Moody’s cuts Société Générale and Crédit Agricole’s credit ratings
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Moody’s cuts Société Générale and Crédit Agricole’s credit ratings

As concerns grow over French bank sovereign debt holdings, Moody’s cuts Société Générale and Crédit Agricole’s credit ratings – to no surprise from the market.

Ratings agency Moody’s has cut Société Générale and Crédit Agricole’s long-term credit ratings by one notch, following its evaluation of the French banking sectors’ exposure to sovereign debt and the level of state aid each bank holds.

Moody’s knocked Crédit Agricole to Aa2 from Aa1 and cited its high level of Greek holdings as a factor. However Moody’s says it will review the rating again at a later date. Meanwhile, Société Générale had its rating reduced from Aa2 to Aa3 with a negative outlook on account of the level of state support it receives.

“The downgrades in credit ratings for French banks Société Générale and Crédit Agricole by Moody’s today was no surprise at all and had been long rumoured in the market,” says Joshua Raymond, chief market strategist at City Index. “One upside to read into the decision was the confidence from Moody’s that French banks remain well capitalised and the fact that many had feared as much as a cut of two notches in the rating for Société Générale, rather than the one notch that was actually cut. All three key French banks lost around 2% by mid morning, and prices remain highly volatile as traders react to every ounce of news and sentiment, almost on an hourly basis.”

Just yesterday, September 13, Frédéric Oudéa chief executive of Société Générale, pointed out at the Barclays Capital Global Financial Services conference in New York that the group’s net banking book’s sovereign exposure to Ireland, Portugal, Greece, Italy and Spain combined was just €4.3 billion as at September 9 2011, which amounts to less than 1% of the group’s balance sheet.

Despite the double set of downgrades, Moody’s left BNP Paribas’ long-term credit rating untouched at Aa2, although it did indicate that the Paris-based bank would be kept on review for a possible cut.

“I can only imagine that [BNP Paribas] is fighting very hard with the agency to avoid a downgrade as Moody’s already rated the bank at the same level as S&P, so any cut would result in a new low rating,” says Gary Jenkins, head of fixed income at Evolution Securities. “It is difficult to know what the market reaction will be – in the old days it would have been very limited – and the market may take some comfort from the fact that the downgrades were limited to a maximum of one notch, as well as the positive comments regarding the ability of each bank to withstand the exposures to Greece, Ireland and Portugal. However this may be offset by comments such as: ‘structural challenges to banks’ funding and liquidity profiles’ for the sector, as well as concerns over BNPs reliance on wholesale funding markets given the ‘potentially persistent fragility in the bank financing markets’.”

Earlier this month, BNP Paribas hit back at critics of its sovereign debt holdings, which led to subsequent share price rise during the day. In a question and answer style statement, BNP Paribas explained why its exposure to Italy’s sovereign bonds was so large.

“Our banking book sovereign bond exposure to Italy is €21 billion, 1.7% of BNP Paribas’ total commitments,” said the statement. “This amount represents only 1% of the total value of Italian bonds outstanding. The Italian debt market has been liquid and widely used as an interest rate management tool by banks and investors, including BNP Paribas at a time when government bonds were deemed risk free.”

However, bank says it brought down its eurozone government bonds banking book portfolio to a total of €75 billion as at June 30, despite reports that it was at €140 billion. The bank says: “The figure of €140 billion mentioned in the press was based on an erroneous interpretation of tables published by the European Banking Authority and did not reflect group’s risks on sovereign bonds.” 

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