DBRS Comments on BNP Paribas Q4 and Full-Year 2008 Results – BNP Paribas (Canada) Ratings Unchanged

DBRS has today commented on the Q4 2008 and full-year 2008 results for BNP Paribas (BNPP or the Group). Based on the announced results for the Group, DBRS does not see any impact on the ratings for its subsidiary, BNP Paribas (Canada) (BNPP Canada). The Long-Term Deposits and Senior Debt rating of BNPP Canada is AA (high) with a Negative trend. The Short-Term Debt rating is R-1 (high) with a Stable trend. The ratings of BNPP Canada reflect the strength of its parent, BNPP, which owns 100% of the shares of BNPP Canada and guarantees its rated debt instruments.

Disrupted markets and the rising cost of risk resulted in BNPP reporting a net loss of EUR 1.4 billion in Q4 2008, a decline from net income of EUR 901 million in Q3 2008 and EUR 1.0 billion in Q4 2007. Volatile markets were a key factor, especially the equity markets, which led to impairments in the Group’s investment portfolio and in its insurance unit. Provisions jumped to EUR 2.6 billion, an increase of EUR 1.8 billion versus Q4 2007, primarily due to counterparty exposure (EUR 731 million), exposure to Bernard Madoff investments (EUR 345 million) and an increased cost of risk (in the United States, Spain and Ukraine, totaling EUR 939 million). Flexible expense management was not enough to prevent the Group from recording its first quarterly loss in recent history.

Solid core business results helped the Group remain profitable for the year. For 2008, BNPP reported a net profit of EUR 3.0 billion, a decline from EUR 7.8 billion in 2007. Full-year results were helped by solid performance in Retail Banking and Asset Management and Services (AMS). Not only in France, but also in Italy and internationally, the retail core businesses maintained revenues and controlled expenses, but they did see rising cost of risk as the year progressed. Net new customer accounts and net asset inflows in 2008 are also indicative of the strength of the customer franchise.

Among BNPP’s major businesses, Corporate and Investment Banking (CIB) was the major driver, with a pre-tax loss of EUR 2.5 billion in Q4 2008 versus a pre-tax loss of EUR 235 million in the prior quarter and pre-tax income of EUR 293 million in Q4 2007. The Group’s equity derivatives business was severely affected by the unprecedented market dislocation, while the Fixed Income business performed relatively well and the Financing business produced strong results.

Uncertainty remains around BNPP’s potential acquisition of various parts of Fortis Group (Fortis), which Fortis shareholders dismissed earlier this month. If these acquisitions are completed, BNPP’s European footprint will expand significantly, increasing its deposit base to the largest in the euro zone. If these acquisitions fall through, DBRS still sees BNPP continuing to cope with this environment and benefiting from its already well-positioned franchise.

BNPP continues to bolster its capitalization and will further augment its capital through a second round of financing from the French government. The EUR 5.1 billion preference share investment will count as core Tier 1 capital and half of the proceeds will be used to simultaneously repay the initial government financing of EUR 2.55 billion of deeply subordinated notes issued in December 2008. The government capital will boost the Group’s Tier 1 capital ratio of 7.8% by 50 basis points and, combined with the effect of the lowering of the floor in 2009 (a boost of ten basis points), will bring BNPP’s pro forma Tier 1 capital ratio to approximately 8.4%. With a broad deposit base and well-perceived franchise, the Group has a solid liquidity profile. The Group’s funding is being supported by its ability to issue debt without any government guarantees.

In coping with this environment, BNPP continues to benefit from a strong franchise, relatively good positioning of its loan portfolios, diversity of its corporate client base, prudent risk management and moderate exposure to emerging markets. Following the announcement of the Fortis acquisition in October 2008, DBRS changed the trend on BNPP Canada to Negative in recognition of the additional challenges that this large acquisition poses for BNPP at a time when the financial markets disruption remains extreme and the Fortis franchise has experienced significant stress. The Negative trend also reflects DBRS’s view that, while generally avoiding exposure to the troubled assets that have plagued many other banks over this time period, the Group nevertheless faces increasing headwinds.

Notes:
The applicable methodology is Analytical Background and Methodology for European Bank Ratings, Second Edition, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.