Societe Generale SA’s quest for funding is prompting the bank, France’s second-largest, to mine sources not tapped before: German car loans and Dim Sum debt.
Seeking shelter from Europe’s resurgent sovereign debt crisis, Societe Generale and France’s three other large, listed banks -- BNP Paribas SA, Credit Agricole SA and Natixis SA --are seeking new ways of financing their balance sheets.
“There’s flight to quality,” said Christophe Nijdam, a Paris-based analyst at AlphaValue, who recommends buying Societe Generale shares. The bank “is using all financing resources acceptable to investors.”
Burned by last year’s liquidity crunch, Societe Generale, BNP Paribas and Credit Agricole are shrinking balance sheets in most overseas markets and cutting sovereign-debt holdings. The four Paris-based banks bolstered assets in France by 11 percent last year to 3.72 trillion euros ($4.67 trillion) while cutting commitments in other European countries by about 7 percent, according to the lenders’ data compiled by Bloomberg.
BNP Paribas assets shrank in 2011 even in Belgium and Italy, its largest retail-banking markets outside France, by 1.6 percent and 3.8 percent respectively, its annual report shows. That’s even though its retail-banking loans in Belgium rose 6.4 percent in the 12 months through March 31, and its Italian retail commitments were stable at 71.3 billion euros in a “trend of decelerating demand,” it said May 4.
Societe Generale boosted French assets by 15 percent and got most new debt placed with investors in northern Europe.
To protect against a refinancing drought, France’s three largest banks have completed about three quarters of their 2012 plans to issue at least 42 billion euros of debt with maturities over one year. Societe Generale went so far as to securitize 700 million euros of German car loans from a unit representing less than 0.5 percent of its balance sheet.
“Winds of risks are blowing through the euro zone and they’d better make sure of their funding,” said Jerome Forneris, who helps manage $8.5 billion at Banque Martin Maurel in Marseille and owns shares in Societe Generale and BNP Paribas. “French banks are taking actions to avoid the stress they endured last year.”
Societe Generale has fallen 61 percent in the past year, trading at 16.25 euros as of 4:27 p.m. in Paris. BNP Paribas, which has tumbled 49 percent in the last 12 months, traded at 26.61 euros. Credit Agricole, which lost 71 percent in the past year, was at 2.98 euros.
Societe Generale got 58 percent of its medium- and long-term financing from northern Europe investors last year, the most since at least the 2008 failure of Lehman Brothers Holdings Inc., compared with 1 percent from investors in southern Europe and 15 percent from France.
BNP Paribas and Credit Agricole, which both operate Italian consumer-banking units, are using assets in the euro region’s third-largest economy to help refinancing efforts. In the first quarter, Credit Agricole got 15 percent of its refinancing from private placements with clients at its Italian unit Cariparma.
At the end of 2011, BNP Paribas had 8.1 billion euros in securitized funding, up from 6.7 billion euros a year earlier. The end-2011 securitized refinancing included 2.6 billion euros of home loans at Italian unit BNL, its annual report shows.
European banks are diversifying ways of getting long-term funds as the region’s deepening debt crisis makes unsecured debt sales scarcer and more expensive.
Deutsche Bank AG, Europe’s largest bank, said last month that it raised about 7 billion euros of long-term funding this year, mostly “via retail and other private placements” at an average rate of 90 basis points above the London Interbank Offered Rate. In the first quarter of 2011, Deutsche Bank issued 10 billion euros at an average spread of 56 basis points more than Libor, with retail networks taking 40 percent.
While unsecured senior bonds represent most of BNP’s outstanding medium- and long-term-funding, this year France’s largest bank placed 57 percent of its debt rollovers through private placements, it said May 4.
France’s largest banks, hurt by losses from Greek sovereign debt last year, are cutting at least 300 billion euros off their balance sheets by scaling back businesses such as dollar-funded aircraft loans. The cuts mirror European rivals’ efforts to meet stricter Basel III capital rules.
French banks “are cutting assets that are most difficult to refinance or that use too much capital,” Forneris said.
In February, BNP Paribas sold $9.5 billion in North American energy assets to Wells Fargo & Co. Societe Generale cut its holdings of subprime-era assets, including U.S. residential mortgage-backed securities, by half in the year through March to 15.6 billion euros, mostly via disposals.
With mounting concerns of a possible Greek exit from the euro and the havoc it may cause across the region, French banks find themselves once again among institutions at risk even after they reduced exposure to the country’s sovereign debt by taking part in the largest debt-swap in March.
French banks were caught in the middle of Europe’s debt crisis last year because of their holdings in private and public debt in Greece, Portugal, Ireland, Spain and Italy. Their access to U.S. dollar short-term funds evaporated after the summer.
French lenders held about $38 billion of private loans in Greece at the end of 2011, more than any other foreign borrowers, according to data from the Bank for International Settlements.
The risk of Greece leaving the 17-nation euro region increased after parties opposed to the terms of the country’s bailout by the European Union and the International Monetary Fund won most of the votes in May 6 elections. Greeks will vote again on June 17 after political parties failed to join forces to form a government.
UBS AG, the third-biggest manager of money for the wealthy, sees a 20 percent chance of Greece leaving the euro within six months, the bank’s chief investment office, led by Alexander Friedman, told client advisers in an internal note last week.
“A possible Greek exit would feed concerns over Spain and Italy,” said Jean-Paul Pollin, an economics professor at Orleans University. “French banks can absorb direct risks in Greece, but indirect effects would be much heavier, with unknown propagation mechanisms through the European financial system.”
Should Greece leave the euro, European banks would face indirect effects in Portugal, Spain, Ireland and Italy including possible markdowns on sovereign debt and possible deposit withdrawals, Citigroup Inc.’s analysts including Stefan Nedialkov and Kinner Lakhani wrote in a May 17 note to clients.
European lenders would probably need another 800 billion-euro three-year funding lifeline from the European Central Bank to help stem contagion from a Greek exit, the analysts said.
The ECB in December and February provided 1 trillion euros in three-year funds to the region lenders, helping unfreeze debt markets. BNP Paribas used the programs to help fund its Italian unit as it cut its intra-group support. Credit Agricole at the end of March used 1.6 billion euros of ECB financing to fund its unprofitable Athens-based division Emporiki Bank.
ECB loans are “just a safety net,” Societe Generale Chief Executive Officer Frederic Oudea said in a May 3 interview. “On the liquidity front, the situation is very sound.”
Societe Generale issued 8.7 billion euros in the January-April 23 period, 35 percent from secured funding such as bonds backed by French mortgages. The bank covered most of its 2012 needs of between 10 and 15 billion euros. As the bank also pre-funded 2.6 billion euros last year, additional issuances this year will cover its 2013 needs, it said May 3.
In April, Societe Generale sold its first Dim Sum bond, raising 500 million renminbi ($79 million) for the funding needs of its Chinese operations.
For Societe Generale, securitizing German car loans at its Bank Deutsches Kraftfahrzeuggewerbe AG, or BDK, unit represented 8 percent of its medium- and long-term issuance between January and April 23, according to data on its website.
“French banks are renationalizing their exposures to fend off risks from troubled countries,” said Francois Chaulet, who helps manage 200 million euros at Montsegur Finance in Paris. “Still, holding German private debt is a joker that would suit any balance sheet.”