French banks, which have cut debt holdings in Europe’s troubled periphery by more than 35 percent since the start of the euro-area crisis, are still struggling to shake off their image as surrogates for the region’s woes.
BNP Paribas SA (BNP), Societe Generale (GLE) SA and Credit Agricole Group (ACA), hit last year by Greek writedowns, have cut some of their riskiest assets and sought more stable funding sources. That didn’t prevent Moody’s Investors Service Inc. this month from listing French banks’ “vulnerability” to a deepening crisis among its reasons for stripping France of its top credit rating.
“They’re caught in the euro sovereign crisis and that’s not going away,” said Julian Chillingworth, who helps manage 17 billion pounds ($27 billion) at Rathbone Brothers in London. “French banks are still a proxy for European troubles.”
French lenders shrank their private and public debt holdings in Greece, Portugal, Ireland, Spain and Italy to $540 billion at the end of June from $833 billion in mid-2009, Bank for International Settlements figures show. That helped President Francois Hollande’s government to borrow at record-low costs as investor concern France’s banks may need aid waned.
Although Moody’s said its ratings and outlook for France’s largest banks were “unaffected” by the country’s sovereign downgrade, it voiced concern about their presence in the euro- area’s troubled economies.
“France is disproportionately exposed to peripheral European countries such as Italy through its trade linkages and its banking system,” Moody’s said Nov. 19. “Despite their good loss-absorption capacity, French banks remain vulnerable to a further deepening of the crisis.”
European banks have cut international assets by 40 percent, or $7 trillion, in the past four years, including $2 trillion in the past year, Morgan Stanley analysts led by Huw van Steenis in London wrote in a Nov. 20 report.
While “we might be over the worst and most pernicious phase,” European banks will face a “profound, complex and multi-year deleveraging,” Morgan Stanley analysts wrote.
The shrinkage may be marked at French banks, which were among Europe’s most ambitious and acquisitive. They spent about $68 billion on assets in other euro-area markets since the creation of the currency, according to data compiled by Bloomberg. BNP Paribas, France’s biggest bank, topped the list, snapping up assets in Belgium and Italy.
And although the three-year-old euro-area debt crisis has forced the banks to retreat as their access to U.S. dollar funding dried up last year and doors to Europe’s debt markets closed, much remains to be done, said Jean-Pierre Lambert, an analyst at Keefe, Bruyette and Woods Ltd. in London.
“French banks will have to keep adjusting,” he said. “It’s a permanent effort.”
In addition to cutting risk-weighted assets, the banks boosted deposits and shrank loan books. BNP Paribas, Societe Generale and Credit Agricole increased deposits by 0.8 percent in the nine months through September to 1.57 trillion euros. Their total loans fell 3 percent. The banks sold corporate-loan portfolios overseas while keeping retail lending stable at home.
French banks, like others in the euro area, were buoyed by the European Central Bank plowing 1 trillion euros into the region’s financial system and ECB President Mario Draghi’s decision in September to agree to buy the bonds, under some conditions, of euro nations whose yields have skyrocketed.
That lifted some of the anxiety attached to the French banking industry, with investors rewarding the lenders for their return from the precipice.
Before today, BNP Paribas shares rose 41 percent this year after falling 36 percent in 2011. They were 0.2 percent higher at 42.92 euros as of 10:58 a.m. in Paris. Societe Generale, which has gained 62 percent after sliding 57 percent last year, was down 0.3 percent at 27.74 euros. Credit Agricole, which gained 34 percent this year after a decline last year of 54 percent, traded down 0.1 percent at 5.85 euros.
Still, BNP Paribas is down 18 percent from Sept. 1, 2009 -- just before the crisis began -- Societe Generale has fallen 46 percent and Credit Agricole 53 percent.
Also, France’s largest banks’ credit default swaps, which reflect the cost of insuring against default, have risen more than their biggest German and U.K. counterparts since Oct. 16, 2009, when former Greek Prime Minister George Papandreou characterized his country’s economic situation as “explosive.”
CDSs for BNP Paribas, Societe Generale and Credit Agricole have risen by at least 80 basis points, or 0.8 percent, while those for Deutsche Bank AG and HSBC Holdings Plc have widened about 41 basis points and 34 basis points respectively. CDSs for peripheral-country banks, UniCredit SpA (UCG), Italy’s biggest, and Banco Santander SA, Spain’s largest, are more than 200 basis points higher.
The French banks’ fates are also inexorably tied to the country’s state and economy, which has barely grown in well over a year. Moody’s called inadequate President’s Hollande’s plan to rekindle the economy and shrink an unemployment rate that’s at a 14-year high.
“As long as banks’ funding conditions depend on their sovereign, and reciprocally states refinance through banks, there is an economic link,” said Emmanuel Dooseman, a partner at independent audit group Mazars in Paris.
Credit Agricole, France’s largest bank by assets, is owned by 39 cooperative regional banks and has a 28 percent share of French deposits. Societe Generale in the first half got 43.5 percent of its revenue in France, while for BNP Paribas it was 32 percent, according to their filings.
French banks paid a toll for the sovereign-debt crisis. Credit Agricole Group had a 2.21 billion-euro third-quarter loss on costs tied to the sale of its Greek unit Emporiki Bank, it said Nov. 9. Societe Generale, France’s third-largest bank by assets, is also selling its Greek branches network.
BNP Paribas, which has no branches in Greece, took 3.2 billion euros in writedowns on the country’s sovereign debt last year. BNP Paribas is also steadily cutting funding to its profitable Italian branch network.
Unlike Credit Agricole and Societe Generale, BNP Paribas posted a rebound in third-quarter earnings and said Nov. 7 that it has reached higher capital levels under Basel III rules than rivals such as Germany’s Deutsche Bank AG. BNP Paribas at the end of September reached a 9.5 percent core Tier 1 ratio and it plans no additional asset cuts after completing its self-imposed corporate- and investment-banking slimming.
“We’ve adapted at the fastest pace possible,” Alain Papiasse, head of BNP Paribas’s corporate and investment bank, told journalists at a Nov. 21 meeting. “We’re like a large overhauled store with all aisles now open for business.”
As of end-September, Credit Agricole had surpassed its cost-cutting target. Societe Generale completed its loan- portfolio disposals program while it still aims to free up capital by reducing assets left over from the subprime crisis.
French lenders’ efforts to insulate themselves from troubled European economies come as the region’s financial system is pushed to conform to stricter Basel III rules.
The French government is also planning a law to wall off the most “speculative” trading, including “pure” proprietary trading, Finance Minister Pierre Moscovici said this month.
French banking officials have voiced concerns that European and French banking rules and reforms will constrain business even as the U.S. takes its time on adopting Basel III.
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency on Nov. 9 said they “do not expect that any of the proposed rules would become effective” at the start of next year. The agencies are working “as expeditiously as possible” to align U.S. banks with guidelines set by the Basel Committee on Banking Supervision.
The regulatory regime being imposed on European banks “is a nightmare,” Frederic Oudea, Societe Generale’s chief executive officer, said at a Nov. 15 conference.
“We don’t want Europe to be the victim,” BNP Paribas Chairman Baudouin Prot said at the conference.
In France, Basel III liquidity rules would be “the most powerful cause for the contraction in bank credit,” an Institut Montaigne report chaired by BNP Paribas’s Honorary Chairman Michel Pebereau said this month.
“The weakening of the financial system, and existing periodical tensions on interbank markets threaten from now on the economy’s financing and create a credit crunch risk in Europe,” the report warned.
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