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
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Nicholas Hill
Senior Vice President
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
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Carola Schuler
MD - Banking
Financial Institutions Group
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Moody's downgrades BNP Paribas's long-term ratings to Aa3, concluding review
