OREANDA-NEWS. July 27, 2015. This week's reduction in the rate paid on Livret A and some other regulated deposits guaranteed by the French government is only positive in the short term for banks' profitability, says Fitch Ratings. Interest rates paid on Livret A, still France's most popular deposits, held by 62 million retail customers, are often used as a benchmark against which French banks set the remuneration rates paid out on a wide range of other savings and deposit accounts.

Sight deposits are rarely remunerated in France but Livret A rate cuts can produce cost savings across a broad range of funding products. This will be positive for margins, especially because a high proportion of lending is extended at fixed rates in France.

But French consumer and corporate borrowers have been able to renegotiate lower loan rates in the current low-interest-rate environment. This is particularly true for retail housing loans, which represent around 40% of total domestic loans extended by French banks. We therefore expect any funding savings triggered by the latest round of Livret A rate cuts, to 0.75% from 1%, to be only temporary.

In the current environment, we expect regulated rates paid on Livret A deposits to remain above market rates, reflecting a concerted effort to ensure that a minimum positive return is assured on household savings. In 2008, the Livret A paid out an annual 4%.

Interest paid on Livret A sight deposits, which is tax free, is determined by the government according to a formula. This is calculated as the higher of average historical monthly Euribor and Eonia, calculated over three months plus the previous 12 months' inflation, and the previous 12 months' inflation (December to December or June to June) plus 0.25%.

The authorities have some flexibility in how they apply the formula, and are using it because current low interest rates, plus low inflation in France (0.3% in the 12 months to end-June 2015), have combined to force Livret A remuneration rates down to a historical low. Had the formula been strictly applied, Livret A rates announced this week would have fallen to 0.5%, but the authorities argued that inflation may rise and agreed a higher rate.

Positively, French banks are seeing signs of loan growth in their domestic loan books. This is still modest at 1.5%-3% yoy for 1Q15, but this is good news after two years of stagnation for some banks. Volume-driven margin growth would boost the profitability reported by many French banks in their home market activities.