Contacted a few days ago to learn more about the amount of their eligible assets to the ECB or the Fed, their need for funding in euros and dollars, the impact of U.S. money market freeze, BNP Paribas was the only one to answer. Spared by the rating agencies, unlike its counterparts, the french Bank had indeed anticaped and detailed in an internal memo the set of answers to frequently asked questions about the situation of the bank, the euro area and the markets in general.
Below are BNP Paribas answers to the most frequently asked questions regarding its balance sheet, funding position and asset portfolio:
Why does BNP Paribas hold one of the largest sovereign debt portfolios among peers? How does BNP Paribas intend to manage its sovereign debt portfolio in the short and medium term?
Our Eurozone Government bonds banking book portfolio has been brought down to a total of €75bn [1] as at 30 June 2011. Its purpose is essentially two-fold:
a) To provide a liquidity buffer which can be used in situations of liquidity stress, given that government securities are still considered by regulators as one of the most liquid and non-risky assets available for such purpose;
b) As a structural hedge for our deposit base in our four domestic markets, in particular against interest rate risk for non-interest bearing accounts such as current accounts in France.
Why is your exposure to Italy’s sovereign bonds so large?
Our banking book sovereign bond exposure to Italy is €21bn, 1.7% of BNP Paribas’ total commitments. This amount represents only 1% of the total value of Italian bonds outstanding. The Italian debt market has been liquid and widely used as an interest rate management tool by banks and investors, including BNP Paribas at a time when government bonds were deemed risk free.
How likely is it that the current crisis could lead to a freezing up of money markets and overnight interbank lending, similar to what we experienced during the Lehman crisis? Are you well-equipped and sufficiently liquid to deal with such an adverse scenario?
The situation today is very different. Among the large European banks, the fall in activity in the interbank market is not mainly due to counterparty risk issues, but to the banks pre-empting the impact of the future Basel liquidity regulation. The interbank market is therefore likely to focus on instruments of one-month duration or less, which is in line with what BNP Paribas had expected.
Regarding BNP Paribas’ funding position:
BNP Paribas has access to substantial short-term euro funding from a wide spread of sources. Conditions and maturities have not significantly changed in recent weeks. There has been no shortage of funds and no change in counterparties.
In USD, we have an excess of short-term liquidity which the bank is obliged to deposit at the Fed.
BNP Paribas has been taking steps since the start of 2011 to secure its funding position by proactively increasing the duration of its short term resources (one month to three months, three months to six months and so on).
Despite the lower level of funding available to European banks from US
money market funds in August, BNP Paribas has been able to tap a wide variety of funding sources. For example, US dollar funds have been sourced from corporates, supras, institutionals, Central Banks, wealth management clients, as well as money market funds across four geographic areas (USA, Asia-Pacific, Gulf countries, Western Europe). The bank has also had recourse to foreign exchange swaps to maintain access to US dollar funds.
The recourse to alternative US dollar funding sources has had cost implications which have impacted pricing.
In addition, BNP Paribas has a sizeable liquidity buffer: BNP Paribas has around €150bn of unencumbered assets eligible as collateral with central banks, of which USD30bn eligible under US Federal Reserve criteria. These eligible assets are made up of Government bonds, loans to United States or Eurozone corporates; selffunded securitizations, and CDs (Certificates of Deposit).
The bank has already secured its long-term position: BNP Paribas 2011 medium and long term funding programme of €35bn was completed in June. As of today a total of €38bn has been raised with an average maturity of 6 years. The USD part represents about 40%.
CDS spreads current levels for European Governments as well as for European Banks do not reflect the bank’s true cost of funding, even senior unsecured funding, which is considerably lower. Furthermore, even in troubled times, BNP Paribas has benefited from “the flight to quality” and has been able to raise funds through covered bonds or private placements at reasonable cost.
Is BNP Paribas actively reducing the size of its balance sheet and/or changing its composition?
BNP Paribas is monitoring the size of its balance sheet pro-actively. The size of BNP Paribas’ balance sheet (€1.9 trillion as at 30 June 2011) is inflated by International Financial Reporting Standards (IFRS) which do not allow for netting of derivatives and other trading items, which is authorized under US GAAP. The netting according to the US GAAP rules would reduce the balance sheet by 25%.
BNP Paribas is clearly a Global SIFI (Systemically Important Financial Institutions), but its Common Equity Tier One Ratio is below 10%, which regulators are increasingly viewing as a minimum requirement for Global SIFIs. Is your Common Tier One Ratio sufficient in the current uncertain market environment, or will you seek to bolster it?
BNP Paribas already has a Common Equity Tier One ratio of 9.6% as at 30 June 2011. The EBA stress tests showed the resilience of our capital base even in a severe downturn scenario with a 7.9% result. BNP Paribas has constantly been profitable through the 2007-2010 crisis and consistently reinforced its capital base by retaining two-thirds of its profits. We have already doubled our capital base over the past three years. Thanks to our high level of profitability (our H1 2011 annualized 13.8% ROE is the highest in our peer group) we should gradually reach the required level for a Global SIFI without any need of capital injection
The set of questions - answers related to sovereign debt, liquidity, euro area is available in the attached document.
