Credit Agricole SA (ACA) and Societe Generale SA, France’s second- and third-largest banks, had their long-term credit ratings cut one level by Moody’s Investors Service, which now plans to examine the impact of tighter financing markets on French lenders.
Moody’s put the companies, along with BNP Paribas (BNP) SA, on review for a possible downgrade on June 15, citing the risks posed by their investments in Greece. Since then, concern over Europe’s escalating sovereign debt crisis has crimped European banks’ ability to raise funds in dollars.
“We extended the review to take into account the system fragility in the banks’ financing markets,” said Nicholas Hill, senior vice president at Moody’s in Paris, in an interview.
Credit Agricole was lowered to Aa2, Moody’s third-highest rating, and remains under review. Paris-based Societe Generale (GLE) was reduced to Aa3, with a negative outlook, as Moody’s re- evaluated its level of state support. BNP Paribas, the largest French bank, had its Aa2 long-term rating kept on review for a possible cut.
French lenders top the list of Greek creditors with $56.7 billion in exposure to private and public debt, according to a June report by the Basel, Switzerland-based Bank for International Settlements. Credit Agricole has an unprofitable Greek subsidiary, Emporiki Bank of Greece SA, while Societe Generale has a controlling stake in Greece’s Geniki Bank SA. BNP Paribas doesn’t have a Greek consumer-banking unit.
Credit Agricole’s new ratings “are more consistent with the bank’s sizeable exposures to the Greek economy,” Moody’s said in the statement.
Credit Agricole rose 1.2 percent to 5.22 euros in Paris trading, after initially dropping 5.9 percent. Societe Generale declined 2.9 percent to 17.39 euros, while BNP Paribas slid 3.9 percent to 26.90 euros.
Before today, BNP Paribas had declined 41 percent in Paris trading this year, Credit Agricole had fallen 46 percent and Societe Generale had dropped 55 percent on escalating concern that the European sovereign debt crisis is turning into a banking crisis. The shares advanced yesterday after BNP Paribas and Societe Generale said they can withstand a Greek sovereign default and a reduction in lending from U.S. money-market funds.
“Moody’s has concluded that BNP Paribas has a sufficient level of profitability and capital that it can absorb potential losses it is likely to incur over time on its Greek government bonds,” the rating company said. The long-term debt and standalone bank financial strength ratings of BNP Paribas remain on review because of concerns about “the structural challenges to banks’ funding and liquidity profiles.”
The standalone bank financial strength ratings of Societe Generale and Credit Agricole are also under review.
“It’s a pretty fast-moving situation and the rating agencies will just keep revisiting it moment after moment,” said Julian Chillingworth, who helps manage 16 billion pounds ($25 billion) at Rathbone Brothers Plc in London.
The European Central Bank said it will lend dollars to two euro-area banks tomorrow, a sign they are finding it difficult to borrow the U.S. currency in markets. The ECB allotted $575 million in a regular seven-day liquidity-providing operation at a fixed rate of 1.1 percent. It’s the first time since Aug. 17 that a lender requested dollars from the ECB. An ECB spokesman declined to comment on which banks borrowed the funds.
U.S. money-market funds “have stopped rolling over dollar loans of European banks,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “I wouldn’t be surprised if demand increased in the next weeks.”
U.S. money-market fund managers have cut their lending to French banks at a pace that may force them to raise capital by selling assets, according to a Sept. 9 report by William Prophet, a desk analyst at Deutsche Bank Securities Inc.
Societe Generale Chief Executive Officer Frederic Oudea said in an interview with Bloomberg Television yesterday that the bank could resist a freeze in dollar financing from U.S. money-market funds indefinitely.
“Even if it were to go to zero, there would be no problem,” Oudea said. “We have plenty of buffers of liquidity and we are adjusting to the reduction in the money-market fund exposure.”
Societe Generale’s share plunge makes it a possible takeover target for a foreign bank, Jean-Pierre Balligand, a Socialist lawmaker who sits on the finance committee of France’s National Assembly, said in an interview today.
Oudea dismissed speculation of a merger or takeover in the interview yesterday, pointing out that most lenders’ shares have tumbled and that a “big” banking merger wouldn’t help solve the euro-region crisis.
BNP Paribas’s cost of borrowing in dollars has risen in the past four weeks amid concern U.S. money-market funds are shutting off lending to France’s banks because of their holdings of Greek government debt. BNP Paribas yesterday said it is able to finance its dollar needs at normal levels “directly and through foreign-exchange swaps.”
The Paris-based bank said today it aims to boost its common equity tier 1 capital ratio to 9 percent by the start of 2013, under Basel III rules, as it scales back U.S. dollar corporate- and investment-banking business.
Financing Market ‘Fragility’
Societe Generale has adequate capital to support its exposure to Greece, Portugal and Ireland, Moody’s said today. The bank financial strength rating remains under review as Moody’s examines the impact of “potentially persistent fragility” in bank funding markets. Moody’s said that it anticipates that rating would be cut by no more than one level.
The ratings actions are “relatively good news,” Bank of France Governor Christian Noyer said on RTL radio in Paris. “It was a limited downgrade. It was two banks out of three. All Moody’s has done is put them on the same level as other rating agencies and at the same level as other major European banks.”
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