How bad is it really for leading French banks and all who work there?
French banks are unhappy places to be. The respective share prices of SocGen and BNP have fallen 18% and 25% since last Friday and anyone working in fixed income sales and trading at either bank in London has reason to feel great apprehension.
Today has been an especially bad day for BNP. Chief executive Baudouin Prot has been obliged to insist that there is 'no peril' in the French banking system. Following a report in the Financial Times that BNP executives are touring the Middle East in search of a capital injection, he's also been obliged to insist BNP doesn't need recapitalization, that it's not seeking cash from Qatar, and that a capital injection from the French government is not a, "working hypothesis."
On the other hand, Prot has also revealed that BNP will be cutting a, "significant," number of people from the investment bank as it targets a $60bn reduction in risk weighted assets by 2012. Most of these cuts are likely to come in New York or London - the bank has announced a 'regroupement' of its overseas activities in Paris and Brussels.
Nevertheless, analysts covering the two leading French banks remain insistent that they are sound and the risks are over-egged.
Capital Position
Prot stressed today that BNP can it will achieve a core tier one ratio of 9% by 2013 without issuing new capital, purely by deleveraging and cutting its risk weighted assets. Similarly, SocGen has committed to raise €4bn through business disposals - although Morgan Stanley analysts raise questions on how viable this will be in current market conditions. Based on a 60% haircut on SocGen's Greek exposure and a 40% haircut on its Irish and Portuguese exposure, they claim to, "feel confident SG can achieve a better Basel 3 ratio than the market thinks."
Morgan Stanley analysts point out that the real danger for French banks is contagion of the sovereign debt crisis to France and Spain. French banks as a whole have €500bn of exposure to Portugal Ireland, Italy, Greece and Spain, of which two thirds of that is to Italy and Spain.
Liquidity Position
Analysts also point out that French banks' liquidity position isn't as desperate as the market is making out - at least for the moment; both banks have completed their funding for 2011.
Following last week's BNP presentation, Morgan Stanley analysts noted that BNP in particular is, "one of the rare banks that [has already] started pre-funding for 2012. The lack of senior unsecured issuance remains a question mark, but it seems BNPP can cope with the situation for now," they concluded.
They also noted that SocGen has reduced its reliance on US dollar short term funding to €60bn, and that its liquidity buffers remained stable at €105bn.
In both cases, the real question is over funding for next year, when BNP needs to raise around €33bn and SocGen needs to raise around €20bn. Morgan Stanley analysts' full appraisal of French banks' liquidity position is given in the table below (click to expand).
Source: Morgan Stanley
