seem to be holding up well so far and growth expectations are improving – and if global real estate bubbles do not suddenly deflate, as well as if high stock market valuations do not undergo a sharp and sudden change of opinion, commercial banks will be able to start seeing their results improve again during 2024. They would then be able to continue actively contributing to the financing of economic growth.

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