France’s biggest banks are rushing to cut the more than 140 billion euros ($171 billion) they provide their operations in Europe’s troubled economies, seeking to protect themselves against a possible breakup of the euro.
In a retreat, French banks, especially BNP Paribas SA (BNP) and Credit Agricole SA -- the largest by assets -- are trying to make their businesses in Italy, Spain, Greece, Portugal and Ireland less reliant on funds from the parent company.
In the decade after the creation of the euro, French banks were among the region’s most ambitious and acquisitive, investing about $36 billion in the five countries, lured by the prospect of growth in those markets. Their pullback now reflects the banks’ attempt to defend themselves against the risk, however remote, of an exit from the euro of any of the countries.
“It’s an unhealthy sign,” said Philippe Bodereau, the London-based head of research for financial firms at Pacific Investment Management Co., the world’s largest bond investor. “It’s like shifting sands, with European banks protecting against invisible currency risks within the euro zone.”
Like other financial institutions in Europe, French banks are trying to match assets and liabilities on a national level to minimize risk. Reducing assets in the five countries to limit cross-border exposure may erode BNP Paribas’s after-tax earnings by 4.7 percent and Credit Agricole’s by 7.2 percent, estimates Benoit Petrarque, a Kepler Capital Markets analyst in Paris.
BNP Paribas, Credit Agricole, Societe Generale SA and Natixis SA (KN) provide 150 billion euros from operations at home to fund their businesses in Italy, Spain, Greece, Portugal and Ireland, according to Morgan Stanley. Kepler estimates the amount just for BNP Paribas, Credit Agricole and Societe Generale (GLE) at 143 billion euros.
“There is a will to cut the link between parents and units in Southern Europe,” Pimco’s Bodereau said. “The most significant link is funding between the parent and the local unit” and reducing it is “the safest way to manage risks during this crisis,” he said.
BNP Paribas’s spokesman Pascal Henisse declined to comment as did Credit Agricole’s spokeswoman Charlotte de Chavagnac and Nathalie Boschat, a spokeswoman at Societe Generale.
Funding exposures to units have been among elements weighing on the banks’ shares. Before today, BNP Paribas had fallen 43 percent in the last 12 months, Credit Agricole 67 percent, Societe Generale 57 percent and Natixis 43 percent.
“When you look at what’s happening in Europe, betting to become a pan-European and pan-euro-zone bank isn’t paying off,” said Jacques-Pascal Porta, who helps manage 500 million euros at Ofi Gestion Privee, including BNP Paribas stock.
Unlike HSBC Holdings Plc (HSBA), Banco Santander SA (SAN) and Standard Chartered Plc (STAN), Europe’s largest banks by market value, BNP Paribas’s retail-banking expansion was largely in the euro area.
“You can have the most efficient organization, but a euro- area footprint today increases your risk profile,” Porta said.
While the widening gap between French yields and those of peripheral countries should have made it more attractive for the banks to borrow at home for operations in other euro-area countries, the risk of a potential euro breakup has put them on the defensive, analysts said. They are instead cutting parent funding for operations in non-French euro markets.
“In the past, you’d have local cross-border risks without asking yourself too many questions,” said Kepler’s Petrarque. “Now, local yields are increasing, and if a country ever had to exit the euro, you can’t ignore hidden forex risks.”
Spanish 10-year bonds yield more than 7 percent, while Italian debt of a similar maturity carries a yield of 6.42 percent. Comparable French securities yield 2.3 percent.
The prospect of a Greek exit from the euro has been raised in recent weeks by German leaders, with Vice Chancellor Philipp Roesler telling broadcaster ARD on July 22 that he is “very skeptical” Greece can be rescued and that the country’s exit from the monetary union has “long ago lost its terror.”
Citigroup Inc. raised its estimate of the chances Greece will drop the euro in the next 12 to 18 months to about 90 percent. In an analyst note, Citigroup updated its forecast for a Greek exit from the 17-nation currency union from a previous estimate of 50 percent to 75 percent, and said it would most likely happen in the next two to three quarters.
Italy -- where French banks have the biggest public and private exposure -- and Ireland have more incentive to quit the euro than Greece, according to Bank of America Merrill Lynch.
Many investors are convinced “that the negative consequences of a euro breakup are so great that politicians will pay whatever price necessary to avoid it,” BofA Merrill Lynch foreign exchange strategists David Woo and Athanasios Vamvakidis wrote in a July 10 report. “We have reservations.”
Using cost-benefit analysis and game theory, the analysts concluded in the report that investors “may be underpricing the voluntary exit of one or more countries.”
French banks are acting on the possibility of that outcome.
BNP Paribas, Credit Agricole (ACA) and Societe Generale have cut their combined holdings of Italian and Spanish sovereign debt by 44 percent and 79 percent respectively on average since mid- 2011, according to calculations based on the banks’ data.
For non-French euro-area operations, the banks are cutting funding support, or assets minus deposits, capital, local debt and European Central Bank long-term financing, analysts said.
After going to as much as 700 billion euros in 2009 from zero before the 1999 creation of the euro, French banks’ gross funding gap, or the mismatch of loans and deposits, fell to 450 billion euros at the end of April, Morgan Stanley analysts including London-based Huw Van Steenis wrote in a June 26 report. The banks want to cut more.
“It’s going to be a long muddling-through process because a euro break-up, although unlikely in the end, has unfortunately become more plausible,” said Christophe Nijdam, a Paris-based analyst at AlphaValue. “For BNP and Credit Agricole the risk isn’t asset quality, but the disastrous and unpredictable economic effects that would follow a Spanish or Italian exit.”
French banks had $334 billion euros in public and private debt holdings in Italy and $115 billion in Spain as of the end of March, Bank for International Settlements figures show. That’s the lion’s share of the $534 billion in holdings they had in the five troubled European economies.
France’s four largest banks’ loans exceed deposits at home, adding to the urgency of shrinking parent funding outside.
BNP Paribas may narrow a 40 billion-euro funding gap in Italy and Spain by moving some loans in those countries to deposit-rich Belgium and Switzerland, three people familiar with the matter said July 2.
BNP Paribas Fortis, the Belgian unit, said July 5 that it plans to reinforce the Brussels hub for corporate-banking, including trade-finance, extending coverage to countries like Spain and Germany. The plan won’t cover France or Italy, it said.
The largest French bank’s cross-border funding to its Italian unit, Banca Nazionale del Lavoro, is down to 20 billion euros from about 30 billion euros at the end of 2010, Chief Operating Officer Francois Villeroy de Galhau said in a June 22 interview. The bank plans to keep cutting the funding exposure “by developing BNL’s own financings,” Villeroy said.
At the end of 2011, BNL, whose loans are more than double deposits, borrowed 5.2 billion euros in the ECB’s three-year loan program at 1 percent, its financial statements show. BNP Paribas declined to provide details of BNL’s use of a second round of ECB loans in February. The French bank also operates Findomestic, Italy’s second-largest consumer finance business.
Credit Agricole’s Italian branches network, Cariparma, had deposits increasing to 34.9 billion euros at the end of March, exceeding loans. Still, with assets from franchises such as corporate- and-investment banking and a 61 percent stake in Agos Ducato, Italy’s largest consumer-finance business, the French lender has a 22.8 billion-euro funding gap in Italy, according to estimates from Kepler.
In Greece, Credit Agricole’s risks are tied to its Athens- based unit Emporiki Bank. France’s second-largest bank, owned by a group of regional lenders, had 23 billion euros of Greek loans at the end of March, the largest holdings for a foreign bank.
Credit Agricole reduced funding to Emporiki to 4.6 billion euros at the end of March from 5.5 billion euros in December, partly as deposits rose, the bank said May 11. It also tapped 1.6 billion euros of ECB funding for Emporiki.
Credit Agricole is considering all options for Emporiki, including combining it with a local rival or walking away, a person with knowledge of the bank’s plans said last month.
Societe Generale, led by Chief Executive Officer Frederic Oudea, operates no branch networks in Italy or Spain. The loan book at its Greek unit, Geniki Bank (TGEN), is about a tenth of Credit Agricole’s Emporiki and provisioned at higher levels.
Its Greek unit has “very low reliance on Group funding” and the bank has “limited non-sovereign exposure” to the five European troubled economies, it said June 15.
“Beyond Greece, SocGen looks okay” as its capital base would be less hit than BNP Paribas’s from a euro exit by Portugal, Spain or Italy, according to Kepler’s Petrarque.
Still, mostly because of its corporate- and investment- banking portfolios in Italy and Spain, Societe Generale runs funding gaps of 13.6 billion euros and 7.7 billion euros in the two countries respectively, Petrarque estimated.
Societe Generale had 13.9 billion euros of non-sovereign risks in Italy and 11.1 billion euros in Spain at the end of March, it said June 15. Societe Generale has concentrated its expansion in eastern Europe and Russia.
“The risk for SocGen is that, whenever economic conditions worsen in the euro area, eastern European economies take a hit, with its loan assets deteriorating,” said AlphaValue’s Nijdam.
To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at firstname.lastname@example.org