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 leading and diversified 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. Nevertheless, the rating action also considers the Group’s cost efficiency, which still lags behind similarly rated international peers despite recurrent cost savings, reflecting pressures from the low interest rate environment in key markets and significant investment in business transformation.

Nevertheless, we also take into account the asset quality challenges faced by BNPP in 2021-2022. Whilst the Group’s asset quality has been consistently improving in recent years, driven by de-risking and sales of NPLs, we view that state guaranteed loans and loan moratoria have been preventing the deterioration of traditional asset quality metrics and therefore expect new NPLs to materialise with the end of the support measures. However, we also acknowledge that the Group has not experienced signs of asset quality deterioration yet.

RATING DRIVERS
An upgrade of the Long-Term Ratings would occur should BNPP substantially improve cost efficiency and profitability whilst maintaining a resilient credit profile and capital position.

The ratings would be downgraded if BNPP experiences a prolonged material deterioration of its asset quality profile, profitability, or capital buffers. Ratings could also be downgraded in the case of a simultaneous deterioration in the Group’s main markets, as this would reduce the benefit of the Group’s diversification.

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.

In DBRS Morningstar’s view, whilst market disruption resulting from the COVID-19 resulted in negative pressure for the Bank’s profitability in 2020, BNPP proved resilient thanks to solid underlying earnings and supported by its diversified franchise to date. BNPP reported net attributable income of EUR 1.8 billion in Q1 2021, up 37.9% year-on-year (YoY). Q1 2021 results were driven by the normalisation of the cost of risk and higher revenues despite growth in operating expenses. The Group's total revenues were EUR 11.8 billion in Q1 2021, up 8.6% YoY, mainly driven by the strong performance in Corporate and Institutional Banking, thanks to sustained revenue growth on all segments, except in FICC which had benefited from a high base in Q1 2020. Despite the continued low interest rate environment, Domestic Markets revenues (DM) grew, driven by volume growth and solid fee generation in specialised services. International Financial Services proved resilient YoY and mainly on the very good performance of BancWest and strong growth in Insurance and Asset Management businesses. Despite growth in operating expenses due to higher banking taxes (IFRIC 21) YoY and CIB on the back on sustained activity levels, the cost base continued to benefit from cost rationalisation measures at DM and IFS. This lead to a sustain improvement in the cost-income ratio to 72.7% in Q1 2021 thanks to the positive jaws effect, but still relatively high compared to European peers. Cost of risk started to normalise at EUR 896 million in Q1 2021, or 42 bps of customer loans, down compared to 67 bps in Q1 2020 and down compared to the last three quarters (65 bps in Q2, 57 bps in Q3 and 74 bps in Q4).

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. DBRS Morningstar views positively that the improving trend in asset quality observed 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 3.1% at end-2020, fairly stable YoY. However, due to the COVID-19 pandemic we expect asset quality to deteriorate in coming quarters when government support expires and bankruptcies start to materialise.

The Group has a solid funding position, supported by well-established deposit franchises in BNPP’s domestic markets and good access to capital markets. At end-March 2021, BNPP’s consolidated customer deposits were EUR 974 billion up from EUR 941 billion at end-2020 and EUR 835 billion at end-2019. The loan-to-deposit (LTD) ratio was 84% improved from 86% at end-2020 and 97% at end-2019, due to the effects of the health crisis on deposits. Typical of universal banks with extensive capital markets businesses, BNPP’s deposit base is accompanied by sizeable wholesale funding, which at end-2020 stood at EUR 296 billion (excluding sterilised short-term funding). Within this, short term funds were EUR 115 billion. The exposure to wholesale funding is mitigated by well diversified funding sources and strong liquidity. At end-2020, the Group had a substantial liquidity reserve (excluding sterilised short-term funding) of EUR 356 billion, equivalent to more than one year of outstanding short-term wholesale debt. In Q1 2021, BNPP reported a solid LCR ratio of 136%.

DBRS Morningstar views BNPP’s capital position as strong overall and its underlying earnings generation capacity as good. While the Group’s capital ratios are below those of some peers’, DBRS Morningstar’s view of capital incorporates the Group’s very stable earnings, solid cushion above the regulatory requirements and its ability to adjust dividends. The Group had a fully loaded CET1 ratio of 12.6% at end-Q1 2021, stable compared to end-2020. BNPP also reported a fully loaded total capital ratio of 16.1 % at end-March 2021. This provides the Group with distance of around 350 bps and 290 bps over the Maximum Distributable Amount. The fully loaded Basel 3 leverage ratio was 4.3% at end-March 2021. The TLAC ratio strengthened to 24.7% without including eligible Senior Preferred debt, positioning BNPP well against TLAC requirements of 20.03% of RWAs in Q1 2021.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 2020 and Q1 2021 Reports, BNPP 2020 and Q1 2021 Press Release, BNPP 2020 and Q1 2021 Presentation, BNPP 2020 Pillar III Document, BNPP 2020 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/380805

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: May 16, 2001
Last Rating Date: July 10, 2020

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