DBRS: BNPP’s Q1 2014 Still Solid Fundamentals; Revenues Stable, Expenses Down

Summary
• Net income up 5.2% to EUR 1.7 billion, supported by resilient revenue generation and lower operating expenses.
• Solid revenues in Retail Banking and Investment Solutions, but weakness in some Capital Markets businesses with reduced client activity.
• Cost of risk increased in Italy and Eastern European countries in particular, but remains manageable; evolving situation in Ukraine increases uncertainty.
• 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 was EUR 1.7 billion in Q1 2014, up 5.2% from EUR 1.6 billion in Q1 2013, mostly supported by solid revenues as well as lower operating expenses that compensated for an unexpected increase in cost of risk. Also, while the net income trend is positive, BNPP remains exposed to a potentially significant US fine – as the Bank now expects the EUR 798 million provision in Q4 2013 related to US dollar payments to be insufficient.

BNPP’s powerful underlying franchise is reflected in its stable revenue generation. Revenues held up at EUR 9.9 billion in Q1 2014, just -0.2% vs. Q1 2013 for the operating divisions at constant scope and exchange rate. This was achieved in spite of weak demand and the low interest rate environment that are putting pressure on earnings. Revenues in Retail Banking that includes Domestic Markets and others retail businesses were up 0.8% year-on-ear (YoY) at constant scope and exchange rate, illustrating the benefice of being diversified. Reduced client activity in Capital Markets continued to drive lower revenues in Corporate and Investment Banking (CIB). While Fixed Income reported a 21.7% decline in revenues vs. Q1 2013, in line with industry trends, CIB overall revenues just decreased by 3.7% YoY to EUR 2.3 billion in Q1 2014 and at constant scope and exchange rate. This was supported by a good quarter in Equities and Advisories thanks to structured products. Investment Solutions (IS), mostly driven by Insurance and Securities Services, reported another good quarter with revenues up 2.7% YoY and at constant scope and exchange rate to EUR 1.6 billion. DBRS anticipates that the combination of the Group’s growth strategy and its cost control will continue to deliver solid earnings as demonstrated in this quarter.

The ability of the Group to absorb credit costs out of underlying earnings remained resilient. BNPP generated gross operating income, or income before provisions and taxes (IBPT), of EUR 3.5 billion. While provisioning expenses of about EUR 1.1 billion in Q1 2014 were up 19% relative to Q1 2013, the capacity to absorb those expenses was unchanged, as provisions absorbed just 30.7% of IBPT in Q1 2014 largely unchanged from 30.9% in 2013. DBRS views this level as very manageable, given BNPP’s generally good quality portfolios.

The deterioration in the cost of risk was driven by two specific areas: in Italy through BNL and in Central Eastern Europe (CEE) through the Bank’s Ukrainian retail subsidiary and corporate banking, but also one exceptional file in France. Overall, BNPP’s credit cost deteriorated in Q1 2014 reaching 68 bps, up 12 bps from Q1 2013. While doubtful loans and commitments in Q1 2014 are slightly up vs. end-2013, the non-performing loan (NPL) ratio was down to 4.3% (4.5% at end-2013) with a stable coverage ratio of 81% at Q1 2014 vs. end-2013. DBRS does not anticipate that the trend will improve in 2014, as credit in Italy and CEE will likely remain under pressure.

DBRS views BNPP’s current capital level as adequate given the Group’s plans. With 10.6% CRDIV Common Equity Tier 1 (CET1) ratio up 30 bps since year-end 2013, fully loaded Basel III CRDIV leverage ratio is estimated at 3.7%. 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.

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.