BNP Paribas Faces Capital Hit, but Not a Dire One

As the United States authorities prepare to punish BNP Paribas, the doubts about the French bank’s financial strength are growing.

Standard & Poor’s said on Wednesday that the regulatory actions, which are expected to include a multibillion-dollar fine, could lead it to downgrade BNP Paribas’s credit rating. Some bank analysts think it possible that the bank will have to cut its dividend, potentially depriving investors of a steady source of income. News reports say that BNP Paribas’s capital could fall below crucial “minimum” levels. The bank’s shares are down 15 percent from their recent high, and scared-sounding French politicians are rallying to its defense.

BNP Paribas’s own numbers, however, put the pessimism in perspective.

In the coming weeks, the bank is expected to plead guilty to charges that it arranged transactions with countries and companies that were the subject of United States sanctions. In the settlement, BNP Paribas is expected to pay penalties totaling roughly $8 billion and perhaps agree to some temporary restrictions on a business known as dollar clearing.

The big question is how much of a hit this will cause to BNP Paribas’s capital, the financial cornerstone of a bank.

At the end of March, BNP Paribas had 67.7 billion euros, or $92 billion, of common Tier 1 capital, a closely watched regulatory measure. That $92 billion was equivalent to 11 percent of its $839 billion of assets, a sum that was adjusted under regulatory guidelines to reflect the assets’ perceived riskiness.

A capital ratio of 11 percent is considered reasonably strong in Europe right now, but how much might it be reduced by penalties imposed by the United States authorities?

BNP Paribas has already set aside $1.1 billion to absorb the costs of the United States action. Subtracting that from the $8 billion in potential penalties leaves a $6.9 billion hit for the bank, which would take its capital to $85 billion from $92 billion. But BNP Paribas is expected to make about $2 billion in the second quarter, which would be an addition to capital, taking the $85 billion up to $87 billion. That amount of capital would be equivalent to 10.4 percent of assets, still a relatively robust ratio.

Even so, investors and analysts are unsettled.

A chief reason is that the European Central Bank is carrying out some reasonably stringent stress tests that will seek to determine whether banks have sufficient capital. These tests require that large banks have a capital ratio of 8 percent after factoring in theoretical losses sustained during a projected dire economic situation. It is not yet possible to know whether BNP Paribas will emerge from the tests with a capital ratio above 8 percent. But as the stress tests loom, investors are keen for large European banks to have capital ratios well in excess of that level.

To reflect such investor concerns, Jon Peace, a bank analyst at Nomura in London, performed an interesting exercise this week. He calculated how much capital certain large European banks would have in excess of a 9 percent ratio. (He chose that number in part because many large banks must have at least a 9 percent ratio by 2019, according to international banking regulations.)

Mr. Peace said that BNP Paribas would have $15.4 billion of excess capital under this approach. That is not an insignificant sum.

BNP Paribas may yet take significant steps to protect its capital that investors would not like. The bank could, for instance, decide to cut its dividend or pay out some of the dividend in an equivalent amount of stock, which doesn’t erode capital.

But one thing is clear: The United States penalties are not going to leave the French bank with a gaping wound that it will struggle to recover from.