DBRS: BNP Paribas Canada’s Ratings Unchanged Following 2Q12 Results, Senior at AA, Trend Negative

DBRS, Inc. (DBRS) has today commented on the 2Q12 results for BNP Paribas (BNPP or the Group). The ratings for BNP Paribas (Canada) (BNPP Canada), BNPP’s subsidiary, are unchanged following the parent’s results. DBRS rates BNPP Canada’s Long-Term Deposits and Senior Debt at AA with a Negative 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.

Apart from the Group’s subsidiary in Italy, the Retail Banking’s segments performed well with growth in loans and a still low cost of risk. Investment Solutions (IS) operations also posted a good quarter. However not yet fully benefiting from the achievement of most of the adaption plan, Corporate and Investment Banking (CIB)’s lower revenues weighted on the Group’s overall result. Net income attributable to equity holders declined to EUR 1.8 billion in 2Q12, down from EUR 2.9 billion in 1Q12 and EUR 2.1 billion in 2Q11, but up from EUR 0.8 billion in 4Q11.

Excluding one-off items in each quarter, BNPP reported Group’s share of net income of EUR 1.7 billion in 2Q12, below the EUR 2.0 billion in 1Q12. In 2Q12, BNPP benefited from the positive impact of its own debt revaluation of EUR 286 million, as well as the amortisation of the fair value of Fortis and Cardif Vita banking books of EUR 141 million, partially offsetting a series of small negative one-off items.

Stability in the earnings available to absorb credit costs was evident in 2Q12, reflecting a slight growth in revenues relative to 1Q12 and a decrease in expenses. BNPP generated gross operating income, or income before provisions and taxes (IBPT), of EUR 3.8 billion, up from 3.0 billion in 1Q12, but below 4.4 billion in 2Q11. This level, however, was sufficient to readily absorb provisioning expense of about EUR 0.9 billion in 2Q12, which was stable relative to 1Q12. The cost of risk remains low and stable in 2Q12 at 50 bps, compared to 51 bps in 1Q12 and to 52 bps in 2011 (excluding Greece), and well below 72 bps in 2010. Provisioning expense absorbed just 23% of IBPT in 2Q12, down from 31% of IBPT in 1Q12, and 42% for the full 2011 year. Given the weak economic backdrop in Europe, DBRS views these levels as low, reflecting generally good quality portfolios.

Reflecting BNPP’s well-positioned franchise with its leading position in France and a significant European presence in retail banking, the Group showed solid results in its retail activities, notably in its core domestic markets of France and BeLux as well as in BancWest and the Mediterranean regions, while Italy somewhat weakened. Retail banking’s revenues in the Domestic Markets were up 0.1% in 2Q12 vs. 2Q11 to EUR 4.0 billion (at constant scope and exchange rates including 100% private banking and excluding PEL/CEL effects), while pre-tax income was stable at EUR 1.1 billion in 2Q12. Loans in 2Q12 grew by 1.7% year-over-year (YoY) while deposits grew at a faster pace, up by 2.8% YoY. In Italy, where the domestic economic environment is the most challenging within the Group’s domestic markets, BNL’s margins held up well but pre-tax income was down 8.3% to EUR 132 million in 2Q12 vs. 2Q11 as the cost of risk increased. In Retail banking outside the Domestic Markets and excluding Personal Finance, revenues were up from 2Q11, as certain business units posted another good quarter (e.g. BancWest), while other business units renewed the nature of their business (e.g. Ukraine). Eur-Med’s contribution (7.2% of retail revenues) improved, helped by good performers (e.g. Turkey and the Mediterranean, which loan portfolios account for 70% of the division).

As a result of difficult markets, Corporate and Investment Banking (CIB) delivered lower results in 2Q12 posting EUR 2.2 billion in revenues, down 23.6% vs. 2Q11 and down 28.5% when compared to 1Q12, which was well above the three previous quarters’ run rate, mostly driven by a recovery in fixed income activities. The net sale of loans as part of the deleveraging process positively impacted CIB revenues by EUR 75 million. In fact, BNPP was able to achieve 90% of its 2012 adaptation plan target with losses coming from loan sales running at only half the level anticipated. In 2Q12, although CIB’s pre-tax income dropped by 40% to EUR 0.8 billion compared to 2Q11, CIB recorded higher performance than in 3Q11 and 4Q11. Indicative of the strength of BNPP’s capital markets franchise, the Group confirmed its position as leader in primary Euro currency bond issues in 2Q12.

In Investment Solutions (IS) in 2Q12, revenues improved by 2.2% from 2Q11 at EUR 1.6 billion. A decline in revenues in Wealth and Asset Management (WAM) was compensated by another good quarter in Insurance and Securities Services business lines. Expenses slightly increased by 2.8% vs. 2Q11, as the Group continues to invest in Asia. IS’s pre-tax income remained at good level of EUR 531 million in 2Q12 as compared to EUR 533 million in 2Q11 and above EUR 206 million in 4Q11.

In general, DBRS views positively the Group’s cost optimisation programs across most of its main business lines, in particular within CIB with its adaptation plan now almost finished, as well as in IS with its operation’s strategic reorientation and in Retail, where cost-cutting is to be achieved. In 2Q12, CIB’s cost-to-income ratio was at 62.6%, below 63.0% in 2011 reflecting 13.4% decrease in costs YoY (or 20.1% at constant scope and exchange rates, excluding adaptation costs of EUR 38 million) compensating for lower revenues. Including the adaptation plan, CIB’s cost-to-income ratio was 59.7% in the first half of 2012. The full benefits of reduced costs are not yet seen with more to come in 3Q12 (30%). On a consolidated basis, the Group’s cost-to-income ratio was 62.8% in 2Q12, as compared to 60.1% in 2Q11 (61.6% in 2011), but well below 69.3% in 1Q12.

Trends in the Group’s credit costs in 2Q12 remain within the average range observed over the last ten years at BNPP at approximately 50 bps. Doubtful loans and commitments barely increased in 2Q12 vs. 2011. The non-performing loan ratio stood at 4.4% (4.3% in 4Q11) with a coverage ratio of 80% (82% in 4Q11). While the Group still faces economic weakness and political uncertainty in certain emerging regions, e.g. Ukraine, it is keeping the cost of risk under control, in part by shifting its business mix towards more conservative lending. In Italy, DBRS views the challenging environment as continuing to pressure BNL’s operations, as impairments increase every quarter, although at a less sustained pace than smaller competitors.

DBRS views BNPP as having significantly bolstered its funding profile and strengthened its liquidity position. As of June 2012, BNPP had EUR 200 billion of available unencumbered assets and deposits at central banks, up EUR 40 billion from end-2011. This now covers close to 100% of short-term wholesale needs, which totaled EUR 205 billion at 2Q12 including LTRO. In advancing its deposits base, BNPP is benefitting from the development of its global Cash Management platform via a combined CIB and Retail Banking offering, allowing the Group to rank as fifth on a global basis, with a presence in Asia. Out of EUR 20 billion refinancing needs of medium and long-term debt in 2012, EUR 22 billion were completed by early July 2012. This was achieved mostly through private placements, but also senior unsecured issuances (11% of total). At end-June 2012, long-term funding sources (including equity, customer deposits, and MLT debt) exceeded long-term assets (including customer loans, tangibles and intangibles assets, and other long-term assets) by EUR 52 billion, of which USD 38 billion.

DBRS maintains its view that the Group has the ability to adjust to the evolving environment given its ability to generate capital. DBRS views positively BNPP’s continuous strengthening of its capital base in the past quarters. Under Basel 2.5, the Core Tier 1 capital ratio was 10.9% at the end of June 2012, up from 10.4% at the end of March 2012, and 9.6% in 2011, mainly due to retained earnings. This improvement benefited from the adaption plan with the positive effect of paying out the 2011 dividend in shares, and still low market risk levels. Besides having already met the 9% EBA Core Tier 1 ratio that was required by June 2012 with 9.2% Core Tier 1 ratio at 4Q11, BNPP estimated that it achieved a 8.9% Basel III fully loaded Core Tier 1 ratio at June 2012 - well on track to meet its 9% target by 31 December 2012.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This commentary was disclosed to the issuer and no amendments were made following that disclosure.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: 1 June 2000
Most Recent Rating Update: 21 December 2011

For additional information on this rating, please refer to the linking document under Related Research.