RPT-Fitch: BNPP's 4Q13 Results Dented by One-off Items; Capital Remains Solid

Mon Feb 17, 2014 9:32am EST

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Feb 17 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says BNP Paribas's (BNPP; A+/Stable/a+) 4Q13 adjusted pre-tax profit declined owing to one-off items. However, the bank continues to have solid capital ratios, which are at the higher end of its global trading and universal bank peers.

BNPP reported an adjusted pre-tax profit of EUR1.0bn in 4Q13, which was down by 43% yoy and 54% qoq, largely owing to a EUR798m provision related to US dollar payments involving parties subject to US sanctions and EUR287m restructuring costs linked to the bank's expense reduction plan. This plan should allow the bank to save EUR2.8bn per year from 2016, but will lead to additional one-off restructuring costs in 2014 and 2015. Adjusted pre-tax profit excludes the fair value of own debt changes and debt value adjustments (EUR16m loss in 4Q13), impairment of goodwill (EUR186m) and non-recurring realised capital gains (EUR81m).

The bank generated EUR8.2bn adjusted pre-tax profit for FY13, down 23% from FY12, but still representing a satisfactory 10% adjusted pre-tax return on total equity. We believe this demonstrates the benefits of having a diversified franchise, largely from fairly stable earnings sources (retail banking represented 58% of business divisions' pre-tax profit excluding the corporate centre; wealth management 20%), which helps the bank to absorb certain non-recurring items.

BNPP's retail banking business generated satisfactory pre-tax return on allocated equity (14% in 4Q13 on an annualised basis), and Fitch expects this to continue. Nevertheless, this business posted an 11.5% yoy decline in pre-tax profit to EUR1.2bn. However, FY13 pre-tax profit in this business remained relatively stable with pre-tax profit declining by a moderate 2.8%. Fitch believes retail banking revenue in BNPP's core markets (France, Belgium, Italy, US) will likely continue to be under pressure unless client demand and interest rates rise from current low levels.

Loan impairment charges (LICs) remained low for the bank's two main retail markets, France and Belgium (24bp and 22bp of loans in 4Q13 on an annualised basis respectively). However, BNPP's main Italian subsidiary (BNL) continues to suffer from weak and deteriorating asset quality (LICs represented 167bp of customer loans in 4Q13 on an annualised basis; 144bp in 3Q13). Nevertheless, BNL was still profitable (EUR24m pre-tax income in 4Q13) and Fitch expects any asset quality deterioration to remain manageable for the group given the diversity and resilience of its total earnings base.

BNPP's corporate and investment banking (CIB) business, which includes its capital markets and corporate banking activities, posted a pre-tax profit of EUR0.4bn, up 36% yoy from a weak 4Q12 but 37% lower than in 3Q13. The bank's capital markets activities saw mixed results, similar to European peers as net revenue fell 6% qoq but improved 3% yoy. Revenue in the fixed income business declined (8% qoq and 13% yoy) but the equities and advisory business improved (44% yoy, but down 4% qoq) as fixed income activities were affected by weak market conditions in 4Q13and low client activity, particularly in the rates business. Pre-tax profit from BNPP's financing business in CIB rose (31% yoy), helped by lower LICs, which can be volatile due to a small number of large exposures.

BNPP's investment solutions business, which comprises wealth and asset management activities as well as the insurance business, continues to generate a sound pre-tax return on allocated equity (24% in 4Q13 on an annualised basis). Operating profit was fairly stable at EUR0.5bn, with improvements in the insurance business offsetting weakness in the wealth and asset management division. Net new money outflows (EUR0.3bn in 4Q13) have stabilised.

BNPP's Basel III 'fully applied' CET1 ratio remained solid at 10.3% at end-4Q13 and compares well with its US and European peers', but declined compared with end-3Q13 due to its purchase of a 25% minority stake in its Belgian subsidiary BNP Paribas Fortis previously held by the Belgian state. Fitch believes the bank continues to have flexibility to expand its franchise and seize growth opportunities, and BNPP continues to target a 10% fully applied CET1 ratio. The bank's CRD IV leverage ratio (based on total CRD IV Tier 1 capital including hybrid instruments that are subject to phase-out) reached 3.7% on a 'fully applied' basis at end-3Q13. This ratio is above the expected 3% regulatory threshold and compares well with that of European peers, but lower than US peers'.

BNPP's funding and liquidity remained adequate. Its Basel III liquidity coverage ratio was above 100% at end-2013; its liquidity buffer rose to EUR247bn at end-4Q13, and covered 154% of the bank's short-term wholesale funding maturing within a year. Cash and deposits with central banks that are part of the liquidity buffer were equal to 64% of short-term wholesale funding maturing within a year.

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