http://wcorporate.bnpparibas.com/applis/wCorporate/wCorporate.nsf/docsByCode/DMMI-8MKMN8/$FILE/HB.pdf
Handelsblatt: Mr Prot, how do the financial markets look to you?
Mr Prot: The banking industry is struggling with problems caused by several issues: a slow-down in growth almost everywhere, the implementation of a new set of regulations, and the debt crisis in the Euro zone. All those factors weigh on the market value of European banks. Still, I think the markets overreacted. In the euro zone there is a core group of rich countries like France and Germany where private household debt is low. At the same time, the governments of weaker countries are taking the necessary measures to straighten out their budgets. Deficit limits have even been enshrined in constitutions, which shows that nations are serious about consolidation.
Do you really trust the statements of heads of governments? Look at the fiasco in Italy now, with constant new plans to clean up the state budget.
Mr Prot: Let’s deal with the core countries first. France has a deficit-rate target of 4.6 per cent in 2012 and three per cent in 2013; in Germany it is 1.5 per cent in 2012 and one per cent in the year thereafter. In Italy it is 1,7% in 2012 and zero in 2013, when Italian expenditures will almost equal tax revenues. This is impressive.
...what does that mean for Italy?
Mr Prot: In July, the Italian Parliament approved austerity measures totaling 48 billion euros. In addition, it has in the last few weeks also approved to reduce expenditure by 54 billion euros, and the package provides for a return to balanced budgets from 2013. It is one of few countries that is able to achieve such a feat so quickly. They are also planning to raise the value added tax by one per cent. So the fears of a possible default following the downgrading have no real foundation. The doubts have more to do with the political context than the economic situation.
Wasn’t it the markets which forced the most recent measures? The on and off-again plan to reduce the austerity package in Italy resulted in a massive loss of trust among investors.
Mr Prot: The important thing is that the second package has now not only been approved by the Parliament but is also being implemented.
Does the market trust the Italians again or are the purchases of government bonds by the European Central Bank (ECB) the only things helping now?
Mr Prot: The crucial factor is the quick and complete implementation of the two austerity packages.
France has it’s problems too, are you sure that France will continue to receive a top triple A rating?
Let’s look at the US first. The reduction by Standard & Poor’s of the US credit rating was based on its assessment of the political decision-making processes there.
This decision was controversial. It unsettled the market overall. The situation is different in France: The three big ratings agencies, S&P, Moody’s and Fitch, all re-affirmed France’s top AAA rating. The outlook there is stable and the French government has taken a clear stance. Everything is directed towards taking the right measures so as not to endanger the credit rating, including, for example, pension reform, which will have positive effects on the trend of expenditures over the next few years.
And...?
Mr Prot: France is one of the few European countries that benefits from healthy population growth, meaning that it is not shrinking, as opposed to, say, Germany. This demographic shift will pay dividends in the next few years with regard to economic growth, contributing to a rise tax revenues.
Mr Prot, What is your projection of economic growth?
Mr Prot: In our scenario, which we consider the most likely, although we assume low rates of growth, they remain positive.
In view of the discussions about ratings and the problems of the banking industry, are you still able to get a good night’s sleep? Are France’s banks afraid of being drawn into the vortex?
In terms of BNP Paribas’ stock, the price has fallen by approximately 30 per cent since the beginning of the year. This is in line with a lot of our European competitors, but also with American banks. Prices are being pressured by a mood of pessimism marked by fears about both growth prospects and debt levels. When there is too much uncertainty in the environment, markets often overreact. If you take the net book value per share of BNP Paribas, which is around 57 euros, and compare that with a stock price of 33 euros there is a discount on the value of the stock of almost 25 billion euros.
You spoke of an overreaction by the markets. But the banks don’t even trust one another: They’d rather invest their money in the ECB than lend to another bank. Why?
Mr Prot: The interbank market for the large European banks does not collapse, because the banks know each other, they know how the business is going in Europe and there is a mutual climate of trust. Moreover, the future liquidity rules under Basel III have already been anticipated. There is no panic, only structural changes that the banks have already implemented.
Regarding BNP Paribas, the situation is clear: we have access to abundant short term euro funding from a wide range of sources.
On the USD side, as you know, for regulatory issue as well as overblown fears on European sovereign debt, the amount of cash from US Money Market Funds has eroded since July. However, in any case, we have developed alternative sources of US fundings, either by diversifying the source (type of counterparty and geographical area) or by doing more foreign exchange swaps. In addition, BNP Paribas has 15 billion euros of excess US dollars cash deposited at the US Federal Reserve and 20 billion euros of High quality liquid assets eligible to this institution. Last but not least, our announced deleveraging plan focuses mainly on dollar assets, with a reduction target of 60 billion US dollars by 2012, and that will, relatively quickly, reduce our funding needs in dollars.
Does BNP Paribas have a big liquidity buffer?
Mr Prot: Yes, it totals approximately 135 billion euros. Our securities can be deposited at the ECB in order to obtain fresh money. Another 30 billion dollars can be deposited with the US Federal Reserve for security sale and repurchase agreements. At the moment, we have 35 billion euros on deposit with the Central Banks, which as I said before includes 20 billion US dollars on deposit with the US Federal Reserve. In June, we also completed our 35 billion euro medium and long-term refinancing programme for this year. As at today we have raised a total of 41 billion euros this year with an average term of six years..
But isn’t the banking industry stuck in a situation similar to the bankruptcy of the investment bank Lehman Brothers three years ago, which triggered the financial crisis?
Mr Prot: No. The situations are not comparable. The main difference lies in the quality of assets found in bank balance sheets. Three years ago, nobody knew how much toxic assets there were in each bank and the risks of losses linked to these assets were imminent. Today the situation is different. Government bonds from the core region of the euro zone are and remain high-quality investments. At the same time, everybody knows where the government bonds are located in bank balance sheets.
Somehow we get the feeling from your words that Europeans have the « bad guy » image and Americans have the problems. Is that right?
Mr Prot: I consider it very important that we here in the euro zone, with our 17 members, explain where we stand. Countries that have problems with a lack of tax revenue and state budgets that are getting out of hand must take their own suitable countermeasures and communicate them as well. At the same time, Europe must develop into a Europe of common interests and the parliaments in individual countries must approve bailout funds. All in all, the countries must remain competitive, despite all these measures. Germany can be considered a prime example in this regard for how an economy can prosper after serious structural reforms.
Have you recently called Christine Lagarde, the former finance minister of France, and told her: What were you thinking when you made your statements about the need of Europe’s banks for an additional 200 billion euros in capital? What made you say that?
Mr Prot: The problem is the method by which the capital requirements were calculated. The calculations were based on credit insurance, so-called “credit default swaps” on government bonds. The result was converted to losses – and thereafter projected in capital requirements. But that is too simplistic and not a fair analysis. There are clear accounting and supervisory-authority rules for equity capital, and we apply them rigorously.
In spite of everything, in view of the new supervisory rules under Basel III, will we see capital increases at banks?
Mr Prot: I can’t speak for other banks. In the case of BNP Paribas, our core capital ratio at the end of June was 9.6 per cent. We built up our equity capital by leaving two-thirds of the generated profits in the bank. In this way we were able in the last three years to double our capital from 29 to more than 57 billion euros. We will continue to build our equity capital through retained earnings. But now, there is a new challenge: complying with the Basel III regulations, where the definition of capital is stricter than before, and where such assets as sovereign debts will be marked to market. I recently announced an adjustment plan that will enable us to achieve a ‘common equity Tier 1 ratio’ above 9% by end of 2012, in line with the Basel 3 requirements and six years ahead of the timetable set by the regulators, without a capital increase. To get there, we will gain 100 basis points - the equivalent of 70 billion euros in risk weighted assets - by an important program of deleveraging and downsizing our balance sheet, and also the disposal of some assets and credit portfolios. Everybody in the company is mobilized to make sure we reach our targets while remaining able to provide a full range of services to our core European corporate clients.
Does investment banking have to be shrunk dramatically? After all we have always been told that banks no longer do proprietary trading.
For proprietary trading, it is something that BNP Paribas does not engage in. For capital markets more broadly, the contraction in bank lending due to Basel 3 will increase the need for access to capital markets, especially Fixed Income, a business line where we have outstanding capacities in euro, but also in dollars. It is an example of how we put capital markets at the service of our clients, and we will for sure continue to do so.
Can you be more specific as to what and where exactly you want to sell?
Our adjustment plan will be achieved through a number of levers. Asset sales is only one of these levers over the longer-term. We will announce more details of our plan when we present our third quarter results on 3 November.
What are BNP Paribas’ plans in Europe and in Germany?
BNP Paribas remains firmly committed to our European home market. We will continue to deploy our "one bank for corporates in Europe" strategy, that relies on our outstanding network of business centers in Europe. This of course applies to our business in Germany which is the biggest country of the eurozone and thus a key market for all our business to business divisions.
Will investors be satisfied that because of retained profits, in the future they won’t receive any dividends or only a small one?
Mr Prot: Now, the dividend is decided each year by the Supervisory Board after the net results for the year are known. In the last few years, BNP Paribas has distributed approximately 30 per cent of its profits.
Can you keep that up if the burdens from the investments in government bonds become too great?
Mr Prot: Again, this is something the board will have to consider in due course.
Do you write off 50 percent of the market value of your Greece investment for prudential reasons or are you using 21 per cent as the standard demanded by the auditors?
Mr Prot : 21% is the outcome of the negociations between ECB and private investors, on one side, and euro governments, on the other side. Market price were not representative anymore of a liquid market. If the program is timely implemented, we already announced that we will consider further provisioning of our Grek exposure.
But what is happening with the bonds that become due only after 2020 and which are not part of the aid package?
Mr Prot : The rules clearly stated that only bonds that run until 2020 had to be written off by 21%. That is what we did !
Would euro bonds bring relief in the current difficult situation?
Mr Prot: I believe euro bonds could be an attractive financial instrument. But that’s not feasible at present.
How great a danger is there that the euro zone will break apart?
Mr Prot: I believe the core countries want the euro, not just for now, but for the long term. That is why they will do everything to overcome difficult times. In my opinion, that is the correct path and in the interests of euro countries such as France and Germany.
The European decision-making process is inherently complex, yet even so, European leaders are taking forceful decisions. The ECB and other European institutions have committed to supporting the financial strength of the Eurozone through an increase of resources including the European Financial Stability Facility and the European Financial Stabilisation Mechanism. It is vital that the process continue to move forward. The positive vote by the Bundestag is a crucial step in the right direction and has clearly had a stabilising effect on the market.
Do you think the ECB will have to purchase long-term government bonds?
Mr Prot: Since it was founded ten years ago, the ECB has built up a great deal of trust. I am convinced that the Central Bank will take the right measures and make the right decisions. If for a transitional period certain countries will need help by the purchase of bonds, then that is okay in my opinion. But the individual countries themselves must make efforts to straighten out their budgets.
Do you want to take over IKB, the bank for small and medium-sized businesses, or is the planned purchase on ice because of the turbulence [in the markets]?
Mr Prot: no comment.
In principle: Does it make sense in difficult times to buy a bank?
Mr Prot: I personally believe that takeovers in the banking sector are not on the agenda at present. That applies in particular to medium to large-scale transactions. It’s not the right time for that.
When will the times get better again?
Mr Prot: It is surely not a question of days but rather of weeks until the fears of investors subside. If we want to get rid of those fears, we need Europe to show a better capacity to speak as one voice and act accordingly.
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