BNP Paribas Consolidates Position in Belgium, and Reports Solid 3Q13 Results

DBRS, Inc. (DBRS) has today commented on the 3Q13 results for BNP Paribas (BNPP or the Group) and its announced acquisition of the remaining 25% stake in BNP Paribas Fortis (BNPP Fortis) owned by the Belgian Federal Holding and Investment Company (or SFPI, the acronym of the French name). 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.

DBRS views BNPP Fortis as a core component of BNPP’s retail franchise that also contributes to BNPP’s other core businesses. This step confirms BNPP’s position in Belgium. The cost-to-income ratio in Belgian Retail Banking was 72.5% at end-2012, which indicates the opportunities for BNPP to improve its performance under its plans. DBRS does not expect changes, as BNPP confirmed its intention to follow the business plan it had announced for BNPP Fortis in March 2013. DBRS also views positively that BNPP maintains the presence of independent Belgian members at the governance level of this important subsidiary. The Group’s Basel III fully loaded common tier 1 ratio is initially reduced by 50 bps, leading to a ratio of 10.3% that nonetheless maintains a buffer above regulatory minimums.

While the Retail Banking globally displays resilient trends, low client activity in capital markets drove a drop in revenues in Corporate and Investment Banking (CIB), a decline that was in line or better than industry trends. Positively, Investment Solutions (IS) driven by Insurance and Securities Services reported a good quarter. Overall, the Group’s revenues in operating divisions were down but that was somewhat offset by controlled operating costs and a lower cost of risk. While net income attributable to equity holders of EUR 1.4 billion in 3Q13 was down from EUR 1.8 billion in 2Q13, it was up from EUR 1.3 billion in 3Q12. Excluding one-off items in each quarter, however, BNPP reported the Group’s share of net income of EUR 1.5 billion in 3Q13, below EUR 1.7 billion in 3Q12 and EUR 2.0 billion in 3Q11.

The ability of the Group to absorb credit costs out of underlying earnings remained resilient. As a result of the decrease in revenues, BNPP generated gross operating income, or income before provisions and taxes (IBPT), of EUR 2.9 billion, down from EUR 3.1 billion in 3Q12, and EUR 3.6 billion in 2Q13. This level, however, was sufficient to readily absorb provisioning expenses of about EUR 0.9 billion in 3Q13, which was 5.5% down relative to 3Q12 (or -7.8% at constant scope and exchange rates). Provisioning expense absorbed just 31% of IBPT in 3Q13, largely unchanged from 3Q12, and still below 42% for the full 2011 year. Given the weak economic backdrop in Europe, DBRS views these levels as very manageable, reflecting BNPP’s generally good quality portfolios.

BNPP’s efforts on cost reduction are not yet having a major impact on its cost-to-income ratio. On a consolidated basis, the Group’s cost-to-income ratio was 69.2% in 3Q13, as compared to 67.7% in 3Q12, and 60.9% in 3Q11. While the cost-to-income ratio varies considerably across segments, which reflects the mix of activities by segment, it also indicates opportunities for improvement. With lower revenues in CIB in 3Q13 (-10.7% at constant scope and exchange rate), CIB’s cost-to-income went up to 70.4% from 62.0% in 3Q12, in spite of a decrease in operating expenses. Reflective of BNPP’s growth strategy, business development initiatives are simultaneously taking place in Asia, Germany and North America in CIB in particular, which DBRS perceives positively.

The Group is keeping the cost of risk under control. BNPP’s credit cost in 3Q13 was back to 55 bps, a level equal to that of 3Q12. Doubtful loans and commitments in 3Q12 were stable vs. 2012. The Group reported that it does not expect a significant impact from the upcoming AQR, as the reporting of restructured loans under the EBA rules is similar to that of BNPP. In 3Q13, the non-performing loan (NPL) ratio stood at 4.6% (4.6% at end-2012) with a coverage ratio of 82% (83% at end-2012).

The Group’s funding profile and liquidity position continue to improve. In 3Q13, BNPP had EUR 239 billion of available unencumbered assets, of which about 38% were deposits at central banks. This covers 155% of short-term wholesale needs including LTRO. In advancing its deposit base, BNPP is benefitting from the development of its global Cash Management platform via a combined CIB and Retail Banking offering. The Group now ranks fourth on a global basis for corporates. Out of EUR 30 billion refinancing needs of medium and long-term debt initially targeted for 2013, EUR 37 billion in issuance was completed at mid-October 2013. This was achieved mostly through private placements (40% of total), and senior unsecured issuances (36%). 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 95 billion, including USD 56 billion.

With deleveraging largely completed by the Group, DBRS views positively BNPP’s continued strengthening of its capital base. In 3Q13, the improvement was mostly driven by retained earnings, and a reduction in RWA due to a decrease in risk related to market activity. BNPP achieved a 10.8% Basel III fully loaded common tier 1 ratio as of 3Q13, up 130bps since 3Q12. The Group’s fully loaded Basel III leverage ratio was estimated at 3.8%, calculated on total Tier 1 capital (CRD4, as applied by BNPP), putting it above the 3.0% target for 1 January 2018.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

[Amended on June 25, 2014 to remove unnecessary disclosures.]