French Banks Likely To Withstand Hit From Greek Restructure
By Elena Berton
Of DOW JONES NEWSWIRES
PARIS (Dow Jones)--French banks could withstand losses from a potential restructuring of Greece's sovereign debt without risking a credit downgrade, since their exposure would be manageable given their size and capital resources, Fitch Ratings analysts said Tuesday.
This view backs a growing consensus among analysts that French banks would be able to absorb the impact to their earnings and suffer only a small decline to their capital ratios--a key measure of a lender's capital strength--if Greece were to restructure its sovereign debt as it struggles to cover its financing needs for the next two years.
Shares in French lenders have taken a hit in recent weeks on investors' continuing concerns about the eventual repercussions from a possible restructuring of Greek bonds, even if it involves a "softer" option of extending debt maturity, based on the sizable exposure of French lenders to the Greek economy.
Latest figures from the Bank for International Settlement show that France's banking sector has the largest overall exposure to Greece, totaling $56.7 billion, compared with German banks' considerably lower exposure of $33.97 billion.
But according to the BIS figures, most of French lenders' exposure is to the private sector through loans to households and companies in Greece, mainly through Credit Agricole SA's (ACA.FR) Emporiki unit, while the riskier exposure to Greek government bonds totals $14 billion, significantly lower than the $22.65 billion held by German banks.
Bernstein analysts said in a note to investors that the negative reaction to these figures is overdone, since French banks have already made provisions for their exposures to the private sector .
"We believe that the impact of an ultimate Greek restructuring will have a limited impact on Tier 1 capital ratios, even when we include a substantial increase in provisions following a sharp decline in economic growth post restructuring," they said.
Bernstein is forecasting that BNP Paribas SA (BNP.FR), France's largest lender by market capitalization and the French bank with the biggest exposure to Greek sovereign debt at EUR5 billion, would see a hit of between 19 and 29 basis points to its Tier 1 capital ratio if Greek bond maturities were extended and regular interest payments to bondholders were cut.
Under the same scenario, the impact on Societe Generale SA (GLE.FR) would be between 15 and 23 basis points, while Credit Agricole would see a hit of between 4 and 5 basis points.
Although Credit Agricole's overall exposure to Greece totals EUR24.5 billion due to its Emporiki unit, the country's sixth-largest lender, its government bond exposure of EUR600 million is the lowest among French banks.
But Fitch analysts pointed out that French banks could face indirect risks from a possible bond restructure in Greece in the form of higher funding costs, as well as likely provisions for covering customers who took out insurance policies invested in Greek government bonds.
Although these types of risks are usually shouldered by policyholders, banks might decide to step in if eventual portfolio losses became too high for their customers.
France's three main listed banks have all said recently that their exposure to Greece remains manageable.
BNP Paribas' Chief Executive Baudouin Prot last month said the impact from an eventual restructuring of Greece's debt would have a limited effect on the lender's operations. He estimated that if Greek bonds were to be restructured using prices at the end of March, it would cost BNP Paribas around EUR1 a share.
Credit Agricole has estimated that if the value of its Greek bond holdings were slashed by 25% it would cost the bank around EUR150 million, while Societe Generale, which has EUR2.4 billion exposure, has said it could absorb any restructuring.
