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Rating Action:

Moody's downgrades BNP Paribas's long-term ratings to Aa3, concluding review

Global Credit Research - 09 Dec 2011

Downgrade driven by impact of funding constraints, deteriorating macro fundamentals

London, 09 December 2011 -- Moody's Investors Service has today downgraded the standalone bank financial strength rating (BFSR) of BNP Paribas (BNPP) by two notches to C from B- (now mapping to A3 on the long-term scale from A1 previously) and the long-term debt and deposit ratings by one notch to Aa3. The one-notch downgrade of the long-term debt and deposit ratings to Aa3 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 BNPP remains very high.

These rating actions conclude the review initiated on 15 June 2011 and extended on 14 September 2011. The lower BFSR reflects our view that BNPP's liquidity and funding constraints are now offsetting its previous, prevailing credit-positive factors (such as high diversification, strong franchise, stable earnings). The outlooks on the BFSR and long-term ratings are negative. The Prime-1 short-term rating was affirmed. Dated subordinated debt securities were also downgraded by one notch to A1 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 euro-area crisis has increased. As one of the largest banks in the euro area, the creditworthiness of BNPP is necessarily affected by the fragile operating environment for European banks.

During our review of BNPP's ratings, we have concluded that:

(1) Liquidity and funding conditions have deteriorated significantly for BNPP, which has historically made significant use of wholesale funding markets. The probability that the bank will face further funding pressures has risen in line with the worsening European debt crisis.

(2) BNPP's deleveraging plan will likely help somewhat reduce its need for wholesale funding. However, given that many other banks in Europe are engaged in similar programmes, there is a mounting risk that the resulting asset sales could be detrimental for capital.

(3) BNPP retains significant, albeit reduced, exposures to sovereigns and their economies that are themselves experiencing tighter refinancing conditions and declining creditworthiness, notably Italy, which in turn expose the bank to heightened credit and liquidity risks.

These considerations have resulted in a lowering of the BFSR to C from B-. In addition, we believe that:

-- The likelihood that BNPP would benefit from government support if needed remains very high, and hence leads to a one-notch reduction in the senior debt and deposit ratings, despite the two-notch downgrade of the BFSR; 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 BNPP'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 BNPP's rating (i) any further deterioration; or (ii) an increase in the likelihood of any such deterioration.

RATINGS RATIONALE

In its press release of 14 September 2011, Moody's concluded that BNPP had a sufficient level of profitability and capital that it could absorb potential losses it was likely to incur on its Greek government bonds (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.

Since then, BNPP has realised significant impairments on its Greek bond holdings commensurate with our own expectations earlier this year, and has now written down its gross exposures by 60%. It was able to do this while remaining broadly breakeven for the third quarter, adjusting for its gain on own credit spreads, and was thus able to maintain its capitalisation. In addition, Moody's continues to recognise important credit strengths, notably a very high degree of diversification, a broad spread of businesses with strong market positions, sound capital, efficiency and loan-book quality.

However, Moody's also noted the challenges to BNPP's funding and liquidity profiles in light of worsening refinancing conditions, as well as the potential for these conditions to constrain BNPP's franchise. This resulted in the extension of the review on BNPP's ratings announced in September 2011.

-- Difficult refinancing conditions have reduced BNPP's liquidity

Since June, BNPP, in common with many other banks, has encountered materially more difficult refinancing conditions, due principally to investor concerns surrounding the European sovereign crisis and the impact on their appetite to invest in banks such as BNPP, given the banks' direct and indirect exposures to distressed sovereigns and economies. While BNPP has been able to issue some long-term debt (some EUR8 billion between August and October, at an average term of 5.3 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 BNPP.

This has resulted in a reduction in the availability of funding to BNPP, which has in turn led to a decline in its pool of central bank eligible liquid assets to EUR128bn (post haircut) at end-September from EUR150 billion at end-June. Central bank deposits increased to EUR42 billion from EUR32 billion over the same period. Whilst Moody's believes that central bank actions will ensure the broad availably of liquidity to the banking sector in general, French banks' borrowing from the Bank of France materially increased in September; Moody's understands that BNPP itself is employing the ECB's longer-term facilities.

This is but one indicator of the tension in funding markets that is credit negative for BNPP. The rating agency believes that central bank eligible liquid assets and central bank deposits broadly cover the group's short-term wholesale borrowing, net of interbank assets, but not including Moody's estimates of the current portion of medium and long-term debt. Thus we still consider BNPP 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

The scale of the funding challenge facing BNPP is underscored by the bank's announcement of a deleveraging plan, aimed at reducing around EUR70 billion of risk-weighted assets (RWA) by the end of 2012. This reduction focuses on US dollar assets, reflecting the particular difficulty in sourcing term US dollar funding. BNPP estimates the one-off impact of this reduction at around EUR1.2 billion in losses on asset sales and restructuring costs. While from a capitalisation perspective this is fully absorbable at about 13 bps of RWAs (after tax), there is an increasing probability, given the system-wide nature of deleveraging efforts under way in France and elsewhere, that a lack of market appetite for assets results in less-than-expected balance-sheet reduction, or at depressed prices. This could mean that the deleveraging plan falls short of its objectives and/or does not succeed in enhancing capitalisation, due to higher-than-foreseen losses.

-- Some sovereign and related-country exposures have become riskier

BNPP has taken significant impairment charges on its Greek government bonds, totalling EUR2.6 billion in the third quarter, leaving EUR1.6 billion of net exposure. This exposure, together with those to Ireland and Portugal (EUR0.3 billion and EUR1.4 billion respectively) remain manageable in the context of BNPP's loss-absorption capacity, due to substantial earnings capacity and capital resources.

However, the bank retains concentrated exposures to other euro area sovereigns including to Italy, which Moody's downgraded on 4 October 2011 to A2 from Aa2, and also to Belgium (Aa1), which remains on review for possible downgrade. While its Italian exposure was substantially reduced to EUR12.2 billion in the banking book at end-October 2011, given its size, BNPP's creditworthiness continues to be vulnerable to a further deterioration in Italy's sovereign credit strength.

PROBABILITY OF SYSTEMIC SUPPORT REMAINS VERY HIGH, SUPPORTING Aa3 LONG-TERM RATINGS

Moody's now factors three notches of systemic support into our long-term debt and deposit ratings of Aa3 (previously two notches). This is derived from the rating agency's view that the probability of systemic support for BNPP, should the need arise, remains very high. Moody's believe 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 us to lower our long-term ratings include:

-- Any broader reappraisal of the implications of the highly fragile funding environment for banks that are reliant on wholesale funding and vulnerable to a loss of investor confidence;

-- A deterioration in sovereign creditworthiness, especially of Italy and Belgium;

-- An increase in our expectation of losses resulting from deleveraging;

-- An inability to meet capital targets;

-- Unexpected losses within the 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 BNPP 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 standalone credit strength, currently A3. For more details, please see "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 A3 standalone credit strength. Junior subordinated obligations currently rated one notch below the standalone credit strength 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 standalone credit strength is expected to remain as before.

FORTIS BANK SA/NV AND BGL BNP PARIBAS

Moody's has also confirmed Fortis Bank SA/NV's and BGL BNP Paribas's long-term debt and deposit ratings at A1 and affirmed their Prime-1 short-term ratings. The outlooks on the debt and deposit ratings are now negative, in reflection of the negative outlook assigned to the debt and deposit ratings of parent BNP Paribas. In addition, Fortis Bank SA/NV's Tier 1 instruments were confirmed at Baa1 (hyb) and assigned a negative outlook. These actions conclude the reviews for possible upgrade initiated on 21 September 2011.

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 TRANSACTIONS BY RELEASING OFFICE FRANCE

Releasing Office:

Moody's France SAS

96 Boulevard Haussmann

75008 Paris

France

Issuers:

- BGL BNP Paribas

- BNP Paribas Fortis Funding

- Fortis Bank SA/NV

- Fortis Funding LLC

- Exane Derivatives SNC

- Exane S.A

LIST OF AFFECTED RATINGS

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_137998

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, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Nicholas Hill
Senior Vice President
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades BNP Paribas's long-term ratings to Aa3, concluding review
No Related Data.

 

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