DBRS: BNP Paribas (Canada) Trend Remains Neg After BNPP’s US Settlement; Sr. LT Debt Confirmed at AA

DBRS, Inc. (DBRS) has today confirmed BNP Paribas (Canada) (BNPP Canada) and BNP Paribas Canada Branch’s Senior Unsecured Debt & Deposits at AA and the Short-Term Debt & Deposits ratings of R-1 (high). The Trend on the ratings is Negative. The ratings of BNPP Canada reflect the strength of its parent, BNP Paribas SA (BNPP or the Group), which owns 100% of the shares of BNPP Canada and guarantees its rated debt instruments.

DBRS also maintains an intrinsic assessment (IA) of AA (low) for the Group. The final ratings of BNPP Canada and BNPP Canada Branch reflect DBRS’s perspective on the Group’s IA and its systemic importance in France. The final ratings are positioned one notch above the IA, incorporating DBRS’s expectation of some form of timely systemic support for the Group in the event of a stress scenario, which is reflected in a Support Assessment (SA) of SA-2.

The continued Negative Trend takes into account the circumstances and magnitude of the settlement reached by the Group related to U.S. dollar clearing violations of U.S. law announced June 30, 2014. The settlement was reached with the U.S. Department of Justice, U.S. Attorney’s Office for the Southern District of New York, the New York County District Attorney’s Office, the Board of Governors of the U.S. Federal Reserve System (FED), the New York State Department of Financial Services (DFS), and the U.S. department of the Treasury’s Office of Foreign Assets Control (OFAC). The settlement includes total penalties of USD 8.97 billion/ EUR 6.6 billion, a guilty plea by BNP Paribas S.A., a one-year suspension (effective 1 January 2015) of USD direct clearing (focused mainly on the Oil & Gas Energy and Commodity Finance) and the dismissal of specific employees. DBRS considers that although the fine is financially manageable, the settlement has revealed serious past weaknesses in the Bank’s control and compliance framework. Given these concerns, DBRS’s current high rating level for BNPP incorporates very limited tolerance for any future risk management and control issues.

The size of the settlement, the one-year ban on US dollar clearing for oil and gas finance business at BNPP Geneva and other locations, and the guilty plea from the core BNPP S.A. entity have the potential to affect client and counterparty confidence. Further negative rating pressure could arise, if these issues result in damage to BNPP’s universal banking model franchise. DBRS notes that the one-year ban on oil and gas related US dollar clearing will begin in 2015. This will provide BNPP with six months to put alternative clearing arrangements in place for customers.

Following the settlement, BNPP has established a new department called Group Financial Security U.S., part of the Group compliance function, which will be based in New York. The new department is tasked with ensuring that BNPP complies globally with US regulation related to international sanctions and embargoes. All USD flows for the entire BNPP Group will be ultimately processed and controlled via the branch in New York. BNPP has also reduced and reorganized its commodity trading operations of the Geneva office, which had already been scaled back in 2012 in part due to the ongoing investigation and increased regulation costs.

In DBRS’ view, the cost of the settlement is not expected to impact the core strength of the organization. While the scale of the settlement is much higher than DBRS had expected, the Group has the financial ability to absorb the resulting charges of EUR 5.8 billion net of reserves, given BNPP’s strong profitability. Group Net Income in 2013 was EUR 4.8 billion. Incorporating the charges in Q2 2014, the Group expects its fully loaded Basel III CET1 ratio at 30 June 2014 to be around 10%, down from 10.6% at 1Q 2014.

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 2013, 62% of revenues were generated in Retail Banking, 22% in CIB and 16% in IS.

Going forward, DBRS will monitor the Group’s success with its 2014-2016 strategic plan, and will continue to assess BNPP’s evolving risk profile and capital positioning in light of the changing global operating environment, which is putting constraints on business practices and pressuring returns in certain businesses within its global capital markets operations.

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 applicable methodologies include the following: DBRS Criteria: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found on the DBRS website under Methodologies.

The primary sources of information used for this rating include company documents, the European Banking Authority, SNL Financial, the French Autorité de Contrôle Prudentiel et de Résolution, the US Department of Justice, the New York State Department of Financial Services and the US Department of the Treasury. 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 G. Reid
Initial Rating Date: 1 June 2000
Most Recent Rating Update: 8 July 2013

For additional information on this rating, please refer to the linking document under Related Research.