Citigroup, Goldman Boosted French Bank Ties Before Rout

Citigroup Inc. (C) and Goldman Sachs Group Inc. (GS) increased gross exposures to French banks in the year’s first half before the European nation’s financial stocks plunged amid perceived dependence on short-term funding.

Citigroup, the third-biggest U.S. lender, boosted gross “cross-border outstandings” with French banks 40 percent to $15.7 billion from Jan. 1 through June 30, according to the company’s quarterly report. Goldman Sachs increased claims by 31 percent to $38.5 billion in the first half, its report shows. The filings don’t disclose collateral the banks received or hedges, which curb potential losses on existing bets.

Credit Agricole SA (ACA) and Societe Generale SA, France’s second- and third-biggest banks, led a rout in the Bloomberg Europe Banks and Financial Services Index since the end of June amid concern that some of the region’s lenders may struggle to maintain funding during government-debt crises. Legg Mason Inc.’s bond unit said its U.S. money-market funds won’t buy new debt from French banks to shield themselves from the perceived risk.

“There is a great cloud of uncertainty that’s hanging over the U.S. banks about the full extent of the exposures they have to French and other European banks,” said Andrew Karolyi, a finance professor at Cornell University in Ithaca, New York. “The market is clearly not reacting well to what they’re seeing.”

Collateralized Loans

Citigroup and Goldman Sachs, both based in New York, were the only large U.S. banks to quantify their exposures to French banks in their quarterly filings, known as 10-Q reports. Cross- border outstandings include cash deposits, receivables, loans and securities. They also include short-term collateralized loans of securities or cash known as repurchase agreements or reverse repurchase agreements.

The disclosures, which didn’t identify the French companies involved in the two banks’ dealings, don’t provide a full picture of the risks because investors can’t see any offsetting collateral or hedges, said David Hilder, an analyst at Susquehanna Financial Group in New York.

“Unfortunately, I think the numbers in the 10-Qs are really not economically meaningful,” said Hilder, who has a “positive” recommendation on Goldman Sachs and “neutral” on Citigroup. “The gross amount is very likely to be misleading in terms of true economic exposure.”

Jon Diat, a spokesman for Citigroup, and Stephen Cohen at Goldman Sachs declined to comment.

‘Crave Greater Clarity’

The 2008 financial crisis showed how the interconnections between financial institutions worldwide can cause risks in one company to spread around the globe. Three years later, investors remain unaware of U.S. banks’ Europe-linked risks, Karolyi said.

“As investors in these banks, we crave greater clarity about the full extent to which they’re laying off their exposures and how and in what form,” Karolyi said. “A little bit more transparency would go a long way to alleviating a lot of investors’ concerns about the extent of these exposures.”

Citigroup said Aug. 5 that it had a $31.7 billion gross exposure to Greece, Italy, Portugal, Spain and Ireland, which are at the heart of the European debt crisis. The bank also said it hedged against possible default by buying credit protection from financial firms outside of those nations.

Chief Executive Officer Vikram Pandit, 54, and Chief Financial Officer John Gerspach had declined requests from analysts seeking these details on a conference call last month, citing instead a $22 billion net figure.

Citigroup has tumbled 25 percent since June 30. Goldman Sachs, led by CEO Lloyd Blankfein, 56, has slid 10 percent.

Short-Selling Ban

Credit Agricole and Paris-based Societe Generale (GLE) plummeted more than 35 percent during the same period. Both banks gained after French regulators announced a temporary ban on short- selling on Aug. 11, with Credit Agricole climbing 3.3 percent to 6.74 euros today, and Societe Generale gaining 2.1 percent to 24.80 euros. Short-sellers sell borrowed shares with plans to buy them back later at a lower price.

Societe Generale is among European financial firms with the lowest net stable funding ratios, indicating they rely on short- term sources of wholesale funding, Royal Bank of Scotland Plc analysts wrote last week in a note. A loss of confidence is “most dangerous” for banks that depend on that type of funding, wrote the analysts, Stefan Stalmann and Jorge Mayo.

Societe Generale said Aug. 10 it had fulfilled “almost all” of its funding plan for 2011 and that its performance in July and early August shows it will be able to post “solid” results in the future.

‘Anxieties Subside’

“The French are particularly exposed to funding concerns because of their funding structure,” the RBS analysts wrote. “It is quite likely in our view that funding will not become a serious issue for the large French banks, that anxieties subside and that the shares rebound. But there is a non-trivial risk that confidence deteriorates further.”

Citigroup has a total of $44 billion in cross-border outstandings in France, when including dealings beyond those with banks. It also had $64.9 billion in so-called commitments to clients in France, which include legally binding letters of credit, according to its quarterly report. Goldman Sachs, the fifth-biggest U.S. bank by assets, had total outstandings of $47.3 billion and didn’t disclose its commitments.

Morgan Stanley (MS), the owner of the world’s largest retail brokerage, last disclosed its outstandings to French banks in an annual report, putting the figure at $39 billion as of Dec. 31. Mary Claire Delaney, a spokeswoman for the New York-based firm, declined to comment.

Derivative Exposure

French counterparties accounted for 3 percent, or about $2.6 billion, of Morgan Stanley’s total corporate lending exposure as of June 30, the firm said last week in a quarterly filing. French counterparties also accounted for 3 percent of over-the-counter derivative exposure. It had credit derivatives with a total fair value of $10.5 billion, according to the filing. The figures represented gross exposure before accounting for collateral and hedges, according to the filing.

Bank of America Corp. (BAC), the biggest U.S. bank, had $8.1 billion in French-bank exposure, including loans and deposits, at the end of 2010. The lender had total French exposure of $20.1 billion at the end of June. The figures don’t include hedges or collateral, Jerome Dubrowski, a spokesman for the Charlotte, North Carolina-based bank, said in an e-mail.

JPMorgan Chase & Co. (JPM), the second-biggest U.S. bank, had $16.5 billion in claims on French banks at the end of 2010, excluding hedges and collateral. Jennifer Zuccarelli, a spokeswoman for the New York-based bank, declined to comment.

“We have been in Europe for hundreds of years,” JPMorgan CEO Jamie Dimon, 55, said in an interview with CNBC last week. “We have manageable exposure to all of the banks. We won’t cut and run. We are very careful what we do but we are not going to leave Europe.”

To contact the reporters on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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