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home | Credit Research | French banks Greek exposure: So much . . .
 

French banks' Greek exposure: So much ado about nothing!


French banks' Greek exposure: So much ado about nothing!

Benoit Feliho

Thursday 16th June

Moody's recent negative move on Credit Agricole (CA), Societe Generale (SG) and BNP Paribas (BNPP) due to their exposure to Greece has somewhat exacerbated uncertainties on financial markets. Although French banks have the highest foreign exposures to the Hellenic country, their holdings of Greek sovereign debt is relatively low compared with their capitalisation. Under our scenarii, French banks' claims vis-a-vis the Greek public sector remain manageable even in case of a default of the Greek government. When including the exposure to the private sector Emporiki and Geniki respectively CA and SG's Greek subsidiaries, further deterioration in asset quality should not lead alone to any major additional capital needs from a regulatory standpoint. We believe the extra capital already held by French banks coupled with their return to profitability will offset a decline in the value of their Greek holdings. We are more concerned about the panic effect and contagion that a default of the Greek government would trigger on financial markets.

Moody's placed France's three largest banks by assets BNP Paribas (BNPP), Credit Agricole (CA) and Societe Generale (SG) on credit watch negative on 14th June 2011. The rating agency's move was driven by these banks' exposures to Greece's public and private debt. Moody's also stressed it does not expect a downgrade on BNPP and CA to exceed one notch. In the case of SG however, a downward move on the name could reach two grades since the ratings on France's third largest bank benefits from a higher than average uplift from systemic support.

What is Greece's current macroeconomic situation?

Greece's public debt increased to 142.8% of GDP in 2010 from 127.1% of GDP in 2009. Although its fiscal deficit improved from 15.4% of GDP in 2009 to 10.50% of GDP in 2010, it remains too high taking into account the country's significant indebtness. In addition, growth prospects are dark. GDP declined by 7.4% at end 2010 and the latest data released on March 2011 also highlighted a GDP drop of 5.5%. Interest rates required to fund Greece's needs soared and without the IMF, ECB and EU's EUR110bn conditional rescue package agreed in May 2010, the country would have defaulted as unable to refinance on the markets. The indebted Hellenic country's ratings were recently downgraded by Moody's to Caa1 from B1 and by S&P from B to CCC. Pressure on Greece has materially increased over the last few days as further austerity measures have to be adopted before the country receives the next tranche of funds. Greece urgently needs this money as within the next three month EUR13bn debt will mature. In addition, disagreement amongst European leaders on a new aid package is adding to investors 'nervousness. On the one hand, a group led by Germany wants to share the costs with private investors through a debt exchange with extended maturities. On the other hand, such a move which would be considered by rating agencies as a default is rejected by the ECB.

 


 

Graph 1:  Greece debt profile



What is French banks' real exposure to Greece?

According to Bank for International Settlements (BIS), total foreign exposure to Greece amounted to USD146bn at year-end 2010. Out of this amount, European claims on the country reached USD136bn i.e above 90% of the Greece's foreign creditors. Alone, French banks' held more than 40% of the whole European banks' exposure, making French lenders Greece's largest creditors. CA, SG and BNPP respectively have a total exposure of EUR21.7bn, EUR5.7bn and EUR5bn to Greece. These amounts represented respectively 42.7%, 19.5% and 8.8% of Core Tier 1 capital published at the end of March 2011. We however believe the situation is not as bad as it seems.

Table 1: Detailed foreign claims vis-à-vis Greece (in USDbn)

Foreign claims by borrower

Held by European banks

Held by French banks

Held by German Banks

Held by UK banks

Held by US banks

Total

Public sector

52.3

15.0

22.7

3.4

1.5

54.1

Banks

8.9

2.2

2.4

2.6

1.5

10.9

Non-banks

75.1

39.6

9.1

8.1

4.3

80.6

Total

136.3

56.8

34.2

14.1

7.3

145.6

                                                                                                                                                Sources: BIS, Feliho Finance

A limited exposure to Greece's public debt

In our opinion, investors must bear in mind that total exposure to the Hellenic Republic includes both holdings in public and private Greek debt. To us, a distinction has to be made between both types borrowers and in the short-term the most worrying situation is that of public debt. Actually French banks' total exposure to Greek public debt is of only EUR15bn of which EUR600m for Credit Agricole, EUR2.5bn for SG and EUR5bn for BNPP. If Greece was to default, we think the impact on French banks will be limited. Even assuming an unlikely 0% recovery rate on Greek public debt, a Greek default should not trigger any recapitalisation needs. Based on our simulations using 1Q11 figures, Core Tier 1 ratio would drop to 8.9% for CA (from 9.0%), 8.0% for SG (from 8.8%) and 8.6% for BNPP (from 9.5%).  

Graph 2: CDS of a selection of French banks

 



How manageable is the exposure to Greece's private sector?

CA and SG have a respective exposure of EUR21.1bn and EUR3.2bn to private borrowers through their Greek subsidiaries. Deterioration of Greece economy has weighed on domestic banks' asset quality and we expect the trend to continue.

Emporiki - 91% held by CA - has a very poor asset quality ratio, which based on our calculations and including both impaired and past due loans in Non-Performing loans (NPLs) was of 40.5% at year-end 2010 (from 33.8% in 2009). Loan Loss Reserves (LLR) covered about 28.9% of NPLs. Assuming a NPL ratio peaking at 50% and a coverage ratio improving to 50%, CA would need to increase Emporiki's LLR by EUR3.2bn. Given the EUR1.6bn profit posted in 1Q11 and the EUR5bn extra capital considering a Core Tier 1 requirement of 8%, the group's total exposure to Greece is manageable even assuming that our scenario materialises this year. 

Geniki - 88% owned by SG - also suffered from a worsening of its asset quality and had a NPL ratio of 28.1% at year-end 2010 (from 22.2% in 2009). LLR coverage was of 52.0% in 2010 (from 30.1% in 2009). Based on a stress test including both asset quality and LLR coverage ratios of 50%, we calculated that Geniki's LLR would need to be increased by EUR275m to face a deterioration of asset quality to ratio 50% and LLR coverage ratio of 50%. Since SG posted a EUR916m 1Q11 net profit, we do not think the extra need in LLR at Geniki coupled with the unlikely 0% recovery rate in the Greek government's bonds would materially affect SG's regulatory solvency and pushed its Core Tier 1 ratio below 8.0%.  

All in all, we do not believe exposure to Greece is a credit driver for French banks. Based on our simulations, even in case of Greek government default, French banks fundamentals would be marginally affected. Including their exposure to private borrowers in Greece, the negative impact would also be limited. There would however be a confidence problem on the whole European banking system in case of a Greek default and contagion would derail the markets as it has been the case following the collapse of Lehman. We also believe that one of the main issues for the French banking system has more to do with its high leverage than with its exposure to Greece.  


 




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