French banks surge on state injection

French banks surge on state injection


The shares of France’s main banks soared on Tuesday after the government said it would inject €10.5bn ($14bn) into the six largest players in an effort to shore up their balance sheets and ensure they continued to provide credit to consumers and businesses.

The move was indispensable if banks were to be “in a position to properly finance the economy”, said Christine Lagarde, finance minister, on Monday night.

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SocGen leads falls on fears of illiquidity - Oct-20European View: Moral guillotine falls at Caisse d’Epargne - Oct-20Full coverage: Global financial crisis - Oct-08Lex: French banks stumble - Feb-19Foreign acquisitions boost BNP earnings - Feb-15Domestic woes weigh on SocGen - Feb-14Until then, France’s banks had given no indication they were interested in acessing a €40bn recapitalisation fund unveiled by the government last week.

But Ms Lagarde said Crédit Agricole would receive €3bn, BNP Paribas €2.55bn, Société Générale €1.7bn, Crédit Mutuel €1.2bn, Caisse d’Epargne €1.1bn, and Banque Populaire €0.95bn.

Crédit Agricole shares opened 7.6 per cent higher on Tuesday, BNP Paribas rose 8 per cent while SocGen shares rose 10.7 per cent. The benchmark CAC-40 average was trading 2.4 per cent higher.

The capital will come in the form of subordinated loans that are repayable after other debts have been met, do not dilute existing shareholders and do not require a change in dividend policy. Nevertheless, subordinated debt can nonetheless be used to increase the banks’ tier one capital ratios, a main measure of balance sheet strength. The loans will be provided at base rate plus 400 basis points.

The French finance ministry said the plan, agreed in principle with the banks, was subject to approval of the European Commission’s competition authorities.

The Bank of France, which also acts as the country’s banking regulator, is expected to raise from 25 per cent to 35 per cent the proportion of tier one capital than can be a hybrid of equity and debt instruments.

Officials in Paris insisted the state was providing the loans not because the banks in question were in difficulty but because the government wanted to ensure that they were able to continue to provide credit for households and companies.

Christian Noyer, governor of the Bank of France saidon Monday that French banks “absolutely did not need new shareholders’ funds” and were “very well capitalised”.

He said: “The aim of this operation is not to recapitalize banks… but to assist in the financing of the economy and the provision of new credit”.

Officials said the move was intended to help French banks maintain their relatively high solvency ratios, and enable them to keep pumping credit into the real economy even though their share prices were under pressure, officials said.

France’s banks have shown little interest in the government’s €40bn recapitalization fund, perhaps fearing the stigma if they sought to use it. SocGen’s share price took a poundingon Monday amid rumours that it was seeking government capital.

Earlier in the day, François Fillon, prime minister, said banks wishing to access the government’s €320bn loan guarantee fund would have to promise to increase their stock of credit at an annual rate of 3 to 4 per cent to qualify. The same will apply to banks receiving capital from the state.

However, with demand for credit set to slow as the economy decelerates, some banking leaders have suggested mainting credit flows could be difficult to ensure. Banks will be required to provide monthly reports to the government on how they are using their injections of public money to finance the real economy.

Banks benefiting from the scheme will also have to respect pay curbs for top managers, with restrictions on severance payments and stock-options. All French banks last week agreed to abide by a code of practice setting out these curbs.

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