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French banks' ratings taken to guillotine

Moody's finally chops the ratings of French banks after months of such predictions by market participants

Moody's finally took a stand on downgrading the long-term debt rating of BNP Paribas, Credit Agricole and Société Générale.

The ratings agency had warned the markets in mid October that France's AAA status was under threat and that it might hit the country with a negative outlook if the money spent on bailing out eurozone members and its domestic banks impacted too much on its budget.

And only a month earlier, Moody's cut SG's and Credit Agricole's credit ratings, as concerns grew over the French bank sovereign debt holdings.

Early on Friday, Moody's downgraded BNP Paribas's long-term ratings to Aa3, which was "driven by impact of funding constraints, deteriorating macro fundamentals" – as with all three French banks that were downgraded.

Key parts of Moody's statement include (emphasis ours):

In its press release of September 14, 2011, Moody's concluded that BNPP
had a sufficient level of profitability and capital that it could absorb
potential losses it was likely to incur on its Greek government bonds

(Greece is rated Ca, outlook developing), and to remain capitalised
consistent with its BFSR, even if the creditworthiness of Irish and
Portuguese government bonds were to deteriorate further. This view
incorporated loss assumptions significantly higher than the impairments
the bank had recognised up to that point in time.

Since then, BNPP has realised significant impairments on its Greek bond
holdings commensurate with our own expectations earlier this year
, and
has now written down its gross exposures by 60%. It was able to do this
while remaining broadly breakeven for the third quarter, adjusting for
its gain on own credit spreads, and was thus able to maintain its
capitalisation. In addition, Moody's continues to recognise important
credit strengths, notably a very high degree of diversification, a broad
spread of businesses with strong market positions, sound capital,
efficiency and loan-book quality.

However, Moody's also noted the challenges to BNPP's funding and
liquidity profiles in light of worsening refinancing conditions
, as well
as the potential for these conditions to constrain BNPP's franchise. This
resulted in the extension of the review on BNPP's ratings announced in
September 2011.

It has come as no surprise to the market, especially as BNP Paribas is one of the largest holders of sovereign debt out of all the banks.

However, the bank vehemently hit back at critics in early September over reports on its sovereign debt holdings, and sought to rebut the bank’s perceived large exposure to Italian sovereign debt, contending that its €21 billion exposure amounted to only 1.7% of its total commitments and to only 1% of outstanding Italian bonds.

The bank also explained that even if the level of exposure may be large, at the time the debt was acquired it was a sensible move, given the bonds’ aforementioned utility in liquidity management.

Meanwhile, after a recent downgrade to its credit rating, Moody's also downgraded Credit Agricole SA's long-term ratings to Aa3:

Moody's Investors Service has today downgraded the standalone bank financial
strength rating (BFSR) of Credit Agricole SA (CASA) by one notch to C- from C
(mapping to Baa2 on the long-term scale from A3 previously) and the long-term
debt and deposit ratings by one notch to Aa3.
The one-notch downgrade of the long-term debt and
deposit ratings follows the downgrade of the BFSR. The long-term ratings
now incorporate three notches of systemic support (previously two
), derived from the rating agency's view that the probability of
systemic support for CASA remains very high.

SG also faced the chop with long-term ratings being cut to A1:


Given the negative outlook on the BFSR and long-term ratings, the probability of an upgrade in either is unlikely. The main factors that could lead Moody's to downgrade its long-term ratings include:

-- Any broader reappraisal of the implications of the highly fragile funding environment for banks that rely wholesale funding and are vulnerable to a loss of investor confidence;

-- A deterioration in sovereign creditworthiness;

-- An increase in Moody's expectation of losses resulting from deleveraging;

-- An inability to meet capital targets;

-- Unexpected losses within the bank's capital markets activity;

-- A further material increase in the probability of a recession leading to higher credit losses; and

-- A deterioration in the creditworthiness of the support provider, France, or its ability and/or willingness to provide support to the benefit of creditors.

In response, SG told Euromoney on Friday (emphasis ours):

Société Générale's new long-term rating is in line with its peers and with ratings attributed to Société Générale by other major agencies.

The group is surprised by this decision and challenges the reasons advanced by Moody’s. In its Q3 2011 results publication, the group demonstrated its capacity to adjust rapidly its management of short- and long-term funding needs in the current unfavourable market environment. The group also showed that its exposures to GIIPS countries were modest and manageable, as acknowledged by Moody’s, and were clearly not an area of concern under any scenario.

The deleveraging strategy initiated by Société Générale in September has already produced tangible results, as evidenced in its Q3 2011 presentation, and is being pursued with determination. The group is confident that the acceleration of its transformation, coupled with its demonstrated earnings capacity, will allow it to attain its stated capital objectives in line with regulatory requirements.

French banks were hit with a double whammy, when the EBA published its formal recommendation relating to banks’ recapitalisation needs.

While the French banks mentioned above (worth 80% of the French banking sector) were not as badly hit in capital shortfalls compared with the Spanish banks (see impending post) – and, in fact, improved capital requirements from the original number of €8.8 billion – there was still a shortfall in €7.3 billion.

Capital requirements resulting from the EBA coordinated exercise 
(1) The calculation includes the estimated impact of CRD3 (due to come into effect on 31 December 2011) on the
Core Tier 1 ratio as at 30 September 2011. It therefore differs from the regulatory requirement in force at the same date.

(2) Capital buffer calculated in accordance with the methodological note published by the EBA (
by reference to market values at 30 September 2011.

Source: Credit Agricole and EBA

However, it’s going to be a tough new year for the French banks that have a capital shortfall, as the national authorities will require banks to submit, by January 20, their plans detailing the actions they intend to take to reach the set core tier 1 target ratio of 9% by June 30: 

“These plans will have to be agreed with national authorities and reviewed, shared and consulted on with the EBA and with other relevant competent authorities within colleges of supervisors as appropriate. National authorities will seek to ensure that throughout the colleges’ discussions of capital plans the need to maintain exposure levels of banking groups in all Member States is taken into account, recalling that if and where necessary the EBA will use its mediation role to that effect.”

Source: EBA statement

- Euromoney Skew Blog


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