DBRS Confirms BNP Paribas’s Long-Term Issuer Rating at AA (low); Stable Trend

DBRS Ratings Limited (DBRS) confirmed BNP Paribas SA (BNPP or the Group)’s Long-Term Issuer rating at AA (low) and the Short-Term Issuer rating at R-1 (middle). The trend on all ratings is Stable. BNPP’s Intrinsic Assessment (IA) has been maintained at AA (low) and its Support Assessment at SA3. The full list of ratings is at the end of this press release.

KEY RATING CONSIDERATIONS
The IA of AA (low) reflects the Group’s very strong and diverse franchise, its ability to adapt to challenges in the operating environment, robust underlying earnings generation capacity and conservative risk management. Funding and liquidity remain strong, benefiting from stable customer deposits and good access to wholesale markets. DBRS also takes into account the Group’s solid build-up of loss-absorbing capacity over the last year and a consistent improvement in asset quality. Cost efficiency is somewhat lagging similarly rated international peers, reflecting pressures from the low interest rate environment in key markets and significant investment in transformation, however the Group remains committed to improving operating efficiency.

RATING DRIVERS
Upward pressure on the ratings could result from a substantial strengthening of the Group’s cushion over regulatory capital ratios, continued improvement in the risk profile, and improving cost efficiency.

The ratings could come under downward pressure if BNPP were to materially increase its risk profile, suffer from a deterioration in its franchise in its key markets, or experience a significant weakening in its capital cushion.

RATING RATIONALE
BNPP has a very strong and well diversified franchise and is one of the largest universal banking groups in Europe. The Group’s retail branch presence spans its Domestic Markets (DM) activities in France, Belgium, Luxembourg and Italy, and International Financial Services (IFS), which covers branch network banking in emerging markets and the United States. The Group’s offering is complemented by a broad range of specialised finance services, some of which have a global reach or are market leading. Corporate and Institutional Banking (CIB) has a well-established position in European capital markets and comprises Corporate Banking, Capital Markets and Securities Services.

Despite pressures on profitability in some of the Group’s core activities, BNPP has continued to generate solid underlying earnings, supported by its diversified franchise. In 2018, net income group share declined by 3% YoY (year-over-year) to EUR 7.5 billion. The Group has faced a tough operating environment in its capital markets activities and also margin pressure in its domestic retail business, but has also benefited from growth in the IFS division, resulting in resilient revenues over the past year. Operating expenses were affected by continued investment in the transformation of the Group; however, the cost of risk remained relatively low. In 1Q19, net income group share was EUR 1.9 billion, increasing by 22% YoY. Adjusted for exceptionals (mainly capital gains on the reduction of the Group’s stake in the Indian insurer SBI Life), net income group share was down 2.2%. DBRS notes that due to persistent low interest rates and challenging capital markets activities the Group has revised downwards its revenue growth target under the 2017-2020 Business Development Plan, intensified the transformation of CIB and increased the recurring cost savings target.

DBRS views the Group’s risk profile as generally conservative with some higher risk elements. Credit risk is mitigated by significant diversification of the loan book. While the majority of the Group’s exposures are low risk, the Group’s proportion of impaired exposures is above some peers, mainly due to higher risk lending in Italy and Personal Finance, as well as the approach of retaining impaired loans on the balance sheet for a longer time. However, DBRS views positively that asset quality has been consistently improving in recent years. Based on DBRS’s calculations, the share of Stage 3 exposures in loans and advances to customers at amortised cost was 4.3% at FY18, declining from 4.9% on January 1, 2018. Exposure to capital markets activities is moderate with the Global Markets division, representing 11% of the Group’s risk weighted assets (RWAs).

The Group has a solid funding position, supported by well-established deposit franchises in BNPP’s domestic markets and good market access. The Group’s loan-to-deposit (LTD) ratio was 95%, remaining broadly stable over the last year. Typical of universal banks with extensive capital markets businesses, BNPP’s deposit base is accompanied by sizeable wholesale funding, which at FY18 stood at EUR 274 billion (excluding sterilised short-term funding). Within this, short term wholesale debt was EUR 125 billion. The exposure to wholesale funding is mitigated by well diversified funding sources and strong liquidity. At FY18, the Group had a substantial liquidity reserve (excluding sterilised short-term funding) of EUR 233 billion, equivalent to 1.9x of outstanding short-term wholesale debt. The liquidity reserve consists predominantly of liquid assets meeting prudential regulation requirements. BNPP’s 1Q19 LCR ratio was a solid 125%.

BNPP’s capital position is strong overall. While the Group’s capital ratios are below those of some peers’, DBRS’ view of capital incorporates the Group’s very stable earnings, solid cushion above the regulatory requirements and its ability to adjust dividends. Despite this, capital remains a key focus given the still evolving regulatory environment, in particular the finalisation of Basel III. At 1Q19, the Basel III common equity tier 1 (CET1) ratio stood at 11.7%, representing a buffer of close to 190 basis points (bps) above the SREP requirements as of January 1, 2019. The first-time adoption of the new IFRS 16 accounting standard from January 1, 2019 had an adverse impact of around 10 bps. The Group targets a CET1 ratio of at least 12% and a total capital ratio of at least 15% in 2020, based on a constant regulatory framework. The 1Q19 Total Capital ratio was 15.1% and the Basel III fully loaded CRD IV leverage ratio was 4.2%. The Group has made solid progress in the issuance of senior non-preferred debt over the last year and its 1Q19 TLAC ratio (including 2.5% of Senior Preferred debt) was 22.5%, (end-2017: 19.0%) positioning it well against regulatory requirements.

The Grid Summary Grades for BNP Paribas SA are as follows: Franchise Strength – Very Strong; Earnings Power – Strong; Risk Profile – Strong; Funding & Liquidity – Strong; Capitalisation – Strong.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include Company Documents, the Bank of France and S&P Global Market Intelligence. DBRS considers the information available to it for the purposes of providing this rating to be 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.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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 and US regulations only.

Lead Analyst: Tomasz Walkowicz, Vice President – Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director – Global FIG
Initial Rating Date: July 23, 2015
Last Rating Date: July 13, 2018

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