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S&P Cuts BNP Paribas Long-Term Rating to 'AA-' with Stable Outlook

Author Sabina Kotova
S&P Cuts BNP Paribas Long-Term Rating to 'AA-' with Stable Outlook

BUCHAREST (Romania), October 17 (SeeNews) – Rating agency Standard & Poor's said it cut its long-term counterparty credit rating on French bank BNP Paribas and its core subsidiaries to 'AA-' from 'AA' and affirmed its 'A-1+' short-term counterparty credit rating, with a stable outlook.

S&P also affirmed its 'A+/A-1' counterparty credit ratings on BPCE, Credit Agricole S.A., Caisse Centrale du Credit Mutuel, Banque Federative du Credit Mutuel and Societe Generale, as well as on all the core subsidiaries of these banks, the rating agency said in a statement on Friday.

BNP Paribas, Credit Agricole and Societe Generale have operations in southeastern Europe.

S&P also said in the statement:

“We now factor one notch of government support (rather than none previously) into our counterparty credit ratings on these four banking groups above their SACPs. At the same time, we lowered the SACPs on the banks by one notch to 'a'. The outlooks are stable.

Meanwhile, we are lowering by one notch our ratings on hybrid capital instruments that were previously rated three notches below the long-term counterparty credit rating, for all five banks (see Ratings List for details).

For cooperative groups, the ratings on the central body--Credit Agricole S.A., Caisse Centrale du Credit Mutuel, and BPCE-- reflect the creditworthiness of the entire cooperative group: Groupe Credit Agricole, Groupe BPCE, and Groupe Credit Mutuel.

The rating action follows the downward revision of our Banking Industry Country Risk Assessment (BICRA) for France to Group 2 from Group 1,; a reassessment of the banks' SACPs, and a review of the extraordinary support that we factor into the ratings on banks from the Republic of France (AAA/Stable/A-1+).

The BICRA change reflects our revised view of banking industry and country risk in France. (See "BICRA On France Revised To Group 2 From Group 1 On Higher Funding Constraints And Rising Housing Prices," published Oct. 14, 2011, on RatingsDirect).

This change, in particular our revision of the economic risk score to '2' from '1', contributed to the one-notch lowering of the long-term ratings or SACPs. A weaker economic risk score increases the capital requirement for banks operating in France according to Standard & Poor's risk-adjusted capital measure.

The downgrade of BNP Paribas and the lowering of our SACPs on the four other banks primarily reflect our opinion that the financial profiles for all of these banks have weakened as a result of more difficult economic and funding market conditions ahead.

We see that their funding and liquidity positions have become more vulnerable to adverse conditions than we had previously anticipated. In addition, we believe that credit risk has risen due to significant exposure to peripheral countries for some of the banks.

For these reasons, we see lower earnings prospects for all five banks. We continue to believe that the moderate current capital position of BNP Paribas, BPCE, Groupe Credit Agricole (subsequently referred to as Credit Agricole), and Societe Generale is a ratings weakness.

Tighter funding conditions are prompting all five French banks to reduce their balance sheets or issue more expensive longer-term resources. In addition, in our opinion, competition to attract more stable customer deposits in France could increase funding costs as well.

The affirmations of our ratings on BPCE, Credit Agricole, Credit Mutuel, and Societe Generale incorporate our view of their strong market position and business diversification, good asset quality, and lower but still adequate profitability.

In addition, we consider all of them highly systemically important in France and believe that extraordinary support from the French government would likely be available if needed. We therefore factor into our long-term rating on these four banks one notch of uplift over their SACPs, which now stand at 'a'.

The one-notch downgrade of all hybrid capital instruments, which were previously rated three notches below the long-term counterparty credit rating, reflects our expectations of a somewhat higher risk of coupon deferral for all banks, in line with the negative rating actions we have taken on the five French banks and with our methodology. (See the Ratings List for details.)

French banks are currently facing risk-adverse capital markets, with a significant deterioration in their funding conditions since August 2011. They are reliant on wholesale funding because their loan books exceed their customer deposits and because of their presence in corporate and investment banking (CIB) activities.

The deficit of deposits over loans is significant for BPCE and Credit Mutuel, but is in line with the average of large European banks for BNP Paribas, Societe Generale, and Credit Agricole. On the other hand, these three banks have more CIB activities--with a stronger focus on corporate finance for Credit Agricole--that generate large balance sheets and significant short-term funding needs.

In our view, French banks have already started to adapt their funding profiles, especially with the issuance of longer-term debt and buildup of large buffers of eligible assets. In addition, because they have largely met their funding targets for 2011, we consider that French banks have some time to continue adapting their activity to new funding conditions.

So far, French banks have made only marginal use of European Central Bank (ECB) funding and continue to benefit from good access to short-term funding in euros. As for other European banks, our assessment of liquidity incorporates our view of a supportive European environment, in terms of banking liquidity and support from the ECB. We incorporate these elements into the banks' SACPs.

As a result of difficult capital market conditions, BNP Paribas and Societe Generale--the most exposed to the shortage of cheap U.S. dollar resources--have accelerated asset disposals, and are more quickly implementing strategic reviews of businesses originally intended to prepare for Basel III capital and liquidity regulations.

nder similar constraints, Credit Agricole has announced a voluntary reduction in short-term funding needs and in some financing activities. We expect BNP Paribas, Societe Generale, and Credit Agricole--and BPCE to a lesser extent--to reduce their presence in activities that demand higher leverage or that don't generate customer deposits (such as some CIB activities or some kinds of specialized lending).

In France, we expect lending activities to slow, particularly in the mortgage market, and French banks to attract more household savings into retail customer deposits at the expense of mutual funds or insurance, at probably some higher cost.

We consider that the increasing cost of preserving liquidity by downsizing wholesale-funded activities, exiting some business segments--in particular some U.S.-dollar-denominated financing--and continuing to raise more expensive longer-term resources and core deposits will contribute to weaker profitability for French banks in 2011 and 2012, on the top of a more difficult economic environment.

While repricing efforts by banks could offset some of the higher funding costs, we believe this would reduce their capacity to boost capital through retained earnings.

BNP Paribas, and Credit Agricole through its insurance subsidiary, are among the most exposed to Greek sovereign debt (Hellenic Republic; CC/Negative/C). However, we consider that the amounts remain moderate in proportion to their balance sheets and earnings capacities.

Furthermore, our ratings, prior to today's rating actions, had already incorporated our estimates for an orderly restructuring of the Greek sovereign debt. We had lowered our ratings in May 2011 on Credit Agricole because of its exposure to the Greek economy through its subsidiary Emporiki.

The difficult economic prospects for Greece contribute to our expectation of pressure on Credit Agricole's earnings in 2011-2012. French banks posted impairments on their Greek sovereign debt on June 30, 2011, on the basis of 21% of the principal of sovereign bonds that they plan to bring to the Institute of International Finance's Financing Offer for Greece launched in July 2011.

This level of coverage is less conservative than what some other European banks have recognized and we don't rule out additional impairments. We already included such impairments in our earnings forecasts for the large French banks for 2011, consistent with our recovery rating of '4' for Greece, indicating an estimated 30%-50% recovery of principal by bondholders.

French banks have low sovereign exposure to Ireland and Portugal, the two other south European countries under EU/IMF adjustment plans, and Spain. The exposure to Italian sovereign debt is material for BNP Paribas and Credit Agricole and not insignificant for the others. However, we consider that the credit risk, as signified by our 'A' rating on the Republic of Italy, is low.

Both banks have also some sizable lending activity to the Italian private sector. We see that credit risk as moderate overall, but with a potential for rising provisioning needs. BNP Paribas also has some non-negligible lending activity to the Spanish private sector that represents an intermediate credit risk.

Our view about Spanish credit risk is incorporated in our economic risk score on Spain of '4', which we recently revised from a lower-risk '3'.

As for most European peers, capital at French banks has increased over the last 18 months, but remains for us an identified weakness for the ratings on the banks--except Credit Mutuel. According to our risk-adjusted capital ratio before diversification at year-end 2010, the capital positions of BNP Paribas, BPCE, Credit Agricole, and Societe Generale were lower than the average ratio for their European peers.

The change in the BICRA economic risk score to '2' from the lower-risk '1' results in a moderate change in the French bank RAC ratio before diversification, ranging from a 10 basis point (bps) decline for BNP Paribas' to a 35 bps decline for the Credit Mutuel group, the most affected by this change.

Our counterparty credit ratings on BNP Paribas, BPCE, Credit Agricole, and Societe Generale incorporate our expectation that they will continue to further increase their capital position over the coming 24 months, in their effort to address stricter regulatory capital requirements under Basel III.

We expect such an improvement to continue to take place through retained earnings but with more emphasis on reduction of risk-weighted assets than we expected some months ago. The plans that BNP Paribas, Societe Generale, and Credit Agricole recently announced to reduce their balance sheets, and meet or raise their capital targets under Basel III support this medium-term expectation.

We are of the view that deleveraging will enhance capitalization over time. However, in the short term, it may not because of the earnings and funding challenges they face.

Our higher rating on BNP Paribas than on its four domestic peers reflects Standard & Poor's opinion of its comparatively stronger business profile that incorporates greater and more successful business diversification.

Our rating on BNP Paribas also reflects its better earnings generation, resulting from resilient underlying revenue streams in most business lines and the absence of significant pocket of risks--as well as its more moderate risk appetite and stronger risk culture.

We view BNP Paribas as having high systemic importance in France. The long-term rating does not incorporate notches of explicit uplift for potential extraordinary support from the French government given its already high rating that reflects only its SACP.”