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Rating Action:

Moody's downgrades Société Générale's long-term ratings to A1

Global Credit Research - 09 Dec 2011

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 Soci?t? G?n?rale (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, 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 France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Soci?t? G?n?rale's long-term ratings to A1
No Related Data.

 

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