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EU Bank Earnings Estimates Exclude $14 Billion Greek Haircut

A Pedestrian Passes A BNP Paribas SA Bank Branch
BNP Paribas SA, Dexia SA and Societe Generale SA, which between them hold 11.1 billion euros ($16 billion) of Greek government debt, are among banks that may have to write down their holdings after signing up to the Institute of International Finance’s rescue plan last week, which requires investors to take 21 percent losses on their holdings. Photographer: Fabrice Dimier/Bloomberg

European lenders’ second-quarter earnings may be lower than analyst estimates because the full extent of writedowns on Greek government bonds isn’t included.

BNP Paribas SA, Dexia SA and Societe Generale SA, which together hold 11.1 billion euros ($16 billion) of Greek government debt, are among banks that may have to write down their holdings after signing up to the Institute of International Finance’s rescue plan last week, which requires investors to take 21 percent losses on holdings that mature before 2020. BNP Paribas reports earnings on Aug. 2, Societe Generale the following day and Dexia SA the day after.

“For banks that have signed up to the IIF proposal it seems inevitable that impairments must follow,” said Dean Portelli, senior financial analyst at ratings company A.M. Best.

The IIF plan will require banks to write down the value of bonds in their trading book as well as, for the first time, record impairments in their banking books because the loss will be permanent, under IFRS accounting rules. Total markdowns for European banks outside Greece could total as much as $14 billion, equivalent to 13 basis points of 2011 core Tier 1 capital, according to Citigroup Inc. analysts. A basis point is 0.01 percentage point. Some banks may not record the impairments until after the Greek deal is completed, said Dirk Peeters, an analyst at KBW Securities.

“There is a lot of uncertainty around how banks with significant Greek exposure will choose to impair their Greek holdings in their second quarter earnings,” said Kinner Lakhani, a banking analyst at Citigroup in London.

Greek Bonds

Banks that prepared earnings before the rescue package was agreed on July 22 may report even bigger losses because they calculated impairments on the market value of their holdings on June 30. Greek 10-year government bonds traded for as little 54 cents on the euro as of the end of the second quarter.

While the impairments may be larger than estimated, analysts say they won’t amend their forecasts so close to the publication of earnings. Officials at Paris-based BNP Paribas and Societe Generale and Brussels-based Dexia declined to comment before the publication of their results.

Under IFRS accounting rules, banks aren’t required to take impairments on a decline in the market value of some of their Greek bonds -- those classed as available for sale -- unless those losses are deemed permanent. The Greek package, which has the backing of 31 banks and insurers, is evidence of a permanent loss, said an auditor at one of the four largest accounting firms, who declined to be named because the change affects his clients.

Auditor Pressure

The Institut Der Wirtschaftsprufer, the German auditing body, and its French equivalent, the Compagnie Nationale des Commissaires, have both in the past 10 days urged banks to take losses in the their second quarter earnings.

Deutsche Bank AG, Germany’s largest bank, filed its earnings with auditors before the IIF deal was agreed, according to a person with knowledge of the situation. The lender took a 155-million-euro writedown on its 1.2 billion euros of Greek debt government debt in the second quarter. A spokesman for the Frankfurt-based bank declined to comment.

Deutsche Bank wrote down all its holdings of Greek government bonds, rather than only those that mature before 2020, Citigroup’s Lakhani said.

All Debt Impaired

“We have assumed that only bonds maturing through to 2019 would be impaired, as per the terms of the IIF proposal,” he said. “Even though we believe there are valid technical arguments for treating all Greek sovereign debt as impaired.”

BNP Paribas would need to record a writedown of more than 1 billion euros were it to mark down its entire 5 billion euros of Greek government debt by 21 percent, data from the stress test this month showed. If it restricts the impairment to bonds that mature before 2020 losses would total 265 million euros.

Societe Generale would need a 557 million-euro writedown for an impairment applied to all its Greek holdings and 512 million euros for those maturing before 2020. Dexia’s potential writedown would range from 727 million euro for all of its Greek government debt to 108 million euros for bonds maturing by 2020.

Analysts tracking the three lenders haven’t significantly changed their forecasts to reflect the impact of the IIF plan. The average earnings per share estimate for Societe Generale in the second quarter is 1.44 euros, down 7 percent on four weeks ago, according to a survey by Bloomberg. Dexia may post a loss of 1.82 euros per share, a 1 percent wider loss than the consensus estimate four weeks ago. BNP Paribas is estimated to earn 1.68 euros, down 12 percent in the last four weeks.

Returns Lower

After writing down the value of debt held in their banking books, lenders may in the longer-term shift to less risky assets, reducing returns.

“The more complicated and concerning issue about taking haircuts to banking book assets, not just trading book, is that behaviorally the banks will be encouraged to shift back up the rating curve toward AA or AAA rated assets,” said Jonathan Tyce, senior analyst for the Bloomberg Industries European banking team. “This, in turn will lower the returns that they can make as they seek improved liquidity and visibility.”

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