DBRS: BNP Paribas Canada’s Ratings Unchanged Following 3Q12 Results, Senior at AA, Trend Negative

DBRS, Inc. (DBRS) has today commented on the 3Q12 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.

While operating divisions posted a good quarter, the corporate center spoiled the overall picture. The Retail Banking’s segments held up with a still low cost of risk, Corporate and Investment Banking (CIB)’s revenues improved, and Investment Solutions (IS) operations were relatively resilient. Net income attributable to equity holders declined to EUR 1.3 billion in 3Q12, down from EUR 1.8 billion in 2Q12, but up from EUR 0.5 billion in 3Q11. Excluding one-off items in each quarter, however, BNPP reported Group’s share of net income of EUR 1.6 billion in 3Q12, just below EUR 1.7 billion in 2Q12 but lower than EUR 2.0 billion in 3Q11. In 3Q12, BNPP was negatively impacted by its own debt revaluation of EUR 774 million, partially offset by the one-off amortization of Fortis PPA due to early redemptions of EUR 427 million.

Resiliency in the earnings available to absorb credit costs somewhat weakened in 3Q12. As a result of a slight decrease in revenues and increase in expenses relative to 2Q12, BNPP generated gross operating income, or income before provisions and taxes (IBPT), of EUR 3.1 billion, down from EUR 3.8 billion in 2Q12, and EUR 3.9 billion in 3Q11. This level, however, was sufficient to readily absorb provisioning expenses of about EUR 0.9 billion in 3Q12, which was stable relative to 2Q12. The cost of risk remains low and relatively stable in 3Q12 at 55 bps, compared to 50 bps in 2Q12 and to 52 bps in 2011 (excluding Greece), and well below 72 bps in 2010. Provisioning expense absorbed 30% of IBPT in 3Q12, up from just 23% of IBPT in 2Q12, and still below 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’s retail activities held up well, notably in its core domestic markets of France and BeLux, as well as in BancWest and the Mediterranean regions, while Italy stabilised. Retail banking’s revenues in the Domestic Markets were only slightly down 0.8% in 3Q12 vs. 3Q11 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 1.0 billion in 3Q12. Although deposits grew up by 5.3% year-over-year (YoY) in 3Q12, loans declined by 0.8% driven by less demand. In Italy, the domestic economic environment is the most challenging within the Group’s domestic markets. There, BNL’s margins held up well, but pre-tax income was down 6.6% to EUR 141 million in 3Q12 versus EUR 151 million in 3Q11. The cost of risk weighted on the increase in revenues vs. 3Q11, although it has stabilized in 3Q12 relative to 2Q12. Overall, results benefited from an improved cost-to-income ratio. In Retail banking outside the Domestic Markets and excluding Personal Finance, revenues were up from 3Q11, as certain business units posted another strong quarter (e.g. BancWest, at constant exchange rate). Eur-Med’s contribution also kept improving, helped by good performers (e.g. Turkey and the Mediterranean, whose loan portfolios account for about 70% of this division).

Fixed Income and Equity delivered a good quarter, offsetting the impact of the now achieved deleveraging in Corporate Banking. Overall, Corporate and Investment Banking (CIB) delivered improved performance in 3Q12, posting EUR 2.4 billion in revenues that were up 6.8% compared to the previous quarter, mostly driven by a rebound in the Advisory and Capital Markets, as well as sustained good performance in Fixed Income activities. With revenues up 33.2%, the division has significantly rebounded from 3Q11, marked by the sovereign debt crisis. In 3Q12, CIB’s pre-tax income of EUR 0.7 billion was up by 7.3% vs. 3Q11, although it declined by 10.8% quarter-over-quarter (QoQ) due to increased cost of risk. Indicative of the strength of BNPP’s CIB franchise, the Group confirms, among other positions, its position as leader in primary Euro currency bond issues and in syndicated loans in Europe in 3Q12.

In Investment Solutions (IS), revenues at EUR 1.5 billion in 3Q12 were down 3.2% QoQ, but were still 3.7% ahead of 3Q11. Another good quarter in Insurance driven by the Asian region compensated for lower momentum in Wealth and Asset Management (WAM). The Securities Services business line slowed in 3Q12. Overall, expenses increased 0.6% vs. 2Q12 and 3.0% vs. 3Q11, as the Group continues to invest in Asia. IS’s pre-tax income remained at a good level of EUR 501 million in 3Q12, as compared to EUR 531 million in 2Q12, and EUR 253 million in 3Q11, when the business line was impacted by the restructuring of the Greek debt.

In general, DBRS views positively the Group’s cost optimisation programs across most of its main business lines. In 3Q12, excluding the impact of the adaption plan and disposals, CIB’s cost-to-income stood at 58.3%, below 62.6% at 2Q12 and 63.0% in 2011 reflecting improved revenues. Including the costs for the adaptation plan, CIB’s cost-to-income ratio increased marginally to 61.5% in 9M12 from 59.7% in the first half of 2012. On a consolidated basis, the Group’s cost-to-income ratio was 67.7% in 3Q12, as compared to 62.8% in 2Q12, and 60.9% in 3Q11 (61.6% in 2011).

Trends in the Group’s credit costs in 3Q12 remain within the average range observed over the last ten years at BNPP at approximately 50 bps, although now very slightly declining down to 55 bps. Doubtful loans and commitments barely increased in 3Q12 vs. 2011. The non-performing loan ratio stood at 4.5% (4.3% in 4Q11) with a coverage ratio of 82% (82% in 4Q11). While the Group still faces economic weakness and political uncertainty in certain emerging regions, it is keeping the cost of risk under control.

DBRS views BNPP as having significantly bolstered its funding profile and strengthened its liquidity position. In 3Q12, BNPP had EUR 239 billion of available unencumbered assets and deposits at central banks, up EUR 79 billion from end-2011. This now covers 114% of short-term wholesale needs, which totaled EUR 209 billion in 3Q12 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 that results in the Group ranking fifth on a global basis, with a presence in Asia. Out of EUR 20 billion refinancing needs of medium and long-term debt initially targeted for 2012, EUR 34 billion were completed in October 2012. This was achieved mostly through private placements (54% of total), but also senior unsecured issuances (17%). At end-September 2012, long-term funding sources (including equity, customer deposits, and MLT debt) substantially exceeded long-term assets (including customer loans, tangibles and intangibles assets, and other long-term assets) by EUR 71 billion. BNL, the Group’s subsidiary in Italy, is increasingly self-funded with now EUR 13 billion intra-group funding down from EUR 18 billion in 2Q12.

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 11.4% in 3Q12, up from 10.9% in 2Q12, and 9.6% in 2011. This improvement benefited from retained earnings, lower RWA as a result of the completion of the adaption plan, and still low market risk levels. Besides having already met the 9% EBA Core Tier 1 ratio that was required by June 2012 with a 9.2% Core Tier 1 ratio in 4Q11, BNPP estimated that it achieved a 9.5% Basel III fully loaded Core Tier 1 ratio as of 3Q12, up 60bps since 2Q12, putting it well ahead of its 9% target for 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.