Thursday, January 26, 2012

Why S&P has downgraded French Banks

On January 23, 2011, S&P has announced to downgrade major French Banks, including BPCE, Crédit Agricole, and Société Générale, from A+ to A. BNP’s rating remained at AA- but was, nevertheless, put on negative outlook.

In the following, I explain S&P’s rationales for the above mentioned announcements as well as how S&P develops its decision, based on its rating methodology for banks.







The above schema shows S&P’s decision-making process as it is described in its rating methodology for banks dated November 9, 2011.

1st line of thought (blue circle) – France’s BICRA score

The BICRA (= Banking Industry Country Risk Assessment) score combines the appreciations of France’s economic and industry risk. This score and, therefore, France’s anchor SACP, remains stable at a-. The reason for this is that France’s downgrade from AAA to AA+, on January 13, 2012, was linked exclusively to “the impact of deepening political, financial, and monetary problems within the euro-zone”; in S&P’s view and from a pure French point of view, the appreciation of its economic and industry risk remains unaffected.

2nd line of thought (yellow circle) – French banks SACP

For all above cited banks, the SACP (= stand alone credit profile) remains unaffected. Naturally, the reasoning varies from one bank to another.

  • BPCE, Crédit Agricole, and Société Générale are seen to have a “strong business position, moderate capital and earnings, adequate risk position, average funding, and adequate liquidity”. Their SACP is a-.
  • BNP is seen to have a “very strong business position, moderate capital and earnings, strong risk position, average funding, and adequate liquidity”. Its SACP is a+.

3rd line of thought (green circle) – Rating uplift / down-lift due to the likelihood of government’s support

S&P applies a 2 step process to motive the rating downgrade of BPCE, Crédit Agricole, and Société Générale as well as the rating confirmation in case of BNP.

First, it evaluates the systemic importance of the specific bank in combination with the French government’s tendency to support private-sector commercial banks:

  • The French government is seen to be “supportive” of its banking sector.
  • BNP, BPCE, Crédit Agricole, and Société Générale have a “high systemic importance”.

Second, applying predefined tables that combine the above findings with France’s new AA+ rating, S&P concludes mechanically that

  • BPCE’s, Crédit Agricole’s, and Société Générale’s indicative ICR are A.
  • BNP’s indicative ICR is AA-.



The French government is seen to be “supportive” of its banking sector.
BPCE, Crédit Agricole, and Société Générale have a “high systemic importance”.

You can find more detailed explanations on S&P’s decision making process and rating methodology for banks here.


References:

  • S&P Announcement on France’s BICRA dated January 23, 2012
  • S&P Research Update on BNP dated January 23, 2012
  • S&P Research Update on BPCE dated January 23, 2012
  • S&P Research Update on Crédit Agricole dated January 23, 2012
  • S&P Research Update on Société Générale dated January 23, 2012
  • S&P Rating Methodology and Assumption – Banks dated November 9, 2011