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 standalone Bank Financial Strength Rating (BFSR) and long-term
debt and deposit ratings of BNP Paribas (BNPP), originally announced
on 15 June, 2011.
In the meantime, the rating agency has concluded that
(i) BNPP's profitability and capital base currently provide an adequate
cushion to support its Greek, Portuguese, and Irish exposures,
and
(ii) its long-term debt and deposit ratings are appropriately positioned
two notches above BNPP's standalone financial strength to reflect
the likelihood it will receive systemic support from governmental authorities
if needed.
However, Moody's announced that it will extend its review
for downgrade of BNPP's B- BFSR and Aa2 long-term
debt and deposit ratings to consider the implications of the potentially
persistent fragility in the bank financing markets, given BNPP's
continued reliance on wholesale funding.
The review is unlikely to lead to a downgrade in the long-term
ratings of more than one notch.
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 Societe Generale),
because of concerns about the potential inconsistency between their ratings
and their exposures to the Greek economy, either through their holdings
of government bonds or the credit they had extended to the Greek private
sector.
Moody's has concluded that BNPP has a sufficient level of profitability
and capital that it can absorb potential losses it is likely to incur
over time on its Greek government bonds (Greece is rated Ca, outlook
developing), and to remain capitalized 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 recognized (see below).
However, during the review, Moody's concerns about the
structural challenges to banks' funding and liquidity profiles have increased,
in light of worsening refinancing conditions, and have prompted
an extension of the review. The continuing review will focus directly
on these funding and liquidity challenges for BNPP, which,
given the current environment, could become long-term constraints
to the performance of its franchise.
Limited Impact Of Greek And Other Peripheral Sovereign Exposures On Overall
Risk Profile
Since the start of the review for downgrade, BNPP, 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 EUR534 million of impairments against the relevant
bonds in the second quarter of 2011. BNPP was able to absorb this
amount easily, as it reported net earnings of EUR2.1 billion
(1) for the quarter and continues to build its capital ratios.
BNPP still has very large exposures to the peripheral European countries'
government bonds in its banking and trading books, totalling EUR5.9
billion for Greece, Ireland (Ba1, negative outlook),
and Portugal (Ba2, negative outlook) combined as at 30 June 2011
(1), the majority of which matures after five years. Italian
and Spanish bond holdings are much larger, at EUR24 billion and
EUR3.9 billion respectively at end-2010, according
to European Banking Authority disclosures. BNPP's exposure
to Greek private sector credit, by contrast, is relatively
small, around EUR3.6 billion at end-2010, and
Moody's believes it is mostly in the form of large corporate exposures
that are less sensitive to the domestic economy. On the same basis,
BNPP's loans to the Portuguese and Irish private sector totalled
EUR4.5 billion and EUR4.8 billion respectively.
In its review, and in the context of a stress test covering BNPP'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
under this scenario would total around EUR4.9 billion, 5.6%
of BNPP's common equity Tier 1 capital after tax and 54bp 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.
As a result, Moody's considers BNPP to be sufficiently profitable
and capitalized that it can absorb potential related losses. Like
many banks, BNPP has sought to enhance its capitalization,
and reported a common equity Tier 1 ratio of 9.6% at end-June
2011 (2), up from about 6% at the start of 2008. More
generally, BNPP also benefits from an exceptional degree of diversity
thanks to a broad array of businesses, most of which have substantial
scale and strong franchises in their own rights and thus sound profitability.
In addition, the bank has been growing its deposit base and lengthening
its market funding. However, given the size of the Italian
bond holdings, BNPP's creditworthiness would be vulnerable
to a deterioration of that of Italy. Additionally, its capital
markets business is large and volatile, and 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
As noted above, BNPP'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 BNPP. 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 BNPP has substantial holdings of central bank
eligible assets, which it reports to be around EUR150 billion and
of which USD30 billion is eligible at the Federal Reserve, and short-term
interbank assets of EUR43 billion (3). In addition, it has
full access to Eurosystem central bank liquidity in major currencies.
As such we believe that BNPP can withstand the short-term credit-negative
impact of the contraction in dollar funding and note that euro funding
remains plentiful. Even so, the amount of its wholesale funding
requirements makes the bank vulnerable to deterioration in market sentiment.
At end--2010, from a strictly accounting view, debt securities
and interbank borrowings totalled EUR376 billion, or 25%
of its total balance sheet excluding insurance technical reserves and
derivatives, 61% of which was due to mature within three
months and 77%, within one year (4).
Moody's expects BNPP to continue to enhance the amount and quality
of its 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 BNPP's BFSR. The
extended review will assess the potential for further, increased
disruption to undermine BNPP'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 REMAIN ON REVIEW FOR POSSIBLE
DOWNGRADE
Moody's regards France as a high support country, in which
BNPP plays a major role as an intermediary and to whose banking system
it is integral.
Moody's assesses the probability of systemic support for BNPP in the event
of distress as being very high. As such, the bank receives
a two-notch uplift from its standalone financial strength rating
of B-, equivalent to BCA of A1 on the long-term scale,
bringing the GLC deposit rating to Aa2, which remains on review
for possible downgrade, reflecting the review for downgrade on the
BFSR.
SUBORDINATED OBLIGATIONS AND HYBRID SECURITIES
The ratings on BNPP's dated subordinated obligations are notched
off the bank's fully supported, long-term GLC deposit
ratings and therefore remain under review for downgrade.
The ratings on the bank's hybrid obligations are notched off BNPP's
Adjusted BCA of A1, in accordance with "Moody's Guidelines for Rating
Bank Hybrid Securities and Subordinated Debt", published 17 November
2009. They remain on review for downgrade, reflecting the
review for downgrade on the BFSR.
KEY RATING FACTORS FOR OTHER ENTITIES AFFECTED BY THIS RATING ANNOUNCEMENT
For LaSer Cofinoga, rated C- / Baa1 / A1, on review
for possible downgrade, the key rating factors are (i) access to
backup funding facility from BNPP; (ii) the evolution of asset quality;
(iii) the potential impact of the reform of consumer credit in France
on the bank's strategy and franchise. For all other entities affected
by this rating announcement, please refer to the rationale above.
PREVIOUS RATING ACTION AND METHODOLOGIES
Please see the ratings tab on the issuer/entity page on Moodys.com
for the last Credit Rating Action and the rating history.
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: company press release and audited 2010 financial statements
(4) Source: audited 2010 financial statements
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.
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.
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.
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Moody's maintains review for downgrade on BNP Paribas' Aa2 long-term ratings to consider impact of funding challenges on Credit Profile