DBRS Morningstar Confirms BNP Paribas’s LT Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of BNP Paribas SA (BNPP or the Group) including the Long-Term Issuer Ratings of AA (low) and the Short-Term Issuer Ratings of R-1 (middle). The trend on all ratings remains Stable. DBRS Morningstar has also maintained the Intrinsic Assessment at AA (low) and the Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of BNPP’s Long-Term ratings at AA (low) continues to reflect 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 Morningstar also takes into account the Group’s build-up of loss-absorbing capacity in recent years and a consistent improvement in asset quality. However, cost efficiency still lags similarly rated international peers, reflecting pressures from the low interest rate environment in key markets and significant investment in business transformation. The Group remains committed to improving operating efficiency and DBRS Morningstar sees cost control as a key driver to support profitability.

DBRS Morningstar also notes that BNPP’s earnings generation and risk profile are likely to be adversely affected by the major economic slowdown driven by the coronavirus pandemic (COVID-19). In particular, the asset quality of the Group’s unsecured retail exposures could be adversely affected by the rise in unemployment in the geographies where the Group is exposed. However, we expect the effects of the economic downturn to be partly offset by some of the fiscal and monetary support measures introduced in response to COVID-19. DBRS Morningstar considers that the impact of the COVID-19 outbreak on the Group in the medium to long-term will depend on the depth of the economic crisis and we will continue to monitor the developing situation and its impact on BNPP’s overall credit profile.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating is unlikely in the near term, given the challenging economic outlook. Nonetheless, an upgrade of the ratings could occur should the Bank’s credit profile remain resilient throughout the COVID-19 crisis and is accompanied by a substantial improvement in cost efficiency and profitability.

The ratings could be downgraded if BNPP experiences a prolonged material deterioration of its asset quality profile, profitability, or capital buffers potentially as a result of the economic consequences of the COVID-19 pandemic.

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 carries out 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, Global Markets and Securities Services.

DBRS Morningstar considers BNPP generates solid underlying earnings, supported by its diversified franchise to date. In DBRS Morningstar’s view, the wide and growing scale of economic and market disruption resulting from the COVID-19 creates negative pressure for the Bank’s revenues, loan loss provisions and profitability. BNPP reported EUR 1,282 million net attributable profit in Q1 2020, down 33.2% year-on-year (YoY). This was mainly driven by ex-ante provisions to cover the expected deterioration in economic conditions as a result of the COVID-19, with provisions absorbing 52.2% of Income Before Profit and taxes (IBPT) in Q1 2020 compared to 28.5% in Q1 2019, as well as its impact on revenues in Equity and Prime Services and Insurance. This was partly offset by a strong reduction in operating costs on the back of the Group's cost savings plan, a trend DBRS Morningstar expects to continue in 2020, partly offsetting the currently expected increase in the cost of risk. Revenues were resilient in Domestic Markets despite the ongoing low rate environment, driven by growth in specialised services. International Financial Services' revenues decreased 5.4% YoY, despite revenue growth in different geographies, impacted by EUR 384 million of negative accounting impact on Insurance revenues marked at fair value. DBRS Morningstar understands that this impact could be reversed if financial markets were to recover. CIB revenues held up thanks to good performance in FICC, Corporate Banking and Securities, but incorporated EUR 184 million of negative impact on Equity and Prime Services revenues linked to the widespread cancellation of 2019 dividends due to COVID-19.

DBRS Morningstar 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 by product and geography. While the majority of the Group’s exposures have shown low risk metrics to date, the Group’s proportion of impaired exposures is above similarly rated 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. The Group’s asset quality has been consistently improving in recent years, driven by de-risking and sales of NPLs. Based on DBRS Morningstar’s calculations, the share of Stage 3 exposures in loans and advances to customers at amortised cost was 3.6% at FY2019, declining from 4.3% a year earlier. Nevertheless, due to the COVID-19 pandemic, we expect asset quality to deteriorate in 2020. This has already led to a significant increase in the cost of risk in Q1 2020, which was up 85% YoY to EUR 1.4 billion, equivalent to 67 bps (FY2019: 39 bps). We note exposure to capital markets activities with the Global Markets division represent 10% of the Group’s risk weighted assets (RWAs) at end-2019. In addition, the most vulnerable sectors to the COVID-19 crisis (Aircraft, Hotels and Leisure, Retail, Transports and Storage and Oil & Gas) represented round 7% of the total portfolio.

The Group has a solid funding position, supported by well-established deposit franchises in BNPP’s domestic markets and strong access to capital markets. The loan-to-deposit (LTD) ratio was 93% improved from 97% at end-2019. Typical of universal banks with extensive capital markets businesses, BNPP’s deposit base is accompanied by sizeable wholesale funding, which at end-2019 stood at EUR 317 billion (excluding sterilised short-term funding). Within this, short term funds were EUR 140 billion. The exposure to wholesale funding is mitigated by well diversified funding sources and strong liquidity. At end-2019, the Group had a substantial liquidity reserve (excluding sterilised short-term funding) of EUR 237 billion, equivalent to 1.7x of outstanding short-term wholesale debt. In Q1 2020, BNPP reported a solid LCR ratio of 130%.

DBRS Morningstar considers BNPP’s capital position as strong overall. While the Group’s capital ratios are below those of some peers, DBRS Morningstar’s view of capital incorporates the Group’s stable earnings, solid cushion above the regulatory requirements and its ability to adjust dividends or sale assets. At end-Q1 2020, the fully loaded CET1 ratio stood at 12.0%, representing a cushion of around to 270 bps above the Supervisory Review and Evaluation Process (SREP) requirements as at 1 January 2020 and a distance of around 220 bps to the Maximum Distributable Amount. BNPP’s fully loaded Total Capital ratio was 15.5% and the Basel III fully loaded CRD IV leverage ratio was 3.9% at end-Q1 2020. BNPP’s TLAC ratio strengthened to 22.0% (and 24.4% including eligible Senior Preferred debt), well above TLAC requirements of 20.11% of RWAs in Q1 2020 albeit we note RWAs are set to increase.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The sources of information used for this rating include Company Documents, BNPP 2019 and Q1 2020 Reports, BNPP 2019 and Q1 2020 Press Release, BNPP 2019 and Q1 2020 Presentation, BNPP 2019 Pillar III Document, BNPP 2019 Registration Document and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/363899.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: May 16, 2001
Last Rating Date: July 12, 2019

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