Dexia Falls as Board Asks Chief to Resolve ‘Structural Problems’

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October 04, 2011, 4:15 AM EDT By Fabio Benedetti-Valentini and John Martens

(Updates to add finance minister’s comments from sixth paragraph and shares down most ever.)

Oct. 4 (Bloomberg) -- Dexia SA, Belgium’s biggest bank by assets, tumbled the most ever in Brussels trading after its board asked Chief Executive Officer Pierre Mariani to take steps to fix the company’s “structural problems.”

“In the current environment, the size of the non-strategic asset portfolio impacts the group structurally,” Dexia said in an e-mailed statement today. “This is why the board of directors asked the CEO, in consultation with the relevant governments and the supervisory authorities, to prepare the necessary measures to resolve the structural problems.” The bank didn’t elaborate on its plans.

The shares slid as much as 38 percent, the steepest intraday decline since the lender’s formation in 1996. The board met yesterday to discuss a possible breakup of the company after the sovereign-debt crisis reduced its ability to obtain funding, three people with knowledge of the talks said. Dexia may set up a “bad bank” for its troubled assets, hive off its French municipal loan book into a venture funded by state-owned La Banque Postale and Caisse des Depots et Consignations, and seek buyers for its Belgian bank, Denizbank AS in Turkey and its asset-management division, one of the people said.

The discussions are complex because Dexia is based in Brussels and Paris, and has both governments as shareholders.

State Support

“Dexia is an extremely complicated file,” said Benoit Petrarque, an Amsterdam-based analyst at Kepler Capital Markets with a “hold” rating on the shares. “The fact that two countries are involved, both under pressure from rating agencies, makes it even more difficult. We are not in 2008 anymore, when you could just inject multibillions of cash.”

Belgian Finance Minister Didier Reynders said the government will support Dexia if necessary. “If it is needed, we will act,” Reynders told reporters today in Luxembourg. “First of all, we need to read all the proposals coming from the bank.”

State shareholders will support Dexia to allow it to roll out measures “in an orderly manner and under the best conditions,” Dexia said, without elaborating.

Stock Slide

The stock was down 29 cents, or 22 percent, to 1.01 euros at 8:50 a.m. in Brussels, cutting Dexia’s market value to about 2 billion euros ($2.6 billion). The shares plunged more than 10 percent yesterday as speculation grew that the bank would seek a second bailout.

A breakup of Dexia would mark the clearest evidence yet that the banking crisis spurred by Europe’s sovereign debt woes is spreading from the periphery to the core of the euro region. Dexia posted a 4 billion-euro loss for the second quarter, the biggest in its history, after writing down the value of its Greek debt.

Dexia, once the world’s biggest lender to municipalities, received a 6 billion-euro bailout from Belgium, France and its largest shareholders in September 2008 following Lehman Brothers Holdings Inc.’s collapse.

Moody’s Investors Service put Dexia’s three main operating units on review for a downgrade yesterday on concern the lender was struggling to fund itself.

Moody’s Review

“Dexia has experienced further tightening in its access to market funding,” Moody’s said in a statement. “Dexia’s collateral postings have increased due to substantial market volatility.”

Dexia emerged from the 1996 merger of Credit Local de France and Credit Communal de Belgique SA, the biggest municipal lenders in their respective countries. Unlike Credit Local de France, which relied exclusively on wholesale funding for its lending, the Belgian firm also operated a retail bank in Belgium and a private bank in Luxembourg.

In September 2008, France and Belgium led the first rescue of Dexia, buying a combined 3 billion euros of stock. The bank’s existing shareholders, which include Caisse des Depots et Consignations and Belgium’s Holding Communal SA, provided an additional 3 billion euros.

Less than a month later, Dexia also obtained as much as 150 billion euros of debt guarantees from France, Belgium and Luxembourg, of which it tapped a maximum of about 96 billion euros in May 2009. The bank stopped issuing government-backed debt in June 2010. It still had 29 billion euros outstanding at the end of last month.

Short-Term Funding

Dexia had sought to reduce its reliance on short-term funding following its rescue. Borrowings due in less than a year declined to 96 billion euros, or about 19 percent of total assets, at the end of the second quarter from as much as 250 billion euros at the end of 2008, according to company filings.

The bank also reduced lending to municipalities as funding dried up. Dexia’s French unit cut municipal lending to 1.26 billion euros in the first half, a 54 percent decrease from the same period a year earlier, according to its semi-annual report. It also stopped lending in Italy after halting loans to municipalities in the U.S, Germany and Britain.

As funding markets froze during the sovereign crisis, the lender turned to the European Central bank for emergency funding. It used the proceeds to buy dollars. The lender said on Aug. 4 that central-bank borrowings had doubled to 34 billion euros in the second quarter. Dexia has about 20 billion euros of assets left it could use as collateral to obtain additional loans from the ECB.

Greek Writedown

Dexia’s largest shareholder following the 2008 rescue was Caisse des Depots with a 17.6 percent stake. Holding Communal, a municipal holding company that was Credit Communal de Belgique SA’s main investor before the 1996 merger, and Arcofin CVBA each own about 14 percent. Belgium’s federal and local governments own about 11 percent in total while the French government owns a 5.7 percent stake directly.

After taking a 377 million-euro pretax writedown on its Greek bond holdings maturing before the end of 2020, Dexia still faced 3.02 billion euros of potential markdowns on its holdings of Greek, Italian, Portuguese, Spanish and Irish government bonds on June 30.

The bank’s holdings of sovereign debt in those five countries total 21 billion euros. That compares with regulatory Tier 1 capital of 14.4 billion euros, equal to 11.4 percent of risk-weighted assets.

Dexia trimmed its bond portfolio, which it was seeking to reduce, to 95.3 billion euros at the end of June from 111.7 billion euros at the end of 2010, according to its website. The bond portfolio includes 7.7 billion euros of non-investment grade notes, mostly to sovereign and public borrowers.

--With assistance from Jacqueline Simmons in Paris and Jones Hayden in Brussels. Editors: Keith Campbell, Edward Evans.

To contact the reporters on this story: John Martens in Brussels at jmartens1@bloomberg.net; Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net.

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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