Dexia to Make $5.1 Billion Provision for Losses on Accelerated Asset Sales
Dexia Takes 3.6 Billion-Euro Charge
Jock Fistick/Bloomberg
Dexia SA, the French-Belgian bank that’s forced to shrink its balance sheet by 35 percent by 2014, said it will take a charge of 3.6 billion euros ($5.1 billion) for the anticipated sale of mostly U.S. residential mortgage-backed securities and long-term bond disposals.
Dexia SA, the French-Belgian bank that’s forced to shrink its balance sheet by 35 percent by 2014, said it will take a charge of 3.6 billion euros ($5.1 billion) for the anticipated sale of mostly U.S. residential mortgage-backed securities and long-term bond disposals. Photographer: Jock Fistick/Bloomberg
Dexia SA (DEXB), the bank that took the most Federal Reserve discount-window help in October 2008, said it will take a charge of 3.6 billion euros ($5.1 billion) for the anticipated sale of mostly U.S. residential mortgage-backed securities and disposals of long-term bonds, loans and units.
The second-quarter provision to cover future losses will reduce Dexia’s Tier 1 ratio, a measure of its ability to absorb losses, to about 11 percent from 13.4 percent at the end of March, the bank, based in Brussels and Paris, said today in a statement. The shares gained the most in seven weeks after Dexia said it will have a Tier 1 ratio of at least 12 percent by the end of this year. The cost of insuring its senior debt rose.
Dexia is using surplus capital accumulated over the past two years to accelerate the reduction of its balance sheet, which had slipped behind the targets agreed with the European Commission, and cut risks linked to the evolution of the U.S. housing market. The decision to speed up divestments shows Chief Executive Officer Pierre Mariani is more concerned about the bank’s access to funding than its ability to withstand potential losses on its Greek sovereign-debt holdings.
“We see the funding and liquidity management as a larger issue for Dexia than capital adequacy,” Albert Ploegh, an analyst at ING Groep NV in Amsterdam, wrote in a note to investors on May 24. “For Dexia, we are concerned over the ability to comply with the net stable funding ratio and on leverage less so if successfully deleveraged.”
Funding Ratio
The net stable funding ratio aims to limit the mismatch between the duration of loans and deposits, ensuring that banks don’t face cash-flow shortages. The leverage ratio would require banks to have Tier-1 capital equivalent to 3 percent of their assets, preventing them from accumulating assets worth more than 33 times its capital level.
The European Union may delay a decision on whether to adopt these two ratios, proposed by the Basel Committee on Banking Supervision and endorsed by the Group of 20 nations last year. Instead, the Brussels-based commission will “consider proposing” such a requirement “after an observation and review period,” according to draft proposals for implementing the so- called Basel III rules in the EU obtained by Bloomberg News.
The shares climbed 4.8 percent to 2.552 euros at the 5:40 p.m. close of trading on Euronext Brussels, the most since April 6 and paring their loss since the start of the year to 1.9 percent. Credit-default swaps on Dexia Credit Local’s senior debt jumped 28 basis points to 310 as of 4:30 p.m. in London, according to CMA.
Short-Term Funding
The disposals, to be carried out by June 2012 and depending on market conditions, will cut Dexia’s need for short-term funding by an additional 20 billion euros, according to the statement. The bank plans to sell bonds and loans with an average maturity of about 10 years, according to a presentation posted on its website.
Dexia borrowed as much as $31.5 billion from the U.S. Federal Reserve’s discount window on Oct. 24, 2008, according to Fed documents released in response to a Freedom of Information Act request. Its total central-bank funding, which peaked at 122 billion euros the same month, dropped to 17 billion euros at the end of March. Its short-term funding needs amounted to 104 billion euros, or about 20 percent of its balance sheet.
Balance Sheet
The bank agreed to shrink its balance sheet by 35 percent to 427 billion euros by the end of 2014 to gain European Union approval for receiving 5 billion euros of capital in state aid in September 2008. The value of its combined assets amounted to 527 billion euros at the end of March, a 40 billion-euro decrease from the end of last year.
The bank also agreed to maintain minimum capital levels during its reorganization, with a core Tier 1 ratio of at least 10.6 percent at the end of last year. The 2011 target is undisclosed.
Amelia Torres, spokeswoman for EU Competition Commissioner Joaquin Almunia, wasn’t available to comment.
Dexia, the former owner of U.S. bond insurer Financial Security Assurance Inc., wrote down the value of its U.S. asset- backed securities by almost $2.31 billion by the end of the first quarter after raising its estimate of future losses on the underlying mortgages. It will take an additional 1.8 billion euros to bring the valuation in line with the securities’ market value pending a sale.
State Guarantees
By writing down the U.S. asset-backed securities to their market value, Dexia said it will be in a position to waive the Belgian and French state guarantees covering losses on those assets and renegotiate the “terms and consequences” arising from the state support.
“The guarantee on the Financial Products portfolio was a significant component of the valuation of the state aid we received at the end of 2008,” Mariani told analysts on a conference call today. “Waiving this guarantee reduces considerably the amount of state aid received and that should be put on the table and discussed with the European Commission in the coming weeks.”
The remaining half of the provision covers losses arising from bonds, loans and units, Dexia said in the presentation on its website.
To contact the reporter on this story: John Martens in Brussels at jmartens1@bloomberg.net
To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net
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