DBRS Confirms BNP Paribas’s Senior Ratings at AA (low); Stable Trend

DBRS, Inc. (DBRS) has today confirmed BNP Paribas, SA (BNPP, or the Group)’s Long-Term Deposits and Senior Debt rating at AA (low) with a Stable trend. The Short-Term Debt rating is also confirmed at R-1 (middle) and the Subordinated Debt is confirmed at A (high), both with a Stable trend. DBRS has also confirmed the Long Term Critical Obligations rating at AA (high) and the Short Term Obligations rating at R-1 (high), both with a Stable Trend. BNPP’s Intrinsic Assessment (IA) has been maintained at AA (low) and its support designation at SA3.

At the same time, DBRS confirmed the ratings for BNP Paribas (Canada) (BNPP Canada) and BNP Paribas Canada Branch, including their Long-Term Intruments ratings of AA (low) with a Stable trend, and Short-Term Instruments rating of R-1 (middle) with a Stable trend. BNPP owns 100% of the shares of BNPP Canada and guarantees its rated debt instruments.

DBRS has also confirmed the Short-Term Obligations rating of BNP Paribas Fortis SA/NV at R-1 (middle), with a Stable trend.

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, the low interest rate environment and demanding regulatory requirements. The Group significantly improved its funding structure and reinforced its capital buffer through accelerated balance sheet adjustment. After achieving most of its 2014-2016 cost savings initiatives, the Group announced at the end of 2015 the launch of its CIB transformation plan to be applied in all regions. This plan includes reducing unproductive risk-weighted assets (RWAs) and residual legacy assets representing 10.5% of the CIB’s total RWAs. Half the RWA reduction will be used to grow existing businesses and optimise low return activities. At end-June 2016, CIB had already sold or securitised 6 billion euros in RWAs out of the EUR 20 billion target for 2019. The development of less capital-intensive businesses and fee-driven activities combined with more digitalisation across businesses is planned in order to grow revenues by around 4% by 2019, while keeping the cost base flat, thus improving the CIB segment’s efficiency.

As one of the largest universal banking groups in Europe, the Group’s IA is underpinned by its strong franchise in retail banking in its domestic markets (France, Belgium Luxembourg and Italy), and an expanding retail presence across Europe, Mediterranean countries, and the United States combined with strong and growing positions in investment banking, asset management, securities services, specialised financing and insurance. Within its universal bank model, Retail Banking remains the major contributor at around 65% of Group revenues. BNPP has an extensive Retail Banking & Services (RBS) franchise, which includes retail and private banking in its Domestic Markets, as well as specialised businesses. The Group also operates International Financial Services (IFS) activities with a retail presence in Europe-Mediterranean countries, such as Poland and Turkey, in the U.S. through BancWest, and Personal Finance across Europe (consumer finance activities). In addition, the Group also has leading positions in Insurance, as well as in Wealth & Asset Management. Another key component of the Group’s franchise is BNPP’s Corporate and Institutional Banking (CIB) that comprises Capital Markets activities and, since 2015, Securities Services, a robust business segment with an increasingly global reach.

The strength of BNPP’s franchise and its diversified mix of businesses enable the Group to maintain a strong revenue generation. This was evident in recent results, as revenues grew to EUR 42.9 billion in 2015, up 9.6% compared to 2014. 2Q16 Group revenues increased by 2.2% year-on-year (YoY) to EUR 11.3 billion. Operating Divisions revenues proved resilient, up 0.7% on a like-for-like basis (equivalent to constant scopes and exchange rate), mainly thanks to a good performance in CIB and despite the continued pressure of the low interest rate environment and the decrease in fees in Domestic Markets. In spite of BNPP’s efforts to control expenses, operating costs were up 10.3% YoY in 2015 on FX effects, increased regulatory costs and the impact of the 2014 acquisitions. Excluding these effects, the rise in operating expenses was more contained (up 3.2% YoY). Operating costs were flat in 2Q16 YoY, however, on a like-for-like basis, Operating Divisions’ costs increased 2.8% in 2Q16 YoY, mostly reflecting business growth in CIB and increased regulatory and compliance expenses. The Group’s reported cost-to-income ratio was 62.6% in 2Q16, below 68.1% in 2015 and 67.7 % in 2014. BNPP has already achieved EUR 3 billion of its targeted cost savings under the Simple and Efficient plan. DBRS notes that the Group has decided to raise the targeted cost savings to EUR 3.3 billion in order to offset compliance expenses in 2016. DBRS also views as positive that the CIB transformation plan encompasses an optimisation of the cost base. The plan’s target is to improve the segment’s cost to income ratio by 8 points by 2019.

BNPP’s low risk portfolios, which comprise the majority of its credit exposures, are generally located in countries where DBRS does not anticipate rapid deterioration. The Group is keeping the cost of risk under control, with a credit cost at the Group level of 45 basis points (bps) in 2Q16, down from 54 bps in 2015 and 57 bps in 2014. This positive trend reflects an improvement in all business lines, especially in Personal Finance, which is growing its positioning on lower risk products, and Italy, where the Group has been focusing its loan portfolio on lower risk corporates in selected regions. The doubtful loans and commitments ratio (net of guarantees and collateral) at 3.9% (end-2Q16) has remained fairly stable when compared to 4.0% at end-2015 and 4.2% at end-2014, while the coverage improved to 89% (compared to a level of 88% at end 2015 and 87% at end 2014).

While DBRS considers BNPP’s regulatory capital level as solid, it remains at the lower end of its global peer group range. The Group retains a strong capacity to generate capital through retained earnings, allowing for RWA growth and dividend payments. At end-2Q16, BNPP had a CRD IV fully loaded common equity tier 1 (CET1) ratio of 11.1%, up from 10.9% at-end 2015 and 10.3% at end-2014. The Group’s phased-in CET1 ratio, at 11.2% at end-2Q16 stands above the ECB’s SREP regulatory requirements of 10% for 2016 (including the 0.5% G-SIB buffer). DBRS also notes that BNPP will need to reach a ratio of Total Loss-Absorbing Capacity (TLAC) to RWA of 20.5% by 2019. In advancing towards this ratio the Group had a total capital ratio of 14.0% at end-2Q16, and it plans to meet regulatory requirements through the issuance of EUR 10 billion of TLAC eligible debt per year by 2019 in addition to reinforcing its capitalisation by issuing EUR 1.5 to 2 billion of Additional Tier 1 (AT1) and EUR 2 to 3 billion of Tier 2.

On 29 July 2016, the European Banking Authority (EBA) published the results of the 2016 EU-wide stress test of 51 European banks, including BNPP. In DBRS’s view, the Group’s results demonstrated the resilience of its balance sheet with the fully loaded CET1 ratio of 8.51% at end-2018 under the adverse scenario assumed by EBA.

RATING DRIVERS

Upward pressure on the ratings could result from BNPP improving its intrinsic strength by sustaining revenue growth and achieving higher cost efficiency, while making progress with enhancing its franchise positions across its businesses, strengthening its capitalisation and streamlining its risk profile.

Downward pressure on the IA is not expected given the progress that BNPP is achieving, but could result from any notable deterioration in key segments in its franchise to the extent that this deterioration would significantly reduce the Group’s earnings power, capitalisation and financial profile.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), DBRS Criteria: Critical Obligations Rating (February 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2016). 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 and SNL. 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: William Schwartz
Initial Rating Date: 23 July 2015
Most Recent Rating Update: 29 September 2015

The rated entity or its related entities did participate in the rating process. DBRS did have access to the accounts and other relevant internal documents of the rated entity or its related entities.