As French tourism numbers fall, the risk for banks could rise

The coronavirus pandemic has brought an eerie still to the usually teeming streets of Paris, and the usual throngs of tourists at the city's top tourist spots such as the Eiffel Tower and the Louvre have disappeared.

Tourism accounts for 7.4% of French GDP and employs around 2 million people, both directly and indirectly, according to the French ministry of the economy. The country generates the largest amount of revenues from tourism of any country except the U.S. and Spain, totaling €55.5 billion globally, according to the French national statistics office, Insee.

Although French banks may be less exposed to the industry than their peers in more heavily tourism-dependent economies such as Spain, bankruptcies in tourism-related businesses and a subsequent rise of unemployment in the sector could result in a rise in nonperforming loans in 2021, Arnaud Journois, vice president of global financial institutions at DBRS Morningstar, said in an interview.

"We have not seen any sign of asset quality deterioration in France or in Spain, as of today, directly related to the crisis and its impact on the tourism sector in particular, but we would expect some pressure next year," he said.

Exposures

S&P Global Market Intelligence data shows that of French banks, Société Générale SA had 0.6% total exposure at default to hotels, catering and leisure at the end of the third quarter, while at BNP Paribas SA, hotels, tourism and leisure represented 0.8% of total gross commitments at September-end, on and off the bank's balance sheet, with 3.7% of outstanding loans classified as doubtful. At Crédit Agricole SA, tourism, hotels and restaurants accounted for 2.5% of corporate exposure at default in the period, while Groupe BPCE, parent of retail networks Banque Populaire SA and Caisse d'Epargne, said tourism, hotels and catering represented 1% of its total group gross exposure.

Groupe BPCE was the most exposed among French lenders to accommodation and food services at 2019-end at 2.70% of total loans, compared to 2.67% at Crédit Agricole Group, 2.30% at both BNP Paribas and Crédit Mutuel Group and 1.38% at SocGen.

SocGen's exposure to tourism, transport and the energy sector as well as its exposure to SMEs will drive NPLs, Journois said. Both BNP Paribas and Crédit Agricole have operations in Italy, another European economy heavily dependent on tourism, and that will weigh on the influx of NPLs, he added.

Aviation

Sectors related to tourism such as aviation, hit hard as planes are grounded, will also impact the French banks, said Johann Scholtz, an analyst at research and investment management firm Morningstar, citing the case of BPCE-controlled investment bank Natixis, which had €4.4 billion exposure at default to the aviation sector at the end of the third quarter.

French banks had 2.54% of loans to the accommodation and food sector in the second quarter, up from 2.33% in the first quarter, according to data compiled by S&P Global Market Intelligence. NPLs related to accommodation and food services stood at 6.90% at the end of the second quarter, versus 7.22% in the first quarter.

France went into a second but softer lockdown on Oct. 30 for just over a month, and the government is planning to gradually lift restrictions. Tourism numbers took a hit in France during the first lockdown, with hotel overnight stays declining to 700,000 in April from 18.6 million a year before. They rebounded to 5.6 million in June, but remained much lower than 21.9 million overnight stays in June 2019.

Winter sports

The important winter sports season in France is about to get underway, and restrictions could put further pressure on the tourism industry, potentially exacerbating bad-loan risks for banks, Journois said.

Hopes for a normal opening of ski resorts were dashed Nov. 24 after French President Emmanuel Macron announced in a televised address that they would not open until mid-January.

However, the government backtracked somewhat Nov. 26 when Prime Minister Jean Castex said ski resorts could open during the Christmas holidays but ski lifts would be closed.

According to the Bank of France, businesses in the accommodation sector were expecting to operate at 17% of normal activity November, compared to 47% in October, while restaurants forecast working at just 9% compared to 62% over the same period.

The French government has jumped in to help the tourism sector with an €18 billion support scheme, and banks have committed to postpone loan payments for SMEs in the industry for 12 months.

That has proved to be an important lifeline for the tourism sector because it "is a major pillar of GDP in France," Vanguelis Panayotis, president of Paris-based MKG Group, a consultancy specializing in the hotel sector, said in an interview. "[Banks are] not taking on a very active role," he said.

Banks, however, are being "very cautious" about lending to the hotel sector.

There will be bankruptcies in the sector, but funds specialized in distressed assets are likely to snap them up, restricting the amount of bad loans for banks, he said, although the very poor quality assets will be left. In addition, a hotel is also a real estate asset so it represents value, Panayotis said.