Societe Generale Seen to Be Targeted by Investors Over Short-Term Funding
Societe Generale (GLE) SA, which yesterday plunged 15 percent, is among banks being targeted by investors because of its perceived dependence on short-term funding, according to analysts at Royal Bank of Scotland Group Plc.
“The primary culprit for the share price decline is funding concerns for European banks in general and French banks in particular,” analysts including Stefan Stalmann said in note to clients today. “The mix of euro doubts and rating fears in recent days and weeks may have dented the confidence of funding counterparties, which has then fed back into equity markets.”
Banks’ overnight borrowings from the European Central Bank jumped to the highest in three months today, a sign some lenders may have need for emergency cash. The gap between the three- month euro interbank offered rate and the overnight indexed swap rate widened to the most since April 2009, a sign that European banks are becoming increasingly reluctant to lend to each other for longer than overnight.
Societe Generale, Credit Agricole SA (ACA), Spain’s Bankia SA, Italy’s UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP) as well as Germany’s Commerzbank AG (CBK) are among banks with the lowest net stable funding ratios and are most reliant on short-term sources of wholesale funding, RBS said. Societe Generale said yesterday it had fulfilled “almost all” of its funding plan for 2011.
Stable funds are those that banks can expect to have for at least a year even in stressed market conditions, such as term deposits and long-standing consumer deposits. The latest round of Basel rules, scheduled to become binding at the start of 2018, will set a minimum amount of stable funds that banks will have to use to finance different types of lending.
“It’s 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,” the RBS analysts said. “But there is a non-trivial risk that confidence deteriorates further.”
French banks may also have 4 billion euros ($5.7 billion) to 5 billion euros less funding available than a “couple” of months ago after U.S. prime money funds declined since the end of May, RBS said. French banks may be able to use alternative sources of dollar funding, reduce their dollar-denominated trading assets, tap into their liquidity reserves or raise funds in euros and swap them into dollars, the analysts said.
France’s top credit ratings were affirmed yesterday by all three major rating firms amid concern the country’s creditworthiness was in doubt, and Societe Generale issued a denial of “all market rumors” as its stock slumped.
Societe Generale said yesterday its performance in July and early August shows it will be able to post “solid” results in the future. Emmanuelle Renaudat, a spokeswoman for the Paris- based lender, said today that the company had no further comment beyond yesterday’s statement.
The stock closed up 3.7 percent in Paris trading at 23 euros. The cost of insuring the bank’s senior bonds rose 5 basis points to 342 basis points, according to data provider CMA, owned by CME Group Inc. The Bloomberg Europe Banks and Financial Services Index reversed earlier losses and climbed 3.4 percent.
Investors are overestimating the risk of a cash shortage at Societe Generale, Citigroup Inc. global head of credit strategy Matt King said in a research note.
“The sell-off in French banks and Societe Generale in particular looks overdone,” London-based King wrote in a research note today. Credit-default swaps for France’s second- largest bank are wider in comparison to contracts on its home country “than any other major bank in Europe.”
Societe Generale has a liquidity buffer of 105 billion euros, compared with short-term debt of about 92 billion euros, according to Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein Ltd. in London.
“The resilience of the French banks against a freeze in the short-term funding market is very high,” Hoffmann-Becking said in a note to clients yesterday. “Since 2007, the banks in general and the French banks in particular have been busy making themselves more resilient against a freeze in the liquidity markets.”
While bank funding “remains a concern” for investors, it is mostly a short-term issue and far from the 2008 peak, Nomura Holdings Inc. analysts including Jon Peace said in a note to clients today.
“Funding remains an ongoing concern for equity investors, and will continue to have a negative impact on margins, but stresses are so far still moderate and are far from systematic for large banks,” Peace said. “A default of Spain or Italy would, however, change the game.”
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