If you work for a leading French investment bank, you should probably be very afraid
French banks have been
downgraded by Moody's. Not by much, but they've been downgraded nevertheless. SocGen is now Aa3; Credit Agricole is Aa2. BNP wasn't downgraded and remains Aa2 - but is under review.
Is this a big deal? In itself, no. As Christian Noyer, governor of the French Central Bank noted today: "It's a very small downgrade, and Moody's had a higher rating than the other agencies so it's just put them on the same level or slightly better than the other [banks]."
Moody's also said that both BNP and SocGen should be able to absorb the capital hit
from a 60% haircut on Greek sovereign debt, prompting Noyer to declare that French banks have enough capital to withstand a Greek default.
However, as Alphaville notes, the size of the potential Greek haircut is ever-growing and Moody's logic isn't entirely clear. If Greece exits the euro, Citigroup's chief economist
Willem Buiter predicts banks will lose 90-100% of the net present value of their holdings in Greek debt.
Even if Greece doesn't exit the eurozone, an outcome which Buiter and
others say would be disastrous, French banks are now operating in a very different world. Their emphasis is now liquidity and freeing up capital. This cannot be good for their investment banking arms.
SocGen announced a cost cutting and asset disposal programme on Monday with the intention of bolstering its capital ratio. 2,000 jobs are to go, predominantly in
Eastern Europe, and costs in the investment bank are to be reduced by 5%.
BNP laid out its stall
today. Like SocGen, it plans to sell
assets in order to bolster its capital position. Most notably, it plans a $60bn reduction in the corporate and investment bank's risk weighted assets by the end of 2012 (nearly a 25% of the total), with one third of that coming by the end of this year.
Analysts we spoke to were unanimous on the likely effects of both banks' strategies.
"They will have to pull back from investment banking," said one leading French banking analyst who declined to be named.
"French banks are going to have to massively downsize their balance sheets, possibly by more than a third" says Simon Maughan, co-head of European equities at MF Global. "They are going to get out of a lot of marginal investment banking activities."
What are those marginal investment banking activities? Capital- hungry fixed income sales and trading businesses where neither SocGen nor BNP is strong but both have been hiring in recent years, come to mind. "It's back up the track in fixed income," says Maughan.
At BNP the future looks particularly ominous for anyone working in dollar businesses, which are going to be at the forefront of the deleveraging. Anyone working in the dollar-based international financing business should be particularly wary of the recent turn of events.
Meanwhile, speculation is growing that SocGen could become a
takeover target (although it's not clear who would want it) or that both banks will require recapitalisation by the French government (although it's not clear the French government could afford this).
Ultimately, the danger is that either bank could end up like Commerzbank post 2008: a parochial operation with a greatly reduced focus on investment banking outside their home market.
