The continuing European debt crisis is denting key sources of funding of major banks. Moody’s has cut the long terms debt ratings of Societe Generale and Credit Agricole and kept BNP Parisbas under review for a downgrade.
The warning came amid a tumultuous period for the French banks that have seen their shares hammered by fears about their exposure to Greece and weaker euro-zone countries. Moody’s said French banks were mainly strong enough to absorb losses from their government bond holdings, but noted that worries that the debt crisis could spread to larger European economies have prompted U.S. money market funds to pull back from lending to the French banks.
“During the summer, concerns over sovereign exposures and the health of sovereign balance sheets grew significantly,” said Moody’s. “This was most manifest in the behavior of U.S. money market funds.” The agency said these funds “became particularly risk-averse, resulting in reduced availability and shorter tenures for this type of financing.”
Moody’s said the banks were able to cope with the short-term impact of the contraction in dollar funding and that euro funding remains plentiful, but that persistent sovereign debt worries threaten to make wholesale money markets fragile for some time.
BNP Paribas and Societe Generale have acknowledged that access to dollars through U.S. money market funds has been drying up and both have said they have secured alternative sources of dollars. They have also indicated they are cutting back on dollar-denominated lending and seeking to sell assets in a bid to bolster their capital, marking a potentially worrying development for slowing economies in France and elsewhere.
“The bigger worry for the near term is that the French banks are facing higher funding costs and are under increasing pressure to deleverage more quickly,” noted Ben Jones, an analyst at the Economist Intelligence Unit. “The fear is that they will do so by paying down debt and curbing lending rather than more gradually over time through earnings growth, and that this will further weaken France’s already fragile economic recovery.”
Societe Generale shares were hardest hit in recent Wednesday trading, falling 10% recently to EUR16.10, BNP Paribas down 6.7% at EUR26.14, and Credit Agricole fell 2.1% at EUR5.05.
Moody’s downgraded Societe Generale’s long-term credit ratings to Aa3 from Aa2 with a negative outlook and lowered Credit Agricole’s rating to Aa2 from Aa1 and kept it on review. It maintained BNP Paribas’s rating at Aa2 but also kept it on review for a downgrade.
Societe Generale said Monday it would accelerate asset disposals and launch a cost-cutting plan in a bid to free EUR4 billion worth of capital by 2013. BNP Paribas followed suit Wednesday, saying it would refocus its business, lowering its dollar liquidity needs and reducing assets in order to comply with Basel III capital rules by the start of 2013.
French financial institutions overall have the highest exposure to Greece–via debt and private loans–rendering them a virtual proxy for fears about whether euro-zone leaders can avoid a destabilizing Greek default that could threaten other weak countries in the region. Shares in Societe Generale have been particularly hard hit, falling nearly 50% since Aug. 1. BNP Paribas’ shares have shed 38% and Credit Agricole’s shares are down 37% over the same period.
Moody’s factored in a potential losses of 60% on Greek sovereign debt for the French banks, much larger than the 21% write-downs they have taken already on their Greek sovereign debt holdings.
The move by Moody’s wasn’t as severe as some investors expected, with BNP dodging a downgrade and Societe Generale avoiding a two-notch downgrade, which Moody’s warned about in June. Even with the downgrade, Moody’s ratings for Societe Generale and Credit Agricole are above those of other ratings agencies.
The drop in Societe Generale’s market value has rekindled speculation that it could become a takeover target.
There is also speculation about some sort of government support or even nationalization of the banks. Nick Hill, Moody’s senior analyst for the French banks, said the rating review also takes into account the likelihood of French government intervention to support French banks, though he declined to estimate the probability of this.
The government is determined to monitor the banks’ efforts to strengthen their equity capital and will guarantee the soundness of the country’s financial system, spokeswoman Valerie Pecresse said after the weekly cabinet meeting. But Bank of France governor Christian Noyer said talk of the nationalization of French banks “makes no sense and is completely surreal.”
Paris, September 14, 2011 (Dow Jones)
