By Lionel Laurent and Matthias Blamont
PARIS (Reuters) - French bank BNP Paribas has warned it might be hit with a fine far in excess of the $1.1 billion (652.29 million pounds) that it set aside last year to cover litigation costs linked to potential breaches of U.S. sanctions on countries including Iran.
The warning from France's biggest bank comes as the global banking industry faces mounting legal woes due to investigations into a string of alleged misdeeds, including fixing benchmark interest rates and manipulating foreign-exchange markets.
A big U.S. fine could have ramifications for BNP beyond the immediate financial hit, as the bank is targeting expansion in North America as a key plank of a new strategy to raise revenue and profits outside traditional European markets.
"There is uncertainty with respect to the amount and the nature of penalties the U.S. will impose," Chief Financial Officer Lars Machenil told Reuters Insider television. "It's not impossible that the fine is far in excess of the ($1.1 billion) provision."
A report in the Wall Street Journal said the fine would be close to $2 billion. BNP declined to comment.
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Asked if the fine could reach $2 or $3 billion, BNP's Machenil told Reuters Insider: "There is nothing more to say."
Machenil told analysts on a conference call that the bank had already set aside around 2.7 billion euros ($3.73 billion) for litigation costs, including the specific $1.1 billion provision.
His comments came after BNP posted a higher-than-expected 5.2 percent rise in first-quarter net income.
Shares in the bank were down 3.8 percent at 53.80 euros by 1434 GMT, having fallen as low as 53.55 euros, not far from their lowest of the year so far. The European banking sector <.SX7P> was down 0.8 percent.
U.S. federal prosecutors are considering criminal charges against BNP for doing business with countries subject to U.S. sanctions, such as Iran, Sudan and Cuba, a person with knowledge of the matter has said.
Regulators may consider suspending the bank's ability to conduct dollar clearing in New York - the process by which transactions are quickly settled and cleared within the banking system - and are looking at possible penalties for individual employees, the person said.
BNP declined to comment. The bank has said it wants North America to account for 12 percent of revenue by 2016, up from 10 percent in 2013, and wants to improve cross-selling between its U.S. investment bank and retail bank unit BancWest.
OPERATIONAL SANCTION
"The risk is that some form of operational sanction may undermine the bank's ability to meet these targets," analyst Jean-Pierre Lambert at brokerage Keefe, Bruyette & Woods said.
"There does not seem to be a serious likelihood that BNP will lose its banking license outright, but there may be consequences for its current activities if its ability to clear U.S. dollar transactions is limited," Lambert said.
Past U.S. settlements have ensnared rivals such as Standard Chartered , which agreed in 2012 to pay $327 million to resolve allegations that it violated U.S. sanctions against Iran, Sudan, Burma and Libya. The bank was separately fined $340 million by New York's banking regulator over Iranian sanctions.
JPMorgan Chase agreed to pay $13 billion in 2013 over mortgage-related charges, while HSBC agreed to pay $1.9 billion to settle a multi-year U.S. criminal probe into money-laundering lapses.
Meanwhile BNP's results showed the effects of its full takeover of Belgian subsidiary Fortis last year, which helped offset writedowns on assets exposed to the Ukraine crisis and rising loan losses in Italy.
The bank has a robust capital base relative to peers, with a core Tier 1 ratio of 10.6 percent at end-March. Machenil said BNP has "excess capital" but would not use this to buy back shares at their current valuation.
"Today we are (trading) somewhere around book value," he said. "You're going to do share buybacks when your share price is substantially below book value."
These comments, coupled with the uncertainty over the U.S. fine, undermined BNP's appeal to investors, Jefferies analyst Omar Fall said.
"The guidance for a higher-than-expected fine on dealings with sanctioned countries and management backing away from a buyback are unhelpful for the capital return story," Fall wrote in a note to clients.
($1 = 0.7237 Euros)
(Additional reporting by Supriya Kurane in Bangalore; Editing by Erica Billingham)