OREANDA-NEWS. December 14, 2015. Fitch Ratings says in a new report that the large French banks will continue to benefit in 2016 from diversified and conservative business models, and solid balance sheets, while the impact from a still fragile French economy and a persistently low interest rate environment is likely to be manageable.

As a result, Fitch has a Stable Outlook on five of the six major French banking groups' Long-term Issuer Default Ratings (IDRs). The Positive Outlook on Credit Agricole's Long-term IDR reflects our expectations of a sustained improvement in the bank's risk profile, which, combined with further evidence of better asset quality, improved profitability and stronger capital ratios, could result in an upgrade.

Fitch forecasts further economic recovery in France with 1.5% GDP growth for 2016, up from an estimated 1.1% in 2015. The gradual recovery in France's economy has translated into low loan growth to date in 2015, but not yet enough to offset margin compression in domestic retail banking for some banks. Nonetheless, we expect all major French banks to continue to generate adequate risk-adjusted returns, as most banks have solid franchises in businesses where revenue prospects are brighter, including in wealth management, insurance and some specialised financial services (eg consumer finance or leasing). French banks' profitability should also benefit from modest loan impairments charges.

French banks should continue to see further improvements in capitalisation. Most banks report satisfactory capital and leverage ratios, and we expect banks to maintain sound earnings retention. The French cooperative banking groups and La Banque Postale will continue to target higher core capital ratios as they do not suffer from material market pressure to deliver high returns and dividends, and for the three cooperative banking groups, also because of their willingness to protect their cooperative member owners (which are also their customers).

Some of the banks have started issuing increasing volumes of Tier 2 debt to build up further buffers. Four of the six major French banks are global systemically important banks (G-SIBs) subject to total loss-absorbing capacity (TLAC) requirements.

We expect gradual improvement in asset quality in most of the major markets where the French banks operate. Some risks remain, mainly in certain foreign subsidiaries or corporate and investment banking businesses, but they are moderate on a relative basis, and appetite for higher-risk transactions within these segments is contained.