BPCE’s capital ratio falls as it waits on Covid loan relief

Delay to state guarantee benefits took 32bp off of CET1 ratio

Groupe BPCE’s risk-weighted assets (RWAs) increased €8 billion ($9.4 billion) to €430 billion over the three months to end-June, after issuing a slew of loans eligible for state guarantees. These assets will benefit from capital relief, but a two-month time lag imposed by the government means the increased exposures added to its regulatory capital burden over Q2.

The French bank said the pile-up of state guaranteed loans took 32 basis points off its Common Equity Tier 1 (CET1) capital ratio, which ended June at 15.4%, down a little from 15.5% three months prior. Had it been able to apply the government relief immediately, the ratio would have been 15.6% and total RWAs €6.8 billion lower.

Groupe BPCE said it had issued 157,000 loans eligible for state backing as of end-July, amounting to €24 billion of new exposures. Of these, 26.2% were to the wholesale and retail trade and 18.1% to the tourism industry.

 

The CET1 ratio reducing effect of these new loans was counteracted somewhat by efforts to crimp exposures elsewhere. The bank said a gross 8bp benefit to the ratio followed the lowering of RWAs not linked to state-guaranteed assets. An additional 9bp benefit followed favourable changes to other comprehensive income.

What is it?

In response to the Covid-19 pandemic, the French government said it would back €300 billion of bank loans while the state-backed investment bank, BPI, would make €5 billion of zero-collateral loans and give payment holidays to certain types of borrowing taken by small and medium-sized enterprises.

Why it matters

With its state guarantees, the French government hopes to stoke lending for businesses struggling with the economic fallout of the coronavirus crisis. But as BPCE found, the assistance comes with strings attached.

The idea of the two-month lag between loan disbursement and capital relief is supposed to head off attempts by banks to extend high-yield, but high-risk, credit to unworthy companies, which if they defaulted would cost the taxpayer.

After this waiting period, the guaranteed portion of the loan is assigned a 0% risk-weighting, meaning a bank need not assign any regulatory capital to the exposure. 

Fitch estimates that 70–80% of corporate loans eligible for relief will attract the 0% weighting. Still, the uncovered portions of these exposures could suck up earnings and deplete capital if they deteriorate in quality as the coronavirus-induced recession deepens.

In this scenario, the state guarantees offer a delay to, rather than a complete pass on, future capital pain.

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