Tags: bnp | paribas | socgen | france | banks | crisis | debt

Big French Banks Retool as Europe Crisis Deepens

Thursday, 22 September 2011 06:27 PM EDT

BNP Paribas SA and Societe Generale SA, France’s two largest banks, are trimming about 300 billion euros ($405 billion) off their balance sheets as Europe’s deepening debt crisis threatens to make them too big to save.

At the end of March, French financial firms had $672 billion in public and private debt in Greece, Portugal, Ireland, Italy and Spain, according to Basel, Switzerland-based Bank for International Settlements. That’s the biggest exposure to the euro-area’s troubled countries and almost a third more than German lenders. The four largest French banks have 5.9 trillion euros in total assets, including loans and bond holdings, or about three times France’s gross domestic product.

“The banks are entering a slimming cure, which is forced by the sovereign crisis,” said Jerome Forneris, who helps manage $10 billion, including the two French lenders, at Banque Martin Maurel in Marseille, France.

Rather than tap the market for capital, BNP Paribas and Societe Generale are seeking to free up a combined 10 billion euros through asset cuts and disposals. Paris-based BNP Paribas plans to cut $82 billion of corporate- and investment-banking assets, while Societe Generale may exit businesses such as aircraft and real-estate finance in the U.S.

The banks have been forced to act after concerns about their sovereign debt holdings made funds reluctant to lend to them, crimping liquidity options. At the end of 2010, France’s three largest banks had at least 500 billion euros of short-term and interbank funding rolling over within three months or less, according to a Barclays Capital note dated Sept. 7.

‘Problematic’ Rescue

“If liquidity conditions worsen, their size and the weight of their trading books would make it more problematic for the government to replicate a rescue like in 2008,” said Christophe Nijdam, an analyst at AlphaValue in Paris.

France provided about 20 billion euros to bolster capital levels at its largest banks after Lehman Brothers Holdings Inc.’s September 2008 bankruptcy. President Nicolas Sarkozy also set up a 320 billion-euro fund to guarantee bank debt.

“If guarantees had to be put in place again like in 2008, it would represent close to 20 percent of GDP,” Nijdam said. With French public debt set to rise to almost 90 percent of GDP in 2012, it would “be more problematic today,” he said.

Credit markets signal a squeeze at French banks, with increased risk of default. Credit-default swaps on BNP Paribas have almost tripled to 292 basis points from 110 in July, according to CMA. Contracts on Credit Agricole SA have climbed to 297 from 130, while those for Societe Generale have surged to 399 from 128.

‘Drastic and Disorderly’

“If it persists, the banks would have no choice but to delever their balance sheets in a very drastic and disorderly fashion,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., wrote in an opinion piece on the website of the Financial Times.

The effort to shrink operations reverses French banks’ buying binge and expansion in the last decade. French lenders spent about $173 billion on acquisitions since 2000, according to Bloomberg data. Outside of France, they invested in Italy, Belgium, Germany and the U.S.

“When the euro was established, there were spots to be among the big regional banking players,” said Francois Chaulet, who helps manage 250 million euros at Montsegur Finance in Paris. “A race for size started not just in France, but throughout Europe. French banks went into southern Europe because these banking markets were still fragmented, with retail-banking margins higher than in northern Europe.”

Tumbling Shares

That expansion has now come back to haunt French banks. Their exposure to Europe’s problem areas and a tightening in U.S. dollar funding are weighing on their shares.

Societe Generale has declined by 63 percent since the start of July, making it the worst performer in the 46-member Bloomberg Europe Banks and Financial Services Index. BNP Paribas fell 57 percent in the period, the third-worst performance, while Credit Agricole dropped 59 percent, the second-worst performance.

Moody’s Investors Service lowered the credit ratings of Societe Generale and Credit Agricole last week and said it may downgrade BNP Paribas.

French financial firms top the list of Greek creditors with about $57 billion in overall exposure to private and public debt at the end of March, according to the BIS.

In Italy, whose sovereign rating was cut by Standard & Poor’s this week, French financial firms at the end of March carried $410 billion in government and private debt, according to BIS data. That’s the most for financial firms from any foreign country.

Buying Binge

French lenders’ debt holdings in Spain stand at $146 billion, in Ireland $30 billion and in Portugal $28 billion.

Credit Agricole spent about 2.2 billion euros in 2006 to amass a controlling stake in Emporiki Bank of Greece SA and then increased its holding over time. Societe Generale has a controlling stake in unprofitable Athens-based Geniki Bank SA. BNP Paribas, which has exposure to Greek sovereign debt, doesn’t have a branch network in the country.

In Italy, French financial companies spent at least 20 billion euros since 2006 to buy banking and insurance assets in the euro-area’s third-largest economy.

BNP Paribas and Credit Agricole bought two of Italy’s 10 largest lenders. BNP Paribas acquired Rome-based Banca Nazionale del Lavoro SpA in 2006 for 9 billion euros. Credit Agricole’s Cariparma unit in Italy operates about 960 branches.

‘Not an Issue’

The three biggest French banks say their exposures are manageable, rejecting suggestions that they need to recapitalize.

“Our situation is under control in terms of liquidity and shareholders’ equity,” BNP Paribas Chief Executive Officer Baudouin Prot said in a French radio interview yesterday. Injection of capital by the state “is neither part of our working hypothesis nor what we want,” he said.

Greece “is not an issue” for Societe Generale, CEO Frederic Oudea said Sept. 12. A hypothetical writedown of as much as 50 percent would result in net losses of between 100 million euros and 150 million euros, he said. The bank said it has “low, declining and manageable sovereign exposure” of 4.3 billion euros to Italy, Spain, Portugal, Ireland and Greece.

The European debt crisis has generated as much as 300 billion euros in credit risk for European banks, the International Monetary Fund said this week, calling for capital injections to reassure investors and support lending.

Capital Buffers

“Without additional capital buffers, problems in accessing funding are likely to create deleveraging pressures at banks, which will force them to cut credit to the real economy,” the IMF said.

French banks have so far rejected such calls.

“French banks have no capital problem,” said Oudea, who is currently the head of the French Banking Federation.

Not all investors and analysts are convinced.

“These banks operate in countries where the public debt is under attack,” said Montsegur’s Chaulet. “That’s the threat.”

Faced with the specter of a Greek debt default, U.S. money- market investors have curbed funding to European banks. At the end of July, the 10 largest U.S. money funds eligible to purchase corporate debt, had cut their exposure to European banks by 20 percent from May 31, according to Fitch Ratings.

Scared Markets

“When the market gets scared, you have this short-dated paper that matures and it is not renewed,” AlphaValue’s Nijdam said. “Because it is in big chunks, the liquidity squeeze can go much faster than, let’s say, a traditional bank run from retail customers.”

French banks say they can cope with the slump in U.S. money-market funding. On Sept. 15, the European Central Bank said it will ensure euro-area lenders access to dollars in coordination with the Federal Reserve.

French banks also have diversified sources of profit, including less cyclical businesses such as insurance, that allowed them to weather the 2008-2009 crisis, said Montsegur’s Chaulet. The lenders’ domestic retail business -- their mainstay -- remains strong, Oudea said this month.

“The banks don’t want to recapitalize and focus on highly profitable businesses or on their domestic retail markets,” said Martin Maurel’s Forneris. “If the sovereign debt crisis is solved, these stocks have a huge potential of rebound over the medium term.”

Underestimated Crisis

For now, the scarcity of short-term U.S dollar funding and sovereign debt crisis that is both deepening and widening is driving banks’ efforts to slim down.

Societe Generale said it plans to free up 4 billion euros in capital through disposals by 2013. Its disposals may come from its Global Investment Management and Services division, Oudea has said, without giving further details. Analysts estimate the bank is shrinking its balance sheet by about 100 billion euros, a number the bank declined to confirm or deny.

BNP plans to cut its total assets by 10 percent, or about 200 billion euros. It’s shrinking its corporate- and-investment banking unit, where there will be “significant” job reductions, Prot said yesterday. On Sept. 19, the bank said it will discontinue its “pure retail” banking activity in Russia, where it operates 26 branches.

BNP Paribas is shrinking its balance sheet after total assets rose 34 percent to 2.24 trillion euros in the three years through June 2010. Total assets were at 1.93 trillion euros in June, about the same size as France’s GDP.

“It’s a step in the right direction, but maybe it won’t be enough,” said AlphaValue’s Nijdam. “To cut the balance sheet, it’s quicker to adjust through the trading books. BNP and SocGen lack the ambition to reduce the size of trading books.”

The banks are also late in taking such steps, said Lutz Roehmeyer, who helps manage about $14 billion at Landesbank Berlin Investment GmbH and holds shares in the two banks.

“They underestimated how big the crisis could get in Europe,” Roehmeyer said. “But this is not a new crisis, it’s just the aftermath of the 2008 banking crisis.”

© Copyright 2024 Bloomberg News. All rights reserved.

BNP Paribas SA and Societe Generale SA, France s two largest banks, are trimming about 300 billion euros ($405 billion) off their balance sheets as Europe s deepening debt crisis threatens to make them too big to save.At the end of March, French financial firms had $672...
Thursday, 22 September 2011 06:27 PM
Newsmax Media, Inc.

Sign up for Newsmax’s Daily Newsletter

Receive breaking news and original analysis - sent right to your inbox.

(Optional for Local News)
Privacy: We never share your email address.
Join the Newsmax Community
Read and Post Comments
Please review Community Guidelines before posting a comment.
Get Newsmax Text Alerts

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

© Newsmax Media, Inc.
All Rights Reserved
© Newsmax Media, Inc.
All Rights Reserved