Fitch: BNPP's 1Q14 Pre-tax Results Resilient; Litigation Costs Likely to Increase

Thu May 1, 2014 10:36am EDT

(The following statement was released by the rating agency) PARIS, May 01 (Fitch) Fitch Ratings says BNP Paribas's (BNPP; A+/Stable/a+) 1Q14 adjusted pre-tax profit was adequate, despite higher impairment charges. BNPP's capital remains solid and we believe the bank would be able to absorb significant non-recurring items, such as litigation costs. Nonetheless, BNPP's Issuer Default Ratings (IDRs) remain sensitive to any large litigation or regulatory expense that would significantly alter BNPP's capital ratios, as is the case for certain peers. BNPP has said that the penalties the US authorities could impose on the bank for USD payments involving parties subject to US sanctions could far exceed the provision amount booked in 4Q13. In 4Q13, BNPP had booked a EUR0.8bn provision relating to this case, bringing the total litigation reserves to EUR2.7bn. For 1Q14 BNPP reported EUR2.3bn pre-tax profit adjusted for fair value of own debt changes and debt value adjustments (EUR64m loss in 1Q14) and non-recurring realised capital gains on equity investment sales (EUR301m). This was down 6% yoy, due to higher loan impairment charges (LICs), but up 161% qoq as 4Q13 was negatively affected by the EUR0.8bn litigation provision. We believe BNPP's 1Q14 results highlight its continued ability to generate satisfactory recurring profit, due to its diversified and largely retail banking-oriented franchise, despite weak economic growth. Strong cost discipline has resulted in lower operating expenses, which offset lower revenue in businesses and/or markets that were under pressure. We expect BNPP's retail banking business to continue to generate satisfactory pre-tax return on allocated equity (17% in 1Q14). However, BNPP remains exposed to headwinds in most of its core retail banking markets, notably due to persistent weak loan demand, low interest rates and high LICs in its main Italian subsidiary (BNL). Pre-tax profit in BNPP's retail banking business was down 14% yoy, largely on higher LICs at BNL and a EUR100m specific provision (half booked in the division, the rest in the corporate and investment banking (CIB) business) due to current political and economic issues in eastern Europe. Given BNPP's fairly small loan book in Ukraine (end-1Q14: EUR1.6bn), we expect any further deterioration to be manageable. BNL continued to suffer from asset quality deterioration in 1Q14 as LICs rose to 185bp of customer loans in 1Q14 on an annualised basis (167bp in 4Q13 and 150bp in 2013). Nevertheless, the Italian subsidiary's contribution to BNPP's pre-tax profit remained slightly positive at EUR16m. Asset quality deterioration at BNL - which we do not expect to be material - would remain manageable for the group given the diversity and resilience of its total earnings base. BNPP's French and Belgian retail networks' performance will remain more sensitive to revenue generation and cost efficiency than to pressure on LICs, which remain low (30bp and 23bp in 1Q14 respectively). BNPP's CIB business posted EUR0.6bn pre-tax profit, down 24% yoy but up 75% qoq. Revenue from the equities and advisory part of capital markets rose 47% yoy from a fairly weak 1Q13 (+25% qoq). A pick-up in the M&A business and strong performance from the equities business in Asia and Europe were main contributors to the improvement. Revenue from the fixed income part of capital markets was down 23% yoy due to low demand in the rates and forex business, a trend broadly in line with most of its global trading and universal bank peers. Pre-tax profit from BNPP's corporate banking business declined 35% yoy, mainly on higher LICs, which can be volatile due to a small number of large exposures. Low client demand in Europe, BNPP's main market, also contributed to this trend. BNPP's investment solutions business (which includes wealth and asset management, insurance and securities services) continued to generate a sound pre-tax return on allocated equity (26% in 1Q14 on an annualised basis). The wealth and asset management activities' pre-tax profit declined 12% yoy, as the bank's investments to boost its franchise weighed on operating expenses. However, BNPP saw net new money inflows in wealth and asset management (EUR6bn), after outflows in 4Q13. The insurance business continued to generate more than half of the division's pre-tax profit and continued to show cost restraint. BNPP's Basel III 'fully applied' CET1 ratio compares well with that of its US and European peers, rising by 30bp to 10.6% at end-1Q14, mainly on earnings retention (16bp). The bank's CRD IV leverage ratio (based on total CRD IV Tier 1 capital including hybrid instruments that are subject to phase-out) was unchanged at 3.7% on a 'fully applied' basis at end-1Q14. This ratio is above the expected 3% regulatory threshold and compares well with that of European peers. BNPP's funding and liquidity remain adequate. Its Basel III liquidity coverage ratio was above 100%; its liquidity buffer, comprising deposits with central banks and unencumbered assets eligible to central banks after haircuts, rose to EUR264bn at end-1Q14, from EUR247bn at end-2013, covering 148% of its unsecured short-term wholesale funding maturing within a year. Contact: Alain Branchey Senior Director +33 1 44 29 91 41 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Francois-Xavier Marchand Associate Director +33 1 44 29 91 46 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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