In my previuos blog, I mentioned that many Continental European banks in the Euro-zone had balance sheet issues, owing to their large holdings of peripheral countries’ sovereign debt. With Greece effectively defaulting last week and having its ratings reduced to their lowest ratings by Fitch and Moody’s, E20 bn of the E109 bn bailout package had to be used to recapitalize Greek banks. Europe’s biggest banks outside Greece own E98 bn in Greek debt, on which they are estimated to lose E20.6 bn (21%) if everything works out as the authorities hope. Most observers are more pessimistic, pencilling in losses of between 50% and 75%, or E-50-75 bn, enough to put a sizable dent in banks’ capital. And that’s before taking losses on positions in Ireland and Portugal into account.
While the Stoxx banks Index jumped 5.7% last week on news of the rescue package for Greece, Portugal and Ireland, it is still selling at only 0.8 times published book value, and has been the worst performing of the 18 Stoxx industry sectors in Europe over the last 18 months according to Bloomberg, down 18% since the beginning of January 2010. An article on Bloomberg today (July 26th) about the second largest French bank Societe Generale (GLE-FP) notes it has E2.5 bn in Greek exposure, approximately 5% of the E56 bn of the total Greek exposure of the French banking system, which includes E15 bn of sovereign debt. This makes France the largest holder of Greek debt in Europe, according to the Bank of International Settlements (BIS)., which is why Societe Generale and two other French banks were put under review by the ratings agencies in mid July in anticipation of a Greek rescheduling.
Societe Generale, which lost E4.9 bn in 2008 when rogue trader Jerome Kerviel made E50 bn in unauthorized trades, also owns 88% of Athens based Geniki Bank (TGEN-GA), which lost E441 m last year, and another E99 m in the first quarter of 2011. Geniki has never made any money for Societe General since its acquisition in 2004. It has lost another E450 m in its 700 branch Russian subsidiary between 2008-2010, and wrote off E2.1 bn in 2008 on US debt securities, a small part of its E11 bn in writedowns since 2007. It still has E29.5 bn in legacy assets, risky securities which were badly affected by the global financial crisis and which are in run-off mode.
Yet Societe Generale is a world leader in equity derivatives, and anchored by its profitable Frennch retail bank, which has made at least E1 bn a year every year since 2005, it was profitable through the crisis, making E2 bn in 2008 and E679 m in 2009. Being paid out in full on its E11 bn of Credit Default Swaps (CDS) it had bought from AIG when the US government bailed out the giant insurer helped a lot; Societe Generale was the largest AIG creditor made whole by the US. Despite its losses in Greece and the Middle East this year, it still made E916 m in the first quarter of 2011, down 14%. In other words, Societe Generale has been one of the better European banks.
A realistic write-down on its Greek positions would be a major problem for Societe Generale, and when added to exposure to Spain, Portugal and Italy, it becomes apparent why investors have been cautious about buying seemingly cheap European banks. Dexia (DEXB-BB), the Belgian bank which was the largest user of the Federal Reserve’s emergency liquidity facility in late 2008, is selling for only 0.4 times book value, but who can trust a historic book value where debt from the PIIGS is valued at par? Societe Generale will lose E500m if the 21% write-down in Greek debt turns out to be accurate, wiping out 15% of this year’s earnings. There’s a reason that it sells for one third of its 2007 price, and the same caution applies to other Euro-zone banks.