DBRS Comments on BNP Paribas Q3 2009 Results – BNP Paribas (Canada) Ratings Unchanged

DBRS has today commented on the Q3 2009 results for BNP Paribas (BNPP or the Group). Based on these results, the ratings for BNP Paribas (Canada) (BNPP Canada), its subsidiary, are unchanged. 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.

BNPP produced solid earnings again in the third quarter illustrating the strength of its diverse, global franchise. The addition of BNP Paribas Fortis (BNPP Fortis) provided a boost to revenues while the Group’s core retail franchises in France and Italy were stable revenue generators and Corporate and Investment Banking (CIB) continued to deliver strong results. BNPP reported net income of EUR 1.3 billion, on revenues of EUR 10.7 billion, which increased by 40% over Q3 2008 mainly due to the consolidation of BNPP Fortis. Demonstrating the steady earnings power of its businesses, the Group’s operating divisions generated EUR 2.6 billion of pre-tax income in the quarter, a 29.5% increase versus the prior quarter with BNPP Fortis largely contributing to this increase.

The Group’s revenues were enhanced by the addition of BNPP Fortis, which contributed 21% of total revenues for the operating divisions. DBRS views the BNPP Fortis acquisition as substantially strengthening BNPP’s franchise in a number of key areas, including two new domestic markets with high income levels, Belgium and Luxembourg. Retail banking in Belgium held up well, with increased deposits year-to-date and stable loan outstandings. The retail franchise in Luxembourg was solid, with moderate loan growth and stable deposits in the quarter. Fortis Investments and Private Banking both experienced increased assets under management (AUM) due to the positive performance effect and the slowdown in net asset outflows.

The Retail Banking (RB) businesses, which include French Retail Banking (FRB) in France, BNL banca commerciale in Italy, BancWest in the U.S., and other retail banking, provided a combined contribution of 52% to revenues in the operating divisions ex. BNPP Fortis in Q3 2009. FRB sustained revenues with a year-over-year increase in loans and a shift in the deposit mix, though net income was negatively affected by increased compensation expense. BNL generated revenue growth with volume increases in loans and accounts for individuals, while reducing expenses to lower its expense ratio to 58.6% in the quarter from 61.6% in the prior quarter.

Contributing 34% to the revenues in BNPP’s operating divisions ex. BNPP Fortis in the quarter, CIB generated revenues of EUR 2.9 billion on strong investor demand, especially for flow products, increased market share and improvement in the stock markets. These results demonstrated the benefit of the breadth and diversity of the CIB’s businesses and customer segments. Fixed Income revenues of EUR 1.6 billion were largely driven by still-wide spreads, which were more normalized than in the first half of the year, but not back to pre-crisis levels. Equity and Advisory revenues were helped by a number of convertible bond issuances on behalf of corporate clients, strong demand from institutional investors for flow products, and renewed interest from individual investors for structured products.

Investment Solutions (IS), which includes Wealth and Asset Management, Insurance and Securities Services, experienced net asset inflows of EUR 7.1 billion in Q3 2009 and a strong EUR 27.1 billion in 9M’09, evidencing the strength of the customer franchise. AUM grew to EUR 577 billion in the quarter from EUR 544 billion in Q2 2009, with positive market performance and net asset inflows.

Though BNPP has demonstrated the strength and revenue generating ability of its businesses, the Group nevertheless remains exposed to the prevailing weakness in the global economy with its potential impact on the cost of risk and the still fragile capital markets. The cost of risk in the quarter stood at EUR 2.3 billion, the same level as the prior quarter, but up 15% as compared to Q3 2008. The weakening of credit quality was indicated by the increase in doubtful loans to EUR 30.0 billion, up by EUR 13.6 billion from year-end 2008. The cost of risk in the Emerging Markets Retail Banking business was EUR 219 million, up from just EUR 43 million in the year-ago quarter, with EUR 98 million contributed by exposure to Ukraine. This level exceeded gross operating income, or income before provisions and taxes (IBPT), resulting in a net loss for the business unit. Appropriately, BNPP has closed branches and reduced headcount and loan outstandings in Ukraine. Within its sensitive loan portfolios, the Group has exposure to commercial real estate, which totaled EUR 11.1 billion, or approximately 1.8% of risk-weighted assets (RWA), as of 30 September 2009. The bulk of this exposure is in BancWest where the cost of risk remains elevated at EUR 342 million and exceeded IBPT in the quarter. BancWest has generated quarterly losses for the first three quarters in 2009, which is a drag on total Group results.

In light of the ongoing stress in the environment, the Group appropriately raised its Tier 1 capital ratio to 10.1% at 30 September 2009, up 80 basis points (bps) from 30 June 2009, largely bolstered by retained earnings and the reduction in RWA. Post-quarter end, BNPP raised EUR 4.2 billion in core Tier 1 capital to be used to repay the French government capital. On a pro-forma basis, inclusive of the capital increase and repayment of the government shares, BNPP’s Tier 1 ratio would be only moderately affected, dropping to 10.0%. BNPP’s liquidity profile remains solid with a portfolio of assets of EUR 190 billion, up from EUR 160 billion at 30 June 2009, available to pledge to central banks for funding and a loan to deposit ratio of 118%, down from 128% at year-end 2007.

Notes:
All figures are in Euros unless otherwise noted.

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.