Top French bank BNP Paribas plans to sell 70 billion euros ($96 billion) of risk-weighted assets to ease investor fears about French bank leverage and funding as its main rivals were hit by ratings downgrades.
BNP escaped Moody's Investors Service's review of French banks without a cut, but the credit rating agency said it would extend its review for a possible downgrade of BNP's long-term debt and deposit ratings.
Surely it can only be a matter of time before BNP Paribas follows in their wake as the bank announces a restructuring plan to increase capital, probably in order to head off a downgrade at the pass, said Michael Hewson, market analyst at CMC Markets, referring to the Moody's downgrades of Societe Generale and Credit Agricole.
BNP shares were down 4.6 percent by 0828 GMT after earlier losing nearly 10 percent, as the European sector lost 0.5 percent. Credit Agricole was 1 percent lower, and SocGen was down 4.9 percent, having also been down 10 percent earlier.
French banks are fighting to restore confidence after suffering a sharp summer sell-off on the stock market, driven by concerns they are too dependent on wholesale market funding and would be ill equipped to cope with the fallout from a Greek debt default.
The industry's main regulator, Bank of France Governor Christian Noyer, called the Moody's downgrade of Credit Agricole and Societe Generale very small, noting the ratings agency said the banks had enough capital to cover any losses.
BNP announced the move to cut its borrowing needs and reduce costs two days after smaller rival Societe Generale unveiled a similar plan as talk about a possible Moody's downgrade grew louder.
These plans that have been announced in the last couple of days ... are things that we will certainly take into account with our review ... They effectively signal the impact of more fragile market conditions on banks' strategies, Moody's analyst Nick Hill said in an interview.
The main French banks have insisted, with Noyer's support, that they are financially strong and well funded, but some analysts insist they will ultimately need to raise capital, possibly with government backing.
I haven't seen any bank in Europe managing to avoid capital raising through asset disposals, and I don't see why it should work now with the market at the bottom, said Antonio Guglielmi, an analyst at Mediobanca in London.
I'm not a buyer of any asset disposal plan as a means to shore up capital levels. Not just for the French banks; in general, we've seen it doesn't work.
Earlier this week French Industry Minister Eric Besson said it was premature to talk about any kind of partial nationalization of the French banking sector, as some experts have said may ultimately be needed.
Such a move would come at a heavy price for the French government, since it would further jeopardize the country's prized triple-A sovereign credit rating, already seen as vulnerable after Standard & Poor's downgraded the United States.
In a presentation posted on BNP's website on Wednesday, the bank said the asset sales would reduce its balance sheet by around 10 percent. The bank will also reduce its U.S. dollar funding needs by $60 billion by the end of 2012, it said.
U.S. dollar funding costs have ramped up recently as European banks are forced to diversify their sources following jitters on the U.S. money markets about the euro zone debt crisis.
U.S. money market funds slashed their holdings of securities issued by French banks on worries over their high exposure to peripheral European debt, J.P. Morgan analysts said on Friday.
By selling assets and freeing up capital, BNP will be in shape to reach a core Tier 1 ratio of 9 percent on January 1, 2013, under the new Basel III regime of tougher capital requirements, the bank said.
Addressing concerns over its exposure to Greek sovereign debt, which is the highest among France's banks, BNP said a hypothetical 55 percent additional writedown of its portfolio would lead to a manageable loss before tax of 1.7 billion euros.
Its first-half pretax profit was 7.4 billion euros.
The bank said there would be a potential hit in the third quarter from its Greek debt exposure.
BNP Chief Executive Baudouin Prot, who is due to move up to the chairman role later this year, will present the plan at a Barclays investor conference in New York later on Wednesday.
SocGen CEO Frederic Oudea presented his own bank's plan on Tuesday.
Analysts estimate SocGen will have to sell around 40 billion euros in risk-weighted assets to meet its own targets.
($1 = 0.731 Euros)
(Additional reporting by Blaise Robinson, Christian Plumb, Daniel Flynn and Vicky Buffery; Editing by James Regan and Will Waterman)