DBRS: BNPP’s 4Q13 Solid Underlying Results; Plan Leverages Core Strengths

Summary
•Net income excluding one-time items was EUR 6.0 billion in 2013, down 5.3% from EUR 6.4 billion in 2012. With one timers, BNPP still generated a solid EUR 4.8 billion in net income in 2013.
•BNPP’s plan announced in conjunction with 4Q13 results focuses on leveraging BNPP’s core strengths. Progress under BNPP’s Transformation Plan is evident, as operating costs in 4Q as in 2013 were contained even with investment in the franchise.
•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

Net income excluding one-time items was EUR 6.0 billion in 2013, down 5.3% from EUR 6.4 billion in 2012, mostly driven by weaker performance in Corporate and Investment Banking (CIB). While lower than 2012, BNP Paribas (BNPP or the Group) still generated a solid EUR 4.8 billion net income in 2013 that included EUR 798 million in provisions related to US dollar payments in 4Q13, goodwill impairments and transformational plan costs.

BNPP’s powerful underlying franchise is reflected in its revenue generation. Revenues totaled EUR 38.8 billion in 2013, down only marginally year-on-year (YoY). French Retail Banking (FRB), a key underpinning for BNPP, generated stable net interest income, but weak demand and the low interest rate environment are putting pressure on earnings. In 2013, pre-tax income in FRB was relatively stable at EUR 2.0 billion. Low client activity in Capital Markets drove lower revenues in CIB, a decline that was contained compared to industry trends. Overall CIB Pre-tax income, however, declined to EUR 2.2 billion in 2013 from EUR 2.9 billion in 2012, but 4Q13 improved from 4Q12. Positively, Investment Solutions (IS), mostly driven by Insurance, reported another good year with a pre-tax income stable at EUR 2.1 billion. DBRS, Inc. (DBRS) anticipates that the combination of the Group’s growth strategy and its cost control will continue to deliver solid earnings.

BNPP’s plan announced in conjunction with 4Q13 results focuses on leveraging BNPP’s core strengths. The plan confirms BNPP’s universal bank business model and its three pillars: Retail Banking (RB), Corporate and Investment Banking (CIB) and Investment Solutions (IS). It seeks to enhance the Group’s identified competitive advantages: leveraging its businesses gathering savings and generating liquidity, achieving critical mass in the capital market activities, and growing its presence in regions with strong potential, such as Asia.

DBRS views BNPP’s current capital level as adequate given the Group’s ambitions. With 10.3% CRDIV Common Equity Tier 1 (CET1) ratio at 4Q13, BNPP targets a lower ratio at 10.0% for 2016, confirming its growth strategy but also its potential for external growth in the short-to medium-term. Fully loaded Basel III CRD4 leverage ratio is estimated at 3.7%, which compares well with EU peers. Overall, DBRS perceives that identified growth areas are consistent with BNPP’s business mix, and expects that solid financial fundamentals will continue to underpin the Bank’s current ratings.

The first announced phase of the Transformation Plan was to improve the Group’s operating efficiency, a plan that covers all geographies. Illustrative of efforts already made, operating costs in 4Q and in 2013 were contained, despite the additional investment in the Group’s franchise, BNPP’s cost-to-income ratio was at 67 % in 2013 relative to 68% in 2012 on a consolidated basis. The cost-to-income ratio varies considerably across segments, which reflects the mix of activities by segment. At constant scope and exchange rate, operating expenses in Domestic Markets decreased, supporting improvement in the cost-to-come ratio in parallel with the development of digital innovations and streamlining of the branch network across domestic markets. Improving the cost-to-income ratio is a key lever for income growth, given the difficulty of generating revenue growth in these more mature businesses. On the other hand, IS operating expenses are up, illustrative of BNPP’s business development initiatives which DBRS perceives positively as BNPP intends to leverage its key businesses and leading positions.

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.

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: Support Assessment for Banks and Banking Organisations. These can be found can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include company documents, the European Banking Authority, 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
Approver: Alan G. Reid
Initial Rating Date: June 1, 2000
Most Recent Rating Update: July 8, 2013

For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.