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

By Alexandre Boksenbaum-Granier and Lionel Laurent

PARIS/LONDON (Reuters) - Fears that a looming U.S. fine on BNP Paribas BNPP.PA could be big enough to force it to raise capital and restrict its dividends hit France's biggest bank on Friday, driving its shares sharply lower.

France's central bank said it was following the case "with the utmost attention" after a report in the Wall Street Journal said the U.S. Justice Department wanted $10 billion from the bank - double the amount previously reported and more than 20 percent more than BNP's 2013 pre-tax income.

BNP declined to comment on the report.

Shares in BNP dropped as much as 6 percent to their lowest in more than eight months, slashing almost $5 billion off the bank's stock market value. The decline took its loss to 18 percent since Feb. 13, when the bank first took a 1.1 billion euro ($1.5 billion) provision for a potential sanctions fine as part 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 noted a fine of the magnitude reported would cut BNP's capital ratio to below 10 percent - a level seen as key to staying out of the danger zone as the European Union carries out "stress tests" of banks' financial health.

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

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

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

The U.S. Justice Department's investigation is a criminal probe 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 less than $10 billion. Still, the multibillion dollar figure would put the fine among the largest penalties imposed on a bank and is far higher than what BNP has provisioned for.

UTMOST ATTENTION

Societe Generale analysts estimated that every $1 billion deviation from the 10 billion base would equivalent to a 12 basis point change in the bank's core Tier 1 capital ratio, a key measure of its financial strength.

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

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

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

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

Since Credit Suisse CSGN.VX agreed to pay more than $2.5 billion for helping Americans avoid taxes, Noyer has expressed concerns 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 than Hollande's Socialists and mainstream parties of the right in recent elections, called the affair a "racket" and said the government should "defend and protect the interests of millions of French depositors".

STIFF PENALTIES

BNP Chief Executive Jean-Laurent Bonnafe and the bank's lawyers met with the New York Department of Financial Services in early May to plead for leniency, sources familiar with the discussions have told Reuters.

One source said the regulator, led by Benjamin Lawsky, was offering to spare the bank revocation of its license provided other stiff penalties were included in the settlement. Such penalties could include temporarily suspending dollar clearing through New York 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 a potentially significant loss of client business in the United States if it was subject to a criminal charge.

The loss of institutional clients could limit BNP's access to short-term wholesale funding, Moody's analyst Alessandro Roccati said. Moody’s estimated BNP borrows around $30 billion from such funds.

BNP's BancWest subsidiary in the United States account for between 6 and 9 percent of group pre-tax income, which reached 8.2 billion euros last year, while corporate and investment banking business account for 6 to 7 percent, analysts estimated.

U.S. authorities have pursued several foreign banks for violating U.S. sanctions on Iran and other countries, alleging the banks did business with entities associated with sanctioned countries, or stripped data from wire transfers so they could go through the U.S. financial system without raising red flags.

Past U.S. settlements have ensnared rivals such as HSBC HSBA.L, which was fined $1.9 billion in December 2012 for compliance failings in Mexico and for enabling clients to avoid U.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.

(Additional reporting by Jean-Baptiste Vey and Brian Love in Paris, with Simon Jessop, Sudip Kar-Gupta, Aimee Donnellan and Steve Slater in London, and Karen Friefeld and Anna Yukhananov in the United States; Writing by Andrew Callus and Maya Nikolaeva; Editing by David Holmes)

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