DBRS Initiates Ratings for BNPP; Sr AA Ratings UR-Neg. on Support; Intrinsic Assessment at AA (low)

DBRS Ratings Limited (DBRS) has today initiated ratings for BNP Paribas S.A. (BNPP or the Group), assigning a long-term debt and deposit ratings of AA and a short-term rating of R-1 (high), both Under Review with Negative Implications (URN). The URN reflects the action taken on 20th May 2015 to review the systemic support assumptions of 38 European Banking Groups. DBRS also maintained the Group’s intrinsic assessment (IA) at AA (low).

At the same time, DBRS confirmed the ratings for BNP Paribas (Canada) (BNPP Canada) and BNP Paribas Canada branch, including their Senior Unsecured Debt & Deposit ratings of AA (low) URN, and Short-Term Instruments rating of R-1 (high) URN. BNPP owns 100% of the shares of BNPP Canada and guarantees the rated debt instruments of these Canadian entities.

These actions followed DBRS’s detailed review of BNPP’s performance and outlook.

In maintaining the Group’s IA at AA (low), DBRS considers that BNPP has been demonstrating its ability to cope with significant headwinds by adjusting to the difficult market conditions, an extended low growth environment and demanding regulatory requirements. After facing reduced access to unsecured wholesale funding in 2011, the Group significantly improved its funding structure and reinforced its capital cushion through accelerated balance sheet adjustment (including disposals of several activities or business units, deleveraging in CIB, and sale of equity stakes). The Group was also able to absorb a record fine of USD 8.9 billion/EUR 6.6 billion (or EUR 5.8 billion net of reserves) in 2014. BNPP maintained a positive net income of EUR 157 million at year-end 2014, as revenue trends remained positive. However, continued progress with expense control, balance sheet management and franchise development, managing risk and capital positioning remain important to enhance BNPP’s resiliency in this uncertain environment. Additionally, DBRS’s current rating level for BNPP incorporates very limited tolerance for any future control issues.

The strength of BNPP’s powerful franchise is indicated by its largely resilient revenue generation. Revenues grew to EUR 39.2 billion in 2014, up +2.0% vs. 2013. The first quarter in 2015 confirmed this positive trend, as revenues at Group level grew even at constant scope and exchange rate, including revenues in Domestic Markets that are pressured by the low interest rate environment. Illustrative of efforts being made on expense control, operating costs in 2014 were contained despite the additional investment in the Group’s franchise. BNPP’s cost-to-income ratio was at 67.7% in 2014, largely stable compared to 67.6 % in 2013 and relative to 67.9% in 2012 on a consolidated basis (65.9% in 2014 and 66.0% in 2013, excluding the transformation costs of the Group’s Simple & Efficient programme).

In DBRS’s view, the majority of the credit exposures, are located in countries where DBRS does not anticipate rapid deterioration. The Group is keeping the cost of risk under control, posting a credit cost at Group level of 61 basis points (bps) in 1Q15 roughly stable from 60 bps in 4Q14, and compared to 57 bps in 2014. While generally stable, there is potential for deterioration coming from the still weak environment in Italy and in some Eur-Med countries (Ukraine, Tunisia, Turkey). The doubtful loans and commitments ratio at 4.0% (net of guarantees and collateral) is trending down (vs. 4.2% at end-2014), with a coverage ratio stable at 87%.

While DBRS considers BNPP regulatory capital level as solid, it is at the lower end of its global peer group. DBRS understands that the Bank intends to invest excess capital organically to finance its development plan, but does not preclude continuing to accumulate capital. At end-2014, BNPP was able to maintain its CRD IV fully loaded CET1 ratio at 10.3% - stable from 4Q13 after absorbing the impact of the substantial fine and above the minimum regulatory requirement of 9%. In 2014, BNPP’s stable CET1 capital level reflected the combination of a number of events. Generated earnings were mainly absorbed by the significant 100 bps impact of the U.S. penalties paid in 2Q14. Three important acquisitions (LaSer in France, DAB Bank in Germany, and Bank BGZ in Poland), reflecting the Group 2014-2016 Plan, were undertaken. In 1Q15, other factors such as the application of IFRIC 21 (booking of annual tax entirely in 1Q15 including the contribution for 2015 to the Single Resolution Fund), the assumption of a 45% dividend pay-out ratio, and the rise in risk-weighted assets (RWA) have offset the internal capital generation from earnings of 35 bps in 1Q15. BNPP’s fully loaded Basel III CRDIV leverage ratio was estimated at 3.4% calculated on total Tier 1 capital down from 3.7% at 1Q14 (partly impacted by the USD-EUR exchange rate), which is also below many of its global peers. Capital levels will be supported by issuances of additional Tier 1 in the tune of EUR 1-2 billion per annum, and issuances of Tier 2 in the tune of EUR 2-3 billion per annum until 01.01.2019.

While upward pressure on the ratings is unlikely due to continuing regulatory challenges, DBRS anticipates that BNPP’s intrinsic strength would benefit if it successfully executes its costs reduction plan and maintains the resilience of its underlying earnings, while making progress with strengthening capital and streamlining its risk profile. Downward pressure on the IA is not expected within the next twelve months, but could result from notable deterioration in key segments of its franchise to the extent that it would impact the Group’s earnings power, capitalisation and financial profile.

The Group’s IA is underpinned by 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. Within that framework of its universal bank model, Retail Banking generally generates about 60% of Group revenues and its diversity partly underpins the Group’s franchise strength. BNPP displays an extensive Retail Banking & Services (RBS) franchise, which includes retail and private banking in Domestic Markets (France, Italy, Belgium and Luxembourg) as well as specialised businesses, but also International Financial Services (IFS) activities. IFS includes a retail presence in Europe-Mediterranean countries such as Poland and Turkey, and in the U.S. through BancWest, and Personal Finance across Europe (consumer finance activities), as well as Insurance and Wealth & Asset Management that add stability, diversification and growth opportunities. Another key component of the Group’s franchise and an important contributor to BNPP’s earnings is BNPP’s Corporate and Institutional Banking (CIB) that encompasses Capital Markets and, more recently, Securities Services, a robust business segment with an increasingly global reach.

BNPP’s ratings remain Under Review with Negative Implications due to DBRS’s review of the systemic support assumptions for a number of European Banks initiated on 20th May 2015. The review reflects DBRS’s view that recent developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Currently, BNPP has a support assessment of SA-2, which results in a one-notch uplift from BNPP’s IA of AA (low) to the final rating of AA. During the review period, DBRS is considering whether to change the support designation of a number of European banks from SA-2 to SA-3, which is the category for banks where DBRS has no expectation of systemic support or is not confident enough that timely systemic support would be forthcoming in times of need to add a notch for systemic support. Such a conclusion would lead to the removal of any uplift and a downgrade of the senior ratings for any affected banks. The review is expected to be completed in September.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Vitaline Vincent
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: 1 June 2000
Most Recent Rating Update: 20 May 2015

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