DBRS Comments on BNP Paribas Q2 2009 Results – BNP Paribas (Canada) Ratings Unchanged

DBRS has today commented on the Q2 2009 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 ratings of BNPP Canada are 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.

In another solid earnings quarter, BNPP generated net income of EUR 1.6 billion, which was stable as compared to net income of EUR 1.6 billion in the prior quarter and EUR 1.5 billion in Q2 2008. Demonstrating the steady earnings power of its businesses, the Group’s operating divisions generated EUR 2.0 billion of pre-tax income in the quarter, excluding BNP Paribas Fortis (BNPP-Fortis), as compared to EUR 2.3 billion in Q1 2009 and EUR 2.2 billion in Q2 2008. The consolidation of BNPP-Fortis in the quarter added EUR 474 million to pre-tax income, while various one-off items were booked in the Corporate Centre adding some noise to the consolidated results.

Total revenues of the operating divisions, excluding BNPP-Fortis, were EUR 9.0 billion in the quarter, a decline of 2.9% versus the prior quarter but up 20.1% versus Q2 2008. The largest contributor to operating revenues in the quarter was Corporate and Investment Banking (CIB) at 37% of the total, with strong investor demand, especially for flow products. BNPP benefited from still wide spreads in Fixed Income while a more normalized business environment and increased demand for simple and easy to hedge structured products in Equity and Advisory boosted revenues.

The Retail Banking (RB) businesses, which include French Retail Banking in France, BNL banca commerciale in Italy, BancWest in the U.S., and other retail banking, provided a combined contribution to operating revenues of 50%, consistent with prior quarters. Adding the two new domestic markets of Belgium and Luxembourg to BNPP’s existing home markets of France and Italy, BNPP-Fortis contributed another EUR 1.4 billion to consolidated revenues. With this addition, BNPP is now the leader in the Eurozone by deposits (EUR 540 billion), private banking (EUR 224 billion in assets) and a European leader in CIB.

Investment Solutions (IS), which includes Wealth and Asset Management, Insurance and Securities Services, experienced net asset inflows of EUR 6.5 billion in the quarter and a strong EUR 20 billion in the first half of the year, evidencing the strength of the customer franchise. Assets under management (AUM) grew to EUR 544 billion in the quarter from EUR 510 billion in Q1 2009, with positive market performance and net asset inflows.

While BNPP continues to generate strong operating revenues, the elevated cost of risk continues to absorb over 50% of gross operating income, which is net of operating expenses. While the Group is generating sustainable revenues that have been enhanced by the BNPP-Fortis acquisition, BNPP remains exposed to the emerging markets, equity investments, and the still fragile capital markets. The cost of risk in the quarter stood at EUR 2.3 billion (EUR 2.0 billion excluding BNPP-Fortis) up from EUR 1.8 billion in the prior quarter and increasing to over 3x the level in Q2 2008. The weakening of credit quality was indicated by the increase in doubtful loans to EUR 29.1 billion, up by EUR 10 billion from the prior quarter, with EUR 6 billion attributable to the addition of BNPP-Fortis. This was partially offset by the addition of reserves for EUR 9 billion, which resulted in its coverage ratio brought to 86%, up from 84% in the prior quarter.

The Group raised its Tier 1 capital ratio to 9.3% at 30 June 2009, up 50 basis points (bps) from 31 March 2009, bolstered by retained earnings, payment of the dividend in shares and reduction in risk-weighted assets (RWA), with a negative offset from the integration of BNPP-Fortis. BNPP continued de-risking the balance sheet in the quarter, though RWA increased to EUR 651 billion, or 28% of total assets, with the consolidation of BNPP-Fortis. BNPP’s liquidity profile remains solid with a portfolio of assets of EUR 160 billion, about 7% of total assets, available to pledge to central banks for funding and a record level of deposits at EUR 540 billion.

DBRS views the consolidation of the BNPP-Fortis businesses as substantially strengthening BNPP’s franchise in a number of key areas: (1) expanding its European footprint in RB; (2) creating leading deposit positions in two new domestic markets with high income levels, Belgium and Luxembourg; (3) enhancing the Group’s position in consumer finance, bancassurance, private banking and investor services; and (4) adding to BNPP’s investment banking and corporate banking businesses. With the Group’s success in integrating acquisitions and building up its local franchises, DBRS remains confident that BNPP can achieve significant benefits and synergies from its BNPP-Fortis acquisition. The Negative trend on BNPP’s long-term rating recognizes the ongoing challenges that remain with an acquisition as large as that of BNPP-Fortis. Additionally, weak economies in Europe and globally continue to drive the elevated cost of risk for the Group, adding pressure on earnings. While DBRS views positively the solid quarterly results of the Group, substantial improvement in credit quality trends would need to be evident prior to any positive rating action.

Notes:
All figures are in Euros unless otherwise noted.

The applicable methodology is Analytical Background and Methodology for European Bank Ratings, Second Edition, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.