While S&P appears to have completely forgotten about the country of Belgium, Moody's has realized that should Greece default, which is now inevitable, there may be aftershocks. Today, it focuses on France, and its three main banks Credit Agricole, SocGen and BNP, all of which it has put on downgrade review with a one notch maximum downgrade potential (except for SocGen which is two). Moody's also refreshed those who care that its downgrade review of Belgium's Dexia is ongoing and could result in a two-notch downgrade. The announcement comes just as it seemed that the EURUSD was about to shake off its late afternoon swoon, and instead is now near the day's lows.
Moody's Investors Service has today placed the standalone financial strength ratings and long-term debt and deposit ratings of three French banking groups -- Credit Agricole SA (CASA), BNP Paribas SA (BNPP), and Societe Generale SA (SocGen) on review for possible downgrade.
The primary focus of all three reviews will be the banks' credit exposures to Greek government debt and the Greek private sector and the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels. The review of SocGen will also assess the likelihood of future government support since our systemic support assumption is currently higher than the average for the French banking system.
Moody's also noted that exposures to Greece are to be included within the ongoing review for possible downgrade of Dexia Group's core operating banks.
The specific rating actions taken today are:
- Credit Agricole SA (CASA): standalone credit strength C+ / mapping to A2 on Moody's long-term scale, with an adjusted baseline credit assessment (BCA) of Aa3 and a senior long-term rating Aa1, all on review for downgrade.
- BNP Paribas SA (BNPP): B-/A1 and Aa2 ratings on review for downgrade.
- Societe Generale SA (SocGen): C+/A2 and Aa2 ratings on review for downgrade.
The short-term Prime-1 ratings of the three French banking groups have been affirmed.
Moody's notes that CASA's and BNPP's reviews are unlikely to lead to downgrades of more than one notch. SocGen's debt and deposit ratings could be downgraded by as much as two rating notches because its review will include a reassessment of the uplift it receives from systemic support, which is currently higher-than-average for the French banking system.
A full list of affected entities and ratings can be found at the end of this press release.
Today's actions reflect Moody's concerns about these banks' exposures to the Greek economy, either through direct holdings of government bonds or credit extended to the Greek private sector directly or through subsidiaries operating in Greece, a key factor for CASA and SocGen due to their local Greek banks. The magnitude and composition of these exposures differ substantially across these banking groups.
Potential mitigants to these concerns are the strong financial profiles, substantial scale and earnings diversification of the French banking groups covered by this review. Moody's will focus on the potential impact of various scenarios for Greek government and private-sector credit exposures on the profitability, capital and funding positions of these banks.
Moody's may take similar actions on other banks with direct exposures to Greece in the coming weeks, if it considers that their ratings may be inconsistent with the potential impact of a Greek default or restructuring. Additionally, we are closely monitoring the risks that would likely result from a Greek default scenario, e.g. the potential impact on weaker countries, the capital markets, and funding conditions, and are taking those risks into consideration in our ratings of banks across the Eurozone.
DETAILED RATIONALE AND REVIEW CONSIDERATIONS FOR CASA, SOCGEN AND BNPP
CREDIT AGRICOLE SA (CASA)
For CASA, the principal direct risk in Moody's view arises from the group's local subsidiary, Emporiki, and from its private sector credit exposures in Greece. Indeed on 3 June 2011, Moody's downgraded the standalone credit assessment and the senior long-term deposit ratings of Emporiki to Caa1 and B1 respectively, in response to the downgrade of the Greek government. Emporiki reported a net customer loan book of EUR21.1 billion at 31 March 2011 compared to Groupe Credit Agricole's consolidated Core Tier 1 capital of EUR50.8 billion. Moody's therefore considers that the secondary effects of a Greek default scenario could have a significant impact on the bank, owing to these direct exposures to the local economy, and the ratings agency's belief that CASA will continue to provide funding and capital support to Emporiki. Moody's review will therefore focus on the potential impact of the various scenarios on the group's profitability, capital and funding.
Moody's expects the direct impact of a default or restructuring of Greek government bonds to be limited in the case of CASA, given the rating agency's view that it has a relatively modest exposure to such debt (EUR0.6 billion net at 31 March 2011).
Similarly to Credit Agricole SA, SocGen has a majority stake in a local bank, General Bank of Greece (Geniki), and thus faces risks from its private sector credit exposures in the country (Geniki reported a net customer loan book of EUR3.4 billion at 31 March 2011, of which we understand a material proportion relates to multi-national companies, compared to SocGen's consolidated Core Tier 1 capital of EUR29.4 billion). Moody's also downgraded on 3 June 2011 the standalone credit assessment and senior ratings of Geniki to Caa1 and B1 respectively, and the ratings agency believes that SocGen will continue to provide funding and capital support to its subsidiary.
However a default or restructuring of Greek government bonds would be more material for SocGen than it would be for CASA, given SocGen's exposure to Greek government debt, reported to be EUR2.5 billion net as at 31 March 2011, although we understand that this exposure has since been reduced. Moody's review will therefore focus on the potential impact of the various scenarios on the bank's profitability, capital and funding.
Furthermore, in its review, Moody's will also re-assess the systemic support assumptions currently factored into the long-term ratings to reflect the post-crisis support environment. The group currently benefits from 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.
Unlike CASA and SocGen, BNPP does not have a local subsidiary bank in Greece and, as such, its relative exposure to the local economy is more modest. Instead, BNPP's main risk arises from its substantial direct holdings in Greek government debt: EUR5.0 billion of net exposure as at 31 December 2010, compared to Common Equity Tier 1 capital of EUR56.6 billion at end-March 2011, in addition to exposures to other weaker Eurozone countries, e.g. Portugal (EUR1.9 billion of net government debt exposure as at 31 December 2010).
Moody's therefore expects the review of BNPP's ratings to focus on the direct and indirect impact of a Greek government debt default/restructuring on the bank's profitability, capital and funding.
Dexia reported EUR3.5 billion of gross banking book exposure to the Greek government as at 31 March 2011, compared to Core Tier 1 capital of EUR17.0 billion, and which is part of the group's total maximum reported credit risk exposure to Greece of EUR5.4 billion at the same date.
In our existing review for possible downgrade of Dexia's three main operating banks, (Dexia Credit Local, Dexia Bank Belgium and Dexia Banque Internationale à Luxembourg), opened on 28 March, 2011, we identified three main factors we would consider.
- Dexia's ability to raise long-term funding at a cost that preserves the economics and the viability of its public finance core business;
- Its ability to continue deleveraging its legacy assets without adversely affecting the average quality and duration of the bond portfolio in run-off; and
- The potential impact of Basel III regulations on Dexia's liquidity management and the group's capitalisation.
We will also consider the potential impact of a Greek government default/restructuring on Dexia within our review, which we expect to conclude in the coming weeks. As previously stated at the opening of our review, we see the potential downside to the A1 long-term senior debt and deposit ratings to be limited to one or possibly two notches. Our decision to affirm the Prime-1 short-term ratings was driven by our expectation that systemic support would be forthcoming for Dexia's financing needs, as it was in the past.
OTHER BANKS' EXPOSURES TO GREECE AND POTENTIAL SIMILAR ACTIONS
With regard to the other large French banks rated by Moody's -- namely, Banque Federative du Credit Mutuel, Credit Industriel et Commercial, Credit Mutuel Arkea and BPCE -- the rating agency perceives their exposures to be lower compared to those of CASA, SocGen, BNPP and Dexia.
As stated, Moody's will consider similar actions for other banks, should the rating agency believe that their ratings would be potentially inconsistent with the direct or indirect impact of a Greek default or restructuring.