DBRS Comments on BNP Paribas 4Q09 and Full Year Results – BNP Paribas (Canada) Ratings Unchanged

DBRS has today commented on the 4Q09 and full year 2009 results for BNP Paribas (BNPP or the Group). Following 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.

In DBRS’s view, BNPP’s consistent revenue generation in 2009 illustrates the strength of its diverse, global franchise and supports the current rating level. BNPP produced solid earnings for the full year 2009 driven by record revenues of EUR 40.2 billion, which were helped by the consolidation of BNP Paribas Fortis (BNPP Fortis). The Group also achieved organic growth through a strong sales and marketing drive which boosted revenues. Revenues were driven by strength in retail banking. Growth was evident in the Group’s core retail franchises of France and Italy, which generated about 22% of revenues. Other Retail Banking contributed 23% of revenues in 2009, BNPP Fortis contributed 13% of Group revenues. Generating approximately 30% of revenues, Corporate and Investment Banking (CIB) had record revenues in 2009.

Positive operating leverage contributed to earnings growth in 2009. The Group’s operating expenses increased by 26.8% year-over-year to EUR 23.3 billion, with the inclusion of BNPP Fortis, but this was well below the 46.8% increase in revenues. Gross operating income, or income before provisions and taxes (IBPT), was EUR 16.9 billion for 2009, absorbing approximately 50% of the Group’s cost of risk. BNPP reported net income Group share of EUR 5.8 billion, an increase of 93% versus 2008.

Quarterly results indicated improving trends. On a linked quarter basis, revenues declined modestly to EUR 10.1 billion, but operating expenses were virtually flat at EUR 6.1 billion, resulting in IBPT of EUR 3.9 billion, as compared to EUR 4.6 billion in the prior quarter. Bottom line profitability was helped by reduced cost of risk in the quarter, which declined 17% quarter-over-quarter to EUR 1.9 billion. BNPP anticipates that the peak cost of risk was in 3Q09 and expects stabilization or declines across its businesses in 2010. Net income in 4Q09 was EUR 1.4 billion, a moderate increase from EUR 1.3 billion in 3Q09 and a major turnaround from a net loss of EUR 1.4 billion in 4Q08.

Growth was evident in BNPP’s four domestic retail banking markets –France, Italy, Belgium and Luxembourg. Retail banking in France and Italy held up well, with year-over-year increases in revenues, boosted by loan and deposit growth. BNPP Fortis contributed a strong 19% of total revenues for the second half of 2009 compared to contributions from French retail banking of 14% and BNL banca commerciale (BNL) in Italy of 7% in the same time period. Deposits in Belgian retail banking rebounded in H2 2009 following the acquisition and were up year-over-year, indicating a renewed confidence in the brand. The retail franchise in Luxembourg experienced moderate loan growth and stable deposits in 2009.

Strong CIB results in 2009 demonstrated the benefit of the breadth of the CIB’s businesses and customer segments, as well as the Group’s overall strengths. CIB generated record revenues of EUR 12.2 billion in 2009 on significant volumes of capital markets activities, supported by a customer-driven business model. With increased revenues and controlled expenses, BNPP improved efficiency to a record 44.7%. Even with full recognition of deferred compensation that remain subject to clawback provisions, the compensation to revenues ratio within CIB declined to 27.7% in 2009 from a more normalized 40%. While CIB revenues were lower than in H1 2009, as spreads tightened, volatility declined and activity slowed versus H1 2009, the results indicate that CIB is well positioned for 2010.

The Group’s asset gathering arm, Investment Solutions (IS), provided a stable revenue source with its diversified business mix, which includes Asset Management, Private Banking, Insurance and Securities Services. IS now has Assets under Management (AuM) of EUR 588 billion, up from EUR 503 billion in 2008, with positive market performance and net asset inflows reflecting its customer franchise. Fortis Investments and Private Banking both increased AuM, another indicator of market confidence. Gaining scale and market presence with the Fortis acquisition, IS will become a more powerful competitor across its various businesses.

While BNPP continues to demonstrate the strength of its franchise and revenue generating ability of its businesses, the Group nevertheless remains exposed to the prevailing weakness in the global economy, including the still fragile capital markets, as well as regulatory and sovereign uncertainties. The cost of risk was EUR 8.4 billion in 2009, which is 46% above the year-ago level. While the cost of risk may be stabilizing, it still remains at elevated levels and DBRS expects that these levels will continue through 2010. While DBRS views the Group’s focus on opportunities in the Central and Eastern Europe, Turkey and the Mediterranean positively, the Group remains exposed to weak economies through emerging markets retail banking, especially the Ukraine. The U.S. economy also remains weak, with BancWest generating a fourth quarterly loss in 2009.

The Group appropriately raised its Tier 1 capital by 50% year-over-year to EUR 62.9 billion at 31 December 2009, largely bolstered by retained earnings, EUR 5.2 billion in capital increases and consolidation of Fortis. BNPP repaid the French government capital in October 2009. BNPP’s Tier 1 ratio is 10.1%, up from 7.8% at the end of 2008. BNPP’s liquidity profile remains solid with a portfolio of assets of EUR 190 billion available to pledge to central banks for funding.

Notes:
All figures are in EUR unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations 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.