Not Quite 3 For 3 As BNP Outlines Rapid Deleveraging While Moodys Maintains Review

Tyler Durden's picture

It seems at the first whiff of downgrades from Moody's, BNP were forced into action announcing a series of asset disposals as Moody's announces no downgrade but maintains review for downgrade...

Some Bloomberg headlines before the Moody's text had the smell of anticipatory ratings action:












Moody's maintains review for downgrade on BNP Paribas' Aa2 long-term
ratings to consider impact of funding challenges on Credit Profile

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.


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.


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

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.


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.


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.


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.


Please see the ratings tab on the issuer/entity page on 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 for a copy of these


(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

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Yamaha's picture

20 black swan eggs now hatching...........

BlackholeDivestment's picture

Yamaha, lol, that was funny, and it ain't even Christmas ...five golden rings, lol

malikai's picture

Tyler: I'm seeing margin cuts across the board on Barclays CFD/FST, CMC, and it looks like IB may be doing the same. Two days ago BBC ran a story about how the UK government is proposing a split of all the banks similar to what was posted here ages ago. The key difference was that the retail banking side of the businesses would be bailout(able) while the investment sides would not.

My question is this: Are these margin cuts in any way related to holding on to liquidity in their investment businesses? The cuts look pretty big and as we know, Barc and others are heavily exposed to the PIIGS.

dwdollar's picture

Fly little swans fly!  Fly to your home in New York City.

Spirit Of Truth's picture

Why is it black swans seem to fly to their destinations in September/October?

Note that the 2008 financial crisis kicked off with the Lehman bankruptcy which occurred with the Hunter full moon on September 15th that year:

The Hunter full moon this year occurred the day before yesterday.

Notably the 2008 crisis didn't take full form until we entered the "black" month of October.  

Is this pattern repeating this year?

Shirley Wilfahrt's picture

It is when the Pigmen return from the islands.


cossack55's picture

Oktoberfest. Damn Germans. Ein grosse bier, bitte.

IQ 145's picture

Tyler is making me nervous; if he'd just stop reporting all this stuff maybe we could pretend everything was alright.

myne's picture

All hail Cygnus Atratus!

Funnily enough, I googled to confirm I spelt it correctly and apparently there's a trading firm by that name.

lolmao500's picture

And what about downgrading Swiss banks, which are as much if not more exposed?

IQ 145's picture

Sir; certainly you jest, something must be sacred in this most profane of worlds.

PY-129-20's picture

They're protected by German FLAK right now. But by nightfall, there will be hundreds and thousands of Black swans in the sky. It will be Götterdämmerung, my friends.

Yamaha's picture

I know what to do - let's put some rules in place to stop shorting. That will make everything better. Moody's will upgrade......

steven1's picture

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bob_dabolina's picture

This is chrisis management 101. 

This is where they want us to look. The core euro countries are in trouble. 

Yamaha's picture

Jobs? Fox News just reported that Obama suffers from low T. No shit? That explains everything - now we can create jobs with Viagra! He should call B Bonds for help.......

IQ 145's picture

Tyler don't joke around about BNP ! BNP is serious. I can hardly believe this shit. What Peter Schiff and I and other people thought is coming true; but it's making me nervous. BNP better not have any "real" problem; if it does, everything could get really smelly and sticky really fast.

Central Wanker's picture

You may (not) want to read Reggie's recent post about BNP. It is serious.

Lazlo Toth's picture

Looking for the Black Goose still....

Cheyenne's picture

I'm sick of reading about bankers, especially foreign ones. It makes me want to deliver a uniquely American message about who these faceless pussies think they're dealing with. Here's a hint:

"Yo. The motherfuckin' Devil's son-in-law."

R.I.P., Eazy E.

PY-129-20's picture

Yes, yes. I know what you are saying. I would love to deliver a uniquely German message to the ECB building in Frankfurt: a Panther Panzer.

Hephasteus's picture

So from this. i gather that BNP is the most fucked since it's at the explain this shit phase.

Let's see what the news has to say.

John Ford Kennedy's picture

"Moody's regards France as a high support country"......What a real joke.

LookingWithAmazement's picture

Moody's downgrades French banks. Stocks rise. No Armageddon.