DBRS: BNPP’s 3Q14 Net Income Up; Revenues Growth, Lower Provisions

Summary
• Net income of EUR 1.5 billion, up 10.6% vs. 3Q13. Excluding own credit adjustment and DVA, net income is EUR 1.7 billion, up 12.5% vs. 3Q13.
• This upward trend is mostly supported by revenues growth, as well as lower operating provisions.
• CRDIV Fully Loaded Common Equity Tier 1 (CET1) ratio at 10.1% taking into account AQR results.
• DBRS rates BNPP Canada and BNP Paribas Canada Branch’s Long-Term Deposits and Senior Debt at AA with a Negative trend. The ratings of BNPP Canada reflect the strength of its parent, BNP Paribas S.A. (BNPP or the Group), which owns 100% of the shares of BNPP Canada and guarantees its rated debt instruments.

The Group reported EUR 1.5 billion net income in 3Q14 in contrast with the previous quarter which loss was driven by an exceptional U.S. fine. Excluding one-off items in each quarter (own credit adjustment and DVA), the net income year-over-year (YoY) trend is positive. In 3Q14, BNPP reported EUR 1.7 billion when adjusted for own credit adjustment, up 12.5% from 3Q13.

This YoY upward trend is mostly supported by revenues growth, as well as lower operating provisions. Operating expenses are being contained as planned, while additional investment in the franchise continues to take place, which reflect the Group’s objectives in expanding in Investment Solutions (IS) and Corporate and Investment Banking (CIB) but also the implementation of the remediation plan as agreed with the U.S. BNPP’s powerful franchise is reflected in its largely resilient revenue generation. Revenues held up at EUR 9.5 billion in 3Q14, up +2.6% vs. 3Q13 for the operating divisions at constant scope and exchange rate. This was achieved thanks to international retail operations, fixed-income and specialized businesses, in spite of still weak demand in France 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 2.8% YoY at constant scope and exchange rate to EUR 6.1 billion, illustrating the benefits of being diversified. CIB overall revenues increased by 2.9% YoY to EUR 2.1 billion. Investment Solutions (IS), mostly driven by Insurance and Securities Services, reported another good quarter with revenues up 5.2% YoY at constant scope and exchange rate to EUR 1.6 billion. DBRS anticipates that the combination of the Group’s franchise strength, growth strategy and cost control will enable the Group to continue to deliver solid underlying earnings as demonstrated in this quarter.

In particular in this quarter, the ECB stress-test based on year-end 2013 data indicated that BNPP has the ability to withstand a severe stress scenario. At the same time, the ability of the Group to absorb credit costs out of underlying earnings continued to improve. BNPP generated gross operating income, or income before provisions and taxes (IBPT), of EUR 2.9 billion. In addition to improved revenues, provisioning expenses of about EUR 0.8 billion were down by 9.2% relative to 3Q13. This resulted in an improved capacity to absorb those expenses, as provisions absorbed just 25.9% of IBPT in 3Q14, well below an already good 30.9% in 2013. Contributing to the improving position, the cost of risk improved, as the Group’s credit cost was down to 47 basis points (bps) in 3Q14 from 59 bps in 2013. This was achieved in spite a still deteriorated economic environment in Italy. Doubtful loans and commitments netted of guarantees and collateral ratio at 4.4% is slightly down compared to end-2013, with a coverage ratio up to 86%. Separately, DBRS views positively BNPP’s progress in reinforcing its compliance and control procedures, supported by an international consulting firm.

In DBRS view, BNPP has the ability to adjust given its proven ability to generate capital organically. Its CRDIV fully loaded Common Equity Tier 1 (CET1) ratio was 10.1%, up 10 bps since last quarter. This takes into account AQR results net impact (-3 bps), an adjustment related to fair value of market exposures, and also reflects the closing of BGZ in Poland and Laser in France (-25 bps) as well as regulatory changes. In 2Q14, the Group took the 100 bps impact of the penalties paid. DBRS positively notes that BNPP issued Tier 2 issuances in October. Fully loaded Basel III CRDIV leverage ratio is estimated at 3.5% calculated on total Tier 1 capital. Group’s 2014 MLT funding programme is fully completed.

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