Capital concerns hit BNP Paribas on report of $10 bln U.S. fine

Reuters - UK Focus

* Investors fear possible loss of dividend, capital impact

* French central bank following case with "utmost attention"

* Shares down as much as 6 pct to lowest in over 8 months (Adds Moody's comments, details)

By Alexandre Boksenbaum-Granier and Lionel Laurent

PARIS/LONDON, May 30 (Reuters) - Fears that a looming U.S.fine on BNP Paribas (Milan: BNP.MI - news) could be big enough to force it toraise capital and restrict its dividends hit France's biggestbank on Friday, driving its shares sharply lower.

France's central bank said it was following the case "withthe utmost attention" after a report in the Wall Street Journalsaid the U.S. Justice Department wanted $10 billion from thebank - double the amount previously reported and more than 20percent more than BNP (Paris: FR0000131104 - news) 's 2013 pretax income.

BNP declined to comment on the report.

Shares in BNP dropped as much as 6 percent to their lowestin more than eight months, slashing almost $5 billion off thebank's stock market value. The decline took its loss to 18percent since Feb. 13, when the bank first took a 1.1 billioneuro ($1.5 billion) provision for a potential sanctions fine aspart of a total litigation provision of 2.7 billion euros.

There was also a rise in the cost of its debt insurance.

Analysts at Citigroup (NYSE: C - news) noted a fine of the magnitude reportedwould cut BNP's capital ratio to below 10 percent - a level seenas key to staying out of the danger zone as the European Unioncarries out "stress tests" of banks' financial health.

"This is not good news as we approach the stress tests ... Acapital increase may very well be a solution," said YohanSalleron, a fund manager at Mandarine Gestion in Paris who cuthis exposure to the bank at the start of the year.

"Potentially the bank may not pay a dividend for the nexttwo years ... There is a very real reputation risk."

BNP had pledged to raise its dividend payout ratio to 45percent of net profit in 2016 from 41 percent in 2013.

The U.S. Justice Department's investigation is a criminalprobe into allegations that the French bank evaded U.S.sanctions against Iran and other countries for years.

The newspaper report said the final settlement could be lessthan $10 billion. Still, the multibillion dollar figure wouldput the fine among the largest penalties imposed on a bank andis far higher than what BNP has provisioned for.

UTMOST ATTENTION

Societe Generale (Paris: FR0000130809 - news) analysts estimated that every $1 billiondeviation from the 10 billion base would equivalent to a 12basis point change in the bank's core Tier 1 capital ratio, akey measure of its financial strength.

Investors also fear BNP could face being excluded fromactivities in the United States should it not accept a heftyfine. They want a quick settlement to avoid further uncertainty.

BNP's five-year credit default swaps - an investor tool toinsure against default - were 7.5 percent wider.

France's government has said little about the issue since itsurfaced early this year. President Francois Hollande wassharply critical of banks and their part in the financial crisisahead of taking power in 2012, calling the world of finance his"main adversary".

An official at Prime Minister Manuel Valls' office said itwas being kept informed but the issue was "a matter between aprivate business and U.S. justice". A central bank spokeswomansaid the bank's chief Christian Noyer was following the case"with the utmost attention".

Since Credit Suisse agreed to pay more than $2.5billion for helping Americans avoid taxes, Noyer has expressedconcerns about U.S. prosecutors' pursuit of European banks.

The finance ministry and Hollande's office declined comment.

The hard-right National Front, which secured more votes thanHollande's Socialists and mainstream parties of the right inrecent elections, called the affair a "racket" and said thegovernment should "defend and protect the interests of millionsof French depositors".

STIFF PENALTIES

BNP Chief Executive Jean-Laurent Bonnafe and the bank'slawyers met with the New York Department of Financial Servicesin early May to plead for leniency, sources familiar with thediscussions have told Reuters.

One source said the regulator, led by Benjamin Lawsky, wasoffering to spare the bank revocation of its licence providedother stiff penalties were included in the settlement. Suchpenalties could include temporarily suspending dollar clearingthrough New York (Frankfurt: HX6.F - news) and terminating more than a dozen employees,though no final decision has been made, the source said.

Moody's rating agency said in a note BNP could face apotentially significant loss of client business in the UnitedStates if it was subject to a criminal charge.

The loss of institutional clients could limit BNP's accessto short-term wholesale funding, Moody's analyst AlessandroRoccati said. Moody's estimated BNP borrows around $30 billionfrom such funds.

BNP's BancWest subsidiary in the United States account forbetween 6 and 9 percent of group pretax income, which reached8.2 billion euros last year, while corporate and investmentbanking business account for 6 to 7 percent, analysts estimated.

U.S. authorities have pursued several foreign banks forviolating U.S. sanctions on Iran and other countries, allegingthe banks did business with entities associated with sanctionedcountries, or stripped data from wire transfers so they could gothrough the U.S. financial system without raising red flags.

Past U.S. settlements have ensnared rivals such as HSBC, which was fined $1.9 billion in December 2012 forcompliance failings in Mexico and for enabling clients to avoidU.S. sanctions on dealings with countries such as Iran, Libya,Sudan, Myanmar and Cuba.

BNP stock was down 3.1 percent at 51.03 euros by 1513 GMT. ($1 = 0.7345 Euros) (Additional reporting by Jean-Baptiste Vey and Brian Love inParis, with Simon Jessop, Sudip Kar-Gupta, Aimee Donnellan andSteve Slater in London, and Karen Friefeld and Anna Yukhananovin the United States; Writing by Andrew Callus and MayaNikolaeva; Editing by David Holmes)

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