Downgrade driven by impact of funding constraints, deteriorating macro fundamentals
NOTE: On December 9th, 2011, Due to an administrative error the incorrect press release was issued.Revised release follows:
Paris, December 09, 2011 -- Moody's Investors Service has today downgraded the standalone bank
financial strength rating (BFSR) of Société Générale
(SocGen) by two notches to C- from C+ (mapping to Baa1 on
the long-term scale from A2 previously) and the long-term
debt and deposit ratings by one notch to A1. The one-notch
downgrade of the long-term debt and deposit ratings follows the
downgrade of the BFSR. The long-term ratings now incorporate
three notches of systemic support (previously two notches), derived
from the rating agency's view that the probability of systemic support
for SocGen remains very high.
The rating actions conclude the review initiated on 15 June 2011 and extended
on 14 September 2011. The lower BFSR reflects our view that SocGen's
prior credit-positive factors (notably high diversification,
strong franchises, stable earnings) have diminished and are now
offset by liquidity and funding constraints. The outlooks on the
BFSR and long-term rating are negative. The Prime-1
short-term rating was affirmed. Dated subordinated debt
securities were also downgraded by one notch to A2 and remain on review
for downgrade pending our reassessment of systemic support for such debt.
As stated in our recent report "Rising Severity of Euro Area Sovereign
Crisis Threatens Credit Standing of All EU Sovereigns", since
the initiation of our review in June 2011, the severity of the crisis
facing the euro area has increased. As one of the largest banks
in the euro area, SocGen's creditworthiness is necessarily
affected by the fragile operating environment for European banks.
During our review of SocGen's ratings, Moody's has concluded
that:
(1) Liquidity and funding conditions have deteriorated significantly for
SocGen, which has made extensive use of wholesale funding markets.
While liquid assets have declined only modestly, the probability
that the bank will face further funding pressures has risen in line with
the worsening European debt crisis.
(2) SocGen's deleveraging plan will likely help somewhat reduce
its need for wholesale funding. Although the bank has already carried
out part of its plan with limited losses, given that many other
banks in Europe are engaged in similar programmes, there is a mounting
risk that any further asset sales, where required, could
generate less-than-expected or negative capital.
(3) SocGen retains some modest exposures to sovereigns and their economies
that are themselves experiencing tighter refinancing conditions and declining
creditworthiness. Greek and Italian exposures have declined,
but still expose the bank to some credit and liquidity risks.
These considerations have led to a downgrade of SocGen's BFSR by
two notches to C-. Moreover, Moody's believes
that:
The likelihood that SocGen would benefit from government support (if needed)
remains very high; this leads to a one-notch reduction in
the senior debt and deposit ratings, despite the two-notch
downgrade in standalone financial strength; and conditions in the
euro area sovereign debt and banking markets -- as well
as macroeconomic conditions overall -- lead us to assign
a negative outlook to SocGen's standalone and long-term debt
and deposit ratings.
Moreover, Moody's will continue to monitor developments in the European
bank debt markets and incorporate in SocGen's ratings any (i) further
deterioration; or (ii) an increase in the likelihood of such deterioration.
RATINGS RATIONALE
In its press release of 14 September, 2011, Moody's
concluded that SocGen had a sufficient level of profitability and capital
that it could absorb potential losses it was likely to incur on its exposures
to the Greek government and economy (Greece is rated Ca, outlook
developing), and to remain capitalised consistent with its BFSR,
even if the creditworthiness of Irish and Portuguese government bonds
were to deteriorate further. This view incorporated loss assumptions
significantly higher than the impairments the bank had recognised up to
that point in time.
In the third quarter, SocGen made further impairments on its Greek
bond holdings and has now taken losses commensurate with Moody's
own expectations earlier this year, having written-down 60%
of its gross exposures. SocGen was, however, broadly
able to breakeven for the third quarter, adjusting for its gain
on its own credit spreads; it thus maintained its existing capital
ratios and indeed further improved capitalisation following a recent liability
management exercise. SocGen does not intend to pay a dividend for
2011, which should further enable capital retention. Moody's
continues to recognise important credit strengths for SocGen, notably
a high degree of diversification, a broad spread of businesses with
good market positions, as well as sound overall loan-book
quality.
However, Moody's also noted the challenges to SocGen's
funding and liquidity profiles in light of worsening refinancing conditions,
as well as the potential for these conditions to constrain SocGen's
franchise. This resulted in the extension of the review on SocGen's
BFSR announced in September 2011.
-- Difficult refinancing conditions have reduced SocGen's
liquidity
Since June, refinancing conditions have worsened considerably,
mainly due to investor concerns surrounding the European sovereign crisis
and the impact on their appetite to invest in banks such as SocGen,
given the bank's direct and indirect exposures to distressed sovereigns
and economies. Although SocGen has been able to issue some long-term
debt (EUR4.1bn in the third quarter, at an average term of
5.6 years), and has exceeded its refinancing plans for 2011,
funding has proven to be more scarce, more expensive and shorter
term than anticipated earlier in the year. This is particularly
true of US dollar funding, since US money market funds have significantly
reduced their exposure to many European banks, including SocGen,
even while short-term euro-denominated funding has remained
available.
The resultant reduction in the availability of funding to SocGen has in
turn led to a slight decline from end-June in its pool of central
bank eligible liquid assets to EUR77 billion (post haircut) at end-September.
Moody's believes that central banks will continue to make liquidity
available to the banking sector, and note that French banks'
borrowing from the Bank of France materially increased in September.
This is one indicator of the stress in wholesale funding markets that
is credit negative for SocGen. While Moody's believes that
unencumbered central-bank-eligible assets of EUR77 billion
broadly cover the bank's outstanding short-term wholesale
borrowing, net of interbank assets and central bank deposits,
SocGen is nonetheless vulnerable to a continued lack of investor appetite
for bank debt. Given the substantial and sustained disruption to
funding markets, it is unlikely that term debt markets will return
to any degree of normality in the near future - indeed, the
risks are skewed to the downside.
-- Resulting deleveraging is challenging and poses risks
SocGen has announced a plan to respond to market conditions by reducing
its liquidity needs by EUR75-95 billion by 2013, and its
risk-weighted assets by EUR60-80 billion. This reduction
focuses on US dollar assets, as funding pressures have been greatest
in this currency. SocGen has not publicly estimated the one-off
cost of this reduction, but estimates a benefit to its pro forma
Basel 3 core Tier 1 capital ratio of around 100 bps by 2013. The
bank has reported a reduction of around EUR40 billion in the liquidity
needs of its corporate and investment bank in 3Q11. However,
in Moody's view, given the broader deleveraging efforts being
undertaken by banks in France and elsewhere, there is an increasing
risk that a lack of market appetite for assets might result in a less-than-expected
balance-sheet reduction, or sales at depressed prices.
This could mean that the deleveraging plan ultimately falls short of its
objectives and/or does not succeed in improving capitalisation due to
higher-than-anticipated losses.
-- Some sovereign and related-country exposures have
become riskier
SocGen has taken material impairment charges on its Greek bonds,
totalling EUR333 million in the third quarter, leaving EUR0.8
billion of total net exposure. This exposure, together with
those to Ireland and Portugal (EUR0.4 billion and EUR0.5
billion, respectively) remain manageable in the context of SocGen's
earnings and capital resources.
Nonetheless we believe that the probability of multiple defaults (in addition
to Greece's private-sector involvement programme) by euro-area
countries is no longer negligible, and this probability will continue
to rise, in Moody's view, the longer the liquidity crisis
continues. A series of defaults would also significantly increase
the likelihood of one or more members not simply defaulting, but
also leaving the euro area. In particular, SocGen retains
a Greek banking subsidiary, General Bank of Greece SA (B3/NP/E),
to which it provides some cross-border funding (we understand under
EUR1 billion), which would likely be subject to impairment in such
a scenario.
PROBABILITY OF SYSTEMIC SUPPORT REMAINS VERY HIGH, SUPPORTING A1
LONG-TERM RATINGS
Moody's now factors three notches of systemic support into the A1
long-term debt and deposit ratings (previously two notches).
This is derived from Moody's view that the probability of systemic
support for SocGen, should the need arise, remains very high.
The rating agency believes that France continues to be a high support
country, with a strong inclination to support its key financial
institutions. The outlook is negative, in line with the outlook
on the BFSR.
KEY RATING SENSITIVITIES
Given the negative outlook on the BFSR and long-term ratings,
the probability of an upgrade in either is unlikely. The main factors
that could lead Moody's to downgrade its long-term ratings
include:
-- Any broader reappraisal of the implications of the highly
fragile funding environment for banks that rely wholesale funding and
are vulnerable to a loss of investor confidence;
-- A deterioration in sovereign creditworthiness;
-- An increase in Moody's expectation of losses resulting
from deleveraging
-- An inability to meet capital targets;
-- Unexpected losses within the bank's capital markets
activity;
-- A further material increase in the probability of a recession
leading to higher credit losses; and
-- A deterioration in the creditworthiness of the support
provider, France, or its ability and/or willingness to provide
support to the benefit of creditors.
SUBORDINATED OBLIGATIONS AND HYBRID SECURITIES
The ratings on the dated subordinated obligations of SocGen are currently
positioned one notch below the senior unsecured ratings. However,
they are included within the reassessment of subordinated debt announced
on 29 November 2011. This may lead us to withdraw entirely the
systemic support of three notches from these securities and notch them
from the bank's BCA, currently Baa1. For more details,
please see our note "Moody's reviews European banks' subordinated,
junior and Tier 3 debt for Downgrade", dated 29 November 2011.
The ratings on the bank's hybrid obligation are notched off the
BCA of Baa1. Junior subordinated obligations currently rated one
notch below the BCA remain on review for downgrade in conjunction with
the above review. The ratings on other hybrid obligations are not
on review and their notching from the BCA is expected to remain as before.
METHODOLOGIES
The methodologies used in these ratings were Bank Financial Strength Ratings:
Global Methodology published in February 2007, Incorporation of
Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology published in March 2007, and Moody's Guidelines for
Rating Bank Hybrid Securities and Subordinated Debt published 17 November
2009. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
LIST OF AFFECTED RATINGS
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_137996
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
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Nicholas Hill
Senior Vice President
Financial Institutions Group
Moody's France SAS
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Paris 75008
France
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Carola Schuler
MD - Banking
Financial Institutions Group
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Releasing Office:
Moody's France SAS
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France
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Moody's downgrades Société Générale's long-term ratings to A1
