Further to the review initiated on 15 June, 2011
Paris, September 14, 2011 -- Moody's Investors Service has announced an extension of its review
of the C+ standalone Bank Financial Strength Rating (BFSR) of Societe
Generale SA (SocGen), equivalent to a standalone Baseline Credit
Assessment (BCA) of A2 on the long-term ratings scale, originally
announced on 15 June, 2011. While Moody's concluded
that SocGen's capital base currently provides an adequate cushion
to support its Greek, Portuguese, and Irish exposures,
Moody's announced that it will extend its review for downgrade of
the C+ BFSR to consider the implications of the potentially persistent
fragility in the bank financing markets, given its continued reliance
on wholesale funding.
As announced in our press release of 15 June 2011, however,
Moody's review also encompassed a re-consideration of systemic
support assumptions factored into SocGen's long-term debt
and deposit ratings under our Joint-Default Approach (JDA).
Moody's has today concluded this aspect of the review by downgrading
SocGen's debt and deposit ratings by one notch to Aa3 from Aa2.
The outlook on the long-term debt ratings is negative. Moody's
anticipates that the impact of our review on the BFSR would be limited
to a one-notch downgrade, which would not in itself impact
the long-term ratings given our revised support assumptions for
SocGen, which anticipate increased uplift at a lower standalone
rating level. However, a conclusion with a negative outlook
on the BFSR would lead to a renewed negative outlook on the long-term
ratings. Given this possibility, we are maintaining our negative
outlook on the long-term ratings during the review of the BFSR.
The Prime-1 short-term ratings have been affirmed.
Moody's will publish separate press releases on other institutions
covered by the review announced on 15 June, 2011.
RATINGS RATIONALE
In its press release of 15 June, 2011, Moody's announced
a review of the BFSRs and long-term ratings of three French banking
groups (BNP Paribas, Credit Agricole SA and SocGen) because of concerns
about the potential inconsistency between their ratings and their exposures
to the Greek economy (Greece is rated Ca, outlook developing),
either through their holdings of government bonds or the credit they had
extended to the Greek private sector.
In the case of SocGen, the review included a reconsideration of
the three notches of systemic support included in its long-term
debt and deposit ratings. Given the shift in the European-wide
public policy environment, Moody's concluded in its review
that the exceptional uplift previously applied to SocGen is no longer
appropriate. As a result Moody's now applies the same assumptions
for systemic support to SocGen as to BNPP and CASA, also considered
highly likely to receive such support, resulting in two notches
of uplift from its A2 standalone BCA. Consequently, Moody's
has downgraded its long-term debt and deposit ratings to Aa3 from
Aa2.
Moody's believes that SocGen has a level of capital, consistent
with its BFSR, that can absorb potential losses it is likely to
incur over time on its Greek government bonds and to remain capitalized
at a level consistent with its BFSR even if the creditworthiness of Irish
and Portuguese government bonds were to deteriorate further. This
assessment incorporates loss assumptions that are significantly higher
than the impairments the bank has already recognised.
However, during the review, Moody's concerns about the
structural challenges to banks' funding and liquidity profiles increased,
in light of worsening of refinancing conditions, and have prompted
an extension of the review. The continuing review will focus directly
on these funding and liquidity challenges for SocGen which, given
the current environment, could become long-term constraints
to the performance of its franchise.
Limited Impact Of Greek And Other Sovereign Exposures On Overall Risk
Profile
Since the start of the review for downgrade, SocGen, along
with many other financial institutions, has expressed its intention
to participate in a proposed restructuring of Greek debt. This
led to its recognition of EUR395 million in impairments in the second
quarter of 2011 (1). SocGen was able to comfortably absorb this
amount, as it reported net earnings of EUR747 million for the quarter
and continues to build its capital ratios. However, at 30
June 2011, SocGen still had net exposures to Greek government bonds
of EUR1.9 billion (2), virtually all of which have been impaired.
The residual risk to the group from these exposures is modest, however,
in Moody's view. Holdings of other non-investment-grade
peripheral European countries government bonds are not a significant concern,
given total exposures including the trading book of only EUR400 million
to Ireland and EUR600 million to Portugal, and these amounts have
since declined slightly further (3). Italian and Spanish government
bond holdings are larger at EUR5.0 billion and EUR2.3 billion
respectively. SocGen's exposures to the Greek private sector
credit are larger but also modest overall, and lie chiefly at its
subsidiary General Bank of Greece (Geniki; E / Caa1 / B1, on
review for possible downgrade), which had gross loans of EUR4.3
billion at 30 June 2011. These loans are of generally poor quality,
and the bank has provisioned EUR1.0 billion, 24% of
the loan book, with a cost of risk in the first half of 2011 of
around 9% annualized (4). SocGen's exposure to Ireland
and Portugal private sector credit are smaller, at EUR2.8
billion and EUR0.9bn respectively at end-2010, according
to European Banking Authority disclosures.
In its review, and in the context of a stress test covering SocGen's
global loan book and structured finance exposures, Moody's
considered a severe case scenario for certain government bond holdings,
using haircuts significantly higher than the impairments the bank has
already recognized: 60% for Greece, 50% for
Ireland, 50% for Portugal, 10% for Spain and
7% for Italy. Taking into account the impairments already
made against some Greek bonds, we believe resultant pretax losses
would total around EUR1.6 billion, about 3.4%
of SocGen's core Tier 1 capital after tax or 32bps of risk-weighted
assets, with further mitigation possible via reduced dividends.
Loss assumptions for private sector credit were based upon those previously
published by Moody's, see "European Banking Credit Loss
Assumptions", published on 2 August, 2010.
For the group overall, the potential impact of these exposures is
diluted considerably and even at the level of SocGen's international
retail banking operations, which include Geniki, the bank
has been consistently profitable as earnings elsewhere offset the Greek
losses. Moody's therefore considers SocGen to be sufficiently
profitable and capitalized that it can absorb further potential related
losses. The bank has strong franchises, good geographical
diversification and a broad spread of business activities. Moody's
also takes into account the bank's legacy positions in structured
credit products, as well as weaknesses in risk management that were
exposed by the trading fraud discovered in early 2008 (and the subsequent
improvements in risk management), in addition to the volatile nature
of SocGen's capital markets business, which in common with
those of many other banks, is characterised by a certain complexity
and opacity of risk profile, as well as a relatively confidence-sensitive
customer base.
CONTINUED REVIEW OF BFSR TO FOCUS ON FUNDING PROFILE
Nevertheless, SocGen's wholesale funding, the majority
of which is short-term, is still high in absolute terms and
may pose a vulnerability given considerable market tension. During
the summer, concerns over sovereign exposures and the health of
sovereign balance sheets grew significantly. This was most manifest
in the behaviour of US money market funds, which are an important
source of short-term US dollars for SocGen. These funds
became particularly risk-averse, resulting in reduced availability
and shorter tenors for this type of financing. For more details,
see Moody's Special Comment, "EU Banks: Stronger
Liquidity and Central Bank Actions Mitigate Recent Volatility but Longer-Term
Concerns Remain".
Moody's notes that SocGen has substantial holdings of central bank
eligible assets, which it reports to be around EUR79 billion,
and EUR26 billion of other liquid assets at end-August.
In addition, SocGen has full access to Eurosystem central bank liquidity
in major currencies. As such Moody's believes that SocGen
can withstand the short-term credit negative impact of the contraction
in dollar funding, and euro funding remains plentiful. Even
so, the amount of the bank's wholesale funding requirements
makes it vulnerable to a deterioration in market sentiment. At
end--2010, from a strictly accounting view, debt securities
and interbank borrowings totalled EUR216 billion, or 25%
of its total balance sheet excluding insurance technical reserves and
derivatives, 64% of which falls due within three months,
and 79%, within one year (5).
Moody's expects SocGen to continue to enhance the amount and quality
of liquidity, reduce its reliance on the wholesale markets,
and lengthen the duration of its borrowings, in anticipation of
the challenges posed by the Net Stable Funding Ratio and Liquidity Coverage
Ratio to be introduced by Basel III. However, given the likelihood
that bank financing conditions will remain fragile and prone to disruption
so long as concerns persist over European sovereigns, and the potential
for that disruption to become more marked and sustained over time,
Moody's is maintaining its review on SocGen's BFSR.
The extended review will assess the potential for further, increased
disruption to undermine SocGen's business model and creditworthiness
given its continued reliance on short-term funding, as well
as the potential impact on other credit considerations, notably
profitability.
LONG-TERM DEBT AND DEPOSIT RATINGS DOWNGRADED TO Aa3
Moody's regards France as a high support country, in which
SocGen plays a major role as an intermediary and to whose banking system
it is integral.
In its press release of June 15, 2011, Moody's stated
that it would re-assess the systemic support assumptions factored
into its long-term ratings on SocGen. The long-term
rating incorporated a three-notch uplift from its intrinsic financial
strength equivalent on the long-term rating scale (above average
for France), compared to the two-notch uplift assigned prior
to Moody's downgrade of the financial strength rating on 14 April 2009,
and the two-notch uplift assigned to both BNPP and CASA.
Moody's still assesses the probability of systemic support for SocGen
in the event of distress as being very high, but now believes that
given the shift in the European-wide public policy environment,
the exceptional uplift previously applied to SocGen is no longer appropriate
and the assumptions of systemic support for SocGen should be in line with
those for BNPP and CASA. This has resulted in a downgrade to the
long-term debt and deposit ratings to Aa3 from Aa2, and in
two notches of uplift from the bank's A2 standalone financial strength
equivalent on the long-term scale, from three notches previously.
OUTLOOK FOR LONG-TERM DEBT AND DEPOSIT RATINGS NEGATIVE
The outlooks for the long-term debt and deposit ratings of SocGen
are negative. This reflects the application of Moody's JDA.
Moody's anticipates that the impact of our review on the BFSR would
be limited to a one-notch downgrade to C, which would not
in itself impact the long-term ratings, given our revised
support assumptions for SocGen, which anticipate increased uplift
at a lower standalone rating level. However, a conclusion
with a negative outlook on the BFSR would lead to a renewed negative outlook
on the long-term ratings. Given this possibility,
we are maintaining our negative outlook on the long-term ratings
during the review period.
KEY RATING SENSITIVITIES
Given the current review for downgrade on SocGen's BFSR, an
upgrade is unlikely.
Similarly, an upgrade of the long-term deposit and debt ratings
is also unlikely in the foreseeable future given the current review for
downgrade on the BFSR.
The main factors which could lead to a lower BFSR include:
- a reconsideration of the bank's funding and liquidity profile
within the context of its broader business model, and the impact
of its current and future funding structure on other credit considerations,
chiefly risk management and profitability;
- a prolongation or intensification of challenges to refinancing
conditions, resulting in a weaker liquidity and / or funding position
in Moody's view;
- increased sovereign risk in the euro area
- an unexpectedly sharp deterioration in the bank's capital
markets activities;
- aggressive expansions of riskier activities or an actual failure
in risk management;
- further significant asset quality deterioration, in the
lending activities or in its structured credit-related exposures;
- increased uncertainty over the bank's ability to strengthen
capital and liquidity in advance of Basel 3 requirements or deteriorating
market conditions.
A one-notch downgrade of the BFSR -- as could result from
our current review -- would not result in a downgrade of the debt
and deposit ratings. The latter could however, in theory,
be downgraded as a result of a multi-notch downgrade of the BFSR
or following a further reduction in Moody's expectation of the probability
of systemic support to be extended to SocGen in the case of stress,
neither of which Moody's expects.
SUBORDINATED OBLIGATIONS AND HYBRID SECURITIES
The ratings on SocGen's dated subordinated obligations are notched
off the bank's fully supported, long-term GLC deposit
ratings.
The ratings on the bank's hybrid obligations are notched off SocGen's
Adjusted BCA of A2, in accordance with Moody's Guidelines for Rating
Bank Hybrid Securities and Subordinated Debt published 17 November 2009.
KEY RATING FACTORS AND SENSITIVITIES FOR OTHER ENTITIES AFFECTED BY THIS
RATING ANNOUNCEMENT
For all other entities affected by this rating announcement, please
refer to the rationale above.
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.
SOURCES
(1) Source: Unaudited interim financial statements
(2) Source: Unaudited 2nd quarter financial results
(3) Source: Unaudited 2nd quarter financial results
(4) Source: General Bank of Greece unaudited interim financial statements
(5) Source: Unaudited company presentation
LIST OF AFFECTED RATINGS
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_135838
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.
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Paris
Nicholas Hill
Senior Vice President
Financial Institutions Group
Moody's France SAS
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Frankfurt am Main
Carola Schuler
MD - Banking
Financial Institutions Group
Moody's Deutschland GmbH
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Moody's France SAS
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Moody's downgrades Societe Generale long-term ratings to Aa3 on normalised systemic support, Outlook negative, BFSR remains on review to consider impact of funding challenges on credit profile
