DBRS Confirms BNP Paribas (Canada) – Sr. Long-Term Debt at AA; Negative Trend

DBRS, Inc. (DBRS) has today confirmed ratings for BNP Paribas (Canada) (BNPP Canada, or the Group) including BNPP Canada’s Senior Unsecured Debt & Deposit rating of AA with a Negative Trend and its Short-Term Debt & Deposit rating of R-1 (high) 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. DBRS has also maintained the Group’s intrinsic assessment (IA) of AA (low). DBRS notes that the final ratings of BNPP Canada reflect DBRS’s perspective on the Group’s systemic importance in France and incorporate DBRS’s expectation of some form of timely systemic support for the Group in the event of a stress scenario which is reflected in an SA-2 Support Assessment (SA), and positions the implied final rating for the parent that is one notch above its IA.

The Negative Trend reflects the downside risks inherent in the economic slowdown and still stressed financial markets, combined with the challenges the Group faces in improving its operating efficiency, enhancing its international operations, and adapting its investment banking activities, while making more effective use of its balance sheet and coping with regulatory and legislative uncertainty.

In maintaining the Group’s IA at AA (low), DBRS considers the Group’s well-positioned franchise with its leading position in France and its significant European presence in retail banking, corporate and investment banking and asset/wealth management. The Group’s franchise strength is underpinned by its extensive retail banking franchise in its home markets of France, Belgium, Italy and Luxembourg that serve consumers and businesses, as well as its European and International Retail Banking businesses that add stability, diversification and growth opportunities. BNPP’s Corporate and Investment Banking (CIB) franchise with its increasingly global reach is another key component of the Group’s franchise and an important, if somewhat uneven, contributor to BNPP’s earnings. BNPP’s banking franchises are complemented by Investment Solutions (IS), which includes wealth and asset management, insurance, securities services and other investor businesses that broaden BNPP’s range of services and extend its product and geographic reach across its franchise. In 2012, 61% of revenues were generated in Retail Banking, 24% in CIB and 15% in IS.

In adjusting to the difficult market conditions and more demanding regulatory requirements, the Group has proved its ability to cope with a challenging environment. After facing reduced access to unsecured wholesale funding in 2011, the Group significantly improved its funding structure and reinforced its capital cushion through accelerated balance sheet adjustment in 2012 (sale of loans, sale of stake in Klépierre). However, continued progress with expense control, balance sheet management and franchise development are important to enhance BNPP’s resiliency in this uncertain environment.

Demonstrating the strength of the Group’s franchise and its underlying revenue generation capabilities, which are key factors for the Group’s intrinsic strength, the Group has sustained its earnings during this prolonged crisis. DBRS considers the Group’s strong position in retail banking in France as an important underpinning of its intrinsic strength. Delivering relatively stable earnings with a very low cost of risk, the French Retail Banking (FRB), which operate under the well-positioned brand of BNP Paribas, typically generate about a third of retail banking revenues. In addition, the Group’s franchise strength is also underpinned by its other home markets of Belgium, Luxembourg, as well as Italy. To improve earnings, the Group is engaged in a global cost reduction program, which DBRS views as essential to sustain earnings in the current environment. The level of BNPP’s diversification is high, as none of the Group’s subsidiaries generate more than 13% in revenues. DBRS views positively the Other Retail Banking businesses. This includes BNPP’s presence in the US through BancWest, which generates 10% of total retail banking revenues. Also it has an important franchise in Personal Finance, which has a presence in 20 countries, with a strong foothold in France and leader in Europe, and its Eur-Med operations that also add diversity to earnings.

Generally the second largest contributor to BNPP’s earnings, albeit with more volatility, is the Corporate and Investment Bank (CIB). CIB is another core component of BNPP’s universal banking franchise that has an extensive international presence in nearly 45 countries. In 2012, CIB contributed 24% of the Group’s revenues and 29% of its pre-tax income. In response to future regulatory changes, new capital requirements and change in dollar funding access, the Group started to adapt its business model in 2011. By the end of 2012, CIB had successfully completed its Adaptation Plan and now plans to bolster its presence in Asia and North America. BNPP maintains large CIB operations, especially in Fixed Income Currency and Commodities (FICC), as well as in Equity Derivatives.

BNPP’s funding profile combines a sizeable, stable deposit base underpinned by its domestic retail banking franchises with significant usage of wholesale funding that is typical of universal banks with significant corporate and investment banking activities. The Group’s franchise strength and adaptability have enabled it to adjust to the stress on its funding, particularly the stress on short-term U.S. dollar funding faced by French banks in 2011. DBRS views positively that BNPP has significantly improved its liquidity position with a sizeable excess of stable funding and a liquidity buffer now covering 137% of short-term wholesale funding at 1Q13. DBRS notes that the management of the Group indicated that BNPP was basically compliant with the LCR ratio as of end-2012.

Also factored into the IA is BNPP’s risk profile. DBRS views BNPP’s careful risk management as an important component of the Group’s success and resiliency during the crisis. The low risk portfolios, which comprise the majority of the credit exposures, are generally matched by low yields that provide limited cushions to absorb any spike in credit costs, though this is not currently anticipated in France. DBRS notes that higher yields are expected to compensate for the higher risk in the Personal Finance businesses. DRBS also factors in the potential for more rapid deterioration and unforeseen events, which could happen in certain Eur-Med countries (Ukraine, Tunisia, Turkey, Algeria), but also to some extent in Italy, which can cause credit deterioration and exceed such earnings. While the Group still faces economic weakness in the Eurozone, it is keeping the cost of risk under control, posting an overall non-performing loan ratio at 4.5% at 1Q13 (4.6% at 4Q12) with a coverage ratio of 85%. Exposures to EU peripheral bonds have been much reduced, except in Italy, where total exposure of EUR 11.6 billion is partly owned through BNL. Market risk and equity risk respectively contributes only about 4.6% and 4.4% of regulatory risk weighted assets (RWA), as BNPP has scaled back its activities that incur market risk with its focus on flow business and less retention of risk.

Given BNPP’s continued progress in strengthening its capital and streamlining its risk profile, DBRS views the Group’s capitalization levels as good. Under Basel 2.5, BNPP’s Core Tier 1 ratio was 11.7% at 1Q13, up 210 bps from 9.6% at end-2011. Also, core Tier 1 Ratio under Basel III fully loaded was 10.0% at 1Q13 (CRD4 as expected by BNPP), which compares well with peers.

Ratings pressure could arise, if BNPP were to have significant difficulties in achieving its gains in efficiency and maintaining an adequate level of profitability. If these difficulties were accompanied by deterioration in BNPP’s franchise that reduced its capacity to generate capital, this could lead to negative ratings pressure, especially if accompanied by renewed pressure on BNPP’s liquidity and funding or material weaknesses in its operations outside of France that impact its capitalisation. Alternatively, if BNPP continues to make progress in improving the efficiency of its businesses and improving earnings, while further enhancing its balance sheet profile, negative ratings pressure could be reduced. A return to a Stable trend could be foreseen, if this progress were accompanied by less fragility in financial markets, economic recovery and reduced regulatory uncertainty.

Notes:

All figures are in Euros (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 and DBRS Criteria: Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/methodologies.

[Amended on January 12, 2015 to reflect actual methodologies used.]

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

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

Lead Analyst: Roger Lister
Rating Committee Chair: Alan 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.