French Banks Take A Beating

Published in Investing on 14 September 2011

Shares in French banks have slumped on fears of a Greek debt default.

We're only halfway through this week and, already, it's been a terrible one for France's banks. That's because fears over these banks' bond holdings have sent their shares sliding southwards.

Dodgy bonds on balance sheets

When the credit crunch hit in August 2007, it happened when banks stopped lending to each other because of fears of hidden losses caused by exposure to iffy subprime mortgage securities.

As the crisis in the euro zone continues, credit markets have been showing signs of stress this summer, with wholesale (inter-bank) lending rates rising. Indeed, earlier this week, the Wall Street Journal claimed that BNP Paribas could no longer borrow dollars. Shares in France's biggest bank slumped on Friday and Monday, before bouncing back yesterday after BNP's strong rebuttal.

Of course, BNP is not the only French bank under the cosh of late. Mr Market is also fretting about France's two other mega-banks, Société Générale (SocGen) and Crédit Agricole.

All three banks have significant exposure to sovereign bonds issued by weak euro-zone economies, notably Greece. With fears of a Greek debt default causing continued panic this week, investors fear 'ticking time-bombs' inside these three French banks.

In June, the three held almost $57 billion of Greek sovereign and private bonds, versus $34 billion owned by Germany's big banks and a mere $14 billion for British banks. Of course, $57 billion is a tiny sum when compared with the many trillions of dollars of assets owned by these three banks.

However, as at last December, they also had huge exposure to Spanish debt (over $140 billion) and Italian debt (nearly $400 billion). It is this exposure to the ailing bond markets of the Mediterranean that is giving investors kittens.

What's the damage?

Here's how shares in France's three big banks have performed since last Friday:

BankFridayMondayTuesdayThis morning
BNP Paribas-7.5%-17.5%7.2%-2.7%
Crédit Agricole-7.8%-16.0%6.7%0.1%


Between them, the big three French banks have total debt holdings of €4.7 trillion, which is around 2½ times France's GDP (gross domestic product, or total national output in a year).

Hence, being 'too big to fail' (TBTF), their future is closely tied to that of the French nation itself. If push comes to shove, France would surely nationalise any TBTF bank so as to prevent the collapse of its banking system. For instance, the French government bailed out Crédit Lyonnais when it faced bankruptcy in 1993.

More bad news from Moody's

Of course, all three banks have denied any solvency problems, yet investors remain anxious about their transparency and close links to the state.

Today, credit rating agency Moody's has downgraded two French banks because of their exposure to Greek debt. Crédit Agricole's rating was cut to Aa2 from Aa1 and SocGen's to Aa3 from Aa2. BNP's rating remains under review and could be cut later. Also, all three ratings could face further cuts, Moody's warned.

Already, both BNP and SocGen have announced major asset sales aimed at increasing their liquidity and capital ratios, while reducing their leverage. BNP intends to sell €70 billion of assets, worth a tenth of its balance sheet; for SocGen, asset sales could raise $40 billion. If these restructurings don't calm the market, then French bank shares could fall further.

As for the euro-zone crisis, German Chancellor Angela Merkel and French President Nicolas Sarkozy are holding talks with Greek Prime Minister George Panandreou today. Alas, without swift and decisive support, Greece could default within weeks, perhaps days.

More from Cliff D'Arcy:

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BigJC1 14 Sep 2011 , 12:30pm

I seem to remember reading that when RBS announced its recent results it provided 50% of its Greek debts, on the same day the French banks were far less prudent (17% from memory, presumably they all use big 4 auditors so how such differences in provisions occur is beyond me - and I'm an FCA).

Until Governments/Auditors get together and agree honest and open bank reporting the fear, mistrust and credit issues will continue. The suspicion is that if truly prudent provisions were used uniformly across all European banks then many French and German banks would need to be nationalised. Of course that presumes France has deep enough pockets to nationalise them - so no political pressure to disclose, no independent audit function (it would appear) to force disclosure and a resulting freezing of the credit system. Fasten your seat belts it's going to get bumpy.

ANuvver 14 Sep 2011 , 1:43pm

Seems to me that Paribas and SocGen have taken the defensive line of "never mind the rumours, look at the numbers", but the problem is that markets just don't believe the numbers. Some banks could be honest about the level of their risk exposure, but investors are making the same adjustment a GP does when they ask you how much you drink.

Not yet through it, but Alistair Darling's memoir so far makes absolutely terrifying reading on the subject of confidence risks in the banking sector and the knotty problems of concerted government action to tackle it.

This is the best of the book so far for me, but it's also providing a fair bit of the much touted "Gordon is a moron" agenda, as well as implying some disturbing stuff about the inner workings of the Two-"Ed"ed Monster...

tattiebogle 15 Sep 2011 , 9:03pm

Sorry folks, I cannot resist this:

So who is the Sick Man of Europe now?

Just need a long memory

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