Capital capitulation

BNP concedes on capital with US bank rethink

BNP Paribas has spent months resisting market overtures for it to strengthen its balance sheet. On December 23 France's largest bank by assets said it was reviewing options for First Hawaiian Bank, one of its two American businesses. Selling the fully owned subsidiary would allow BNP to meet new capital requirements for globally systemic institutions by mid-2017, the French lender reckons, 18 months ahead of a regulatory deadline.

There's a more immediate need for a capital fix. BNP Paribas' common equity Tier 1 (CET1) ratio is below that of peers. It was 10.7 per cent on fully applied Basel III rules at the end of September, versus an average for European banks calculated by Morgan Stanley of 11.8 per cent.

BNP says selling First Hawaiian would lift its ratio to 11.1 per cent. How? Putting First Hawaiian in line with peer Bank of Hawaii on capital and valuation terms - a big adjustment since the two carry very different leverage - might see the BNP unit fetch $3 billion, or euro 2.7 billion. So, BNP could secure a small premium to First Hawaiian's $2.7 billion book value. It would also be free of the obligation to set capital aside for First Hawaiian's assets.

Japan's Nomura, trying to build in America again, might be a possible buyer of this outpost in the Pacific island famed for its surfing and grass skirts. US banks have generally steered clear of Hawaii, but rising domestic interest rates could prompt a rethink. And, the strength of the dollar could attract other international bidders or make an initial public offering appealing.

If the French bank cut its 2015 dividend, its CET1 ratio would rise by a similar amount. It has committed to a 45 per cent payout ratio costing around euro 2.7 billion, which represents 0.4 percentage points on its CET1 ratio. That takes account of an adjustment to Eikon estimates of the bank's full-year net income for an upcoming euro 900 million goodwill charge, which BNP has said it will take in the fourth quarter on its Italian business. Nixing a year's worth of dividends may be an indignity too far for BNP. But the French bank is saying "aloha" to new realism on capital. Oui, finalement.