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Fitch: Revenue Headwinds at BNPP in 3Q17; Resilient Operating Profit
November 2, 2017 / 11:49 AM / 18 days ago

Fitch: Revenue Headwinds at BNPP in 3Q17; Resilient Operating Profit

(The following statement was released by the rating agency) LONDON, November 02 (Fitch) BNP Paribas S.A.'s (BNPP) resilient 3Q17 results highlight the benefits of business growth in favourable markets, which offset industry-wide weakness in fixed income trading and lingering revenue pressure in several of the bank's retail markets, including in Turkey. Selected strengths in BNPP's franchise, including in Belgian retail banking, personal finance, and loan loss provision releases in corporate banking helped sustain performance. BNPP generated EUR2.8 billion pre-tax profit in 3Q17, 7% lower yoy, excluding a EUR326 million capital gain on the sale of a 4% stake in Indian-based insurer SBI, EUR172 million impairment of goodwill related to its retail bank in Turkey, provisions for home loan purchase schemes (PEL/CEL) and EUR21 million own credit adjustment. Pre-tax profit at BNPP's home markets fell 2% yoy and contributed 31% of the group's total, excluding the corporate centre and the SBI capital gain. French retail banking continues to be the group's single largest business by revenue, but its pre-tax profit contribution fell 5% yoy to EUR302 million (excluding PEL/CEL), below that of Belgian retail banking, as volume growth was unable to mitigate the negative impact from low interest rates on net interest income (3% lower yoy). We believe cost containment will remain key to maintaining the business's performance, as the bank was on track to meet its updated guidance of a 1% yoy revenue fall in French retail banking for 2017. Belgian retail banking continued to perform well, with broad-based revenue improvements despite negative interest rates and lower operating expenses. The low interest rate environment also affected BNPP's Italian retail banking operations, as a 5% yoy decline in net interest income could not be offset by higher fees, partly led by growth in off-balance sheet savings products. Loan impairment charges (LICs) were 5% lower yoy, but at EUR203 million consumed a material three quarters of pre-impairment operating profit. Reflecting the bank's repositioning towards lower-risk borrowers in the region, LICs represented 105bp of average gross loans in 3Q17, down from 110bp in 3Q16 but still markedly higher than the 50bp level targeted for 2020. Other domestic operations, including leasing, Luxembourg retail and Compte-Nickel, saw an 8% yoy pre-tax profit fall, as investments in digital services weighed on the cost base. International Financial Services (IFS) overall generated EUR1.4 billion pre-tax profit (3% higher yoy), 45% of the group's pre-tax profit excluding the corporate centre and the SBI capital gain. We expect continued sound performance in personal finance, underpinned by business growth and new partnerships, notably in auto lending which remains strategically important to the group and is lower-risk than unsecured consumer lending. Revenue generation in IFS (down 0.5% yoy in 3Q17) was affected by foreign exchange effects and in particular by a 13% yoy revenue decline in retail banking in Europe-Mediterranean, which includes Turkey. Margin compression in Turkey was due to more rapid upwards repricing of deposits compared with assets following higher interest rates. Together with growth slowdown in Turkey, this led to a EUR172 million impairment of all of the goodwill of BNPP's retail bank in Turkey. Excluding the SBI impact, insurance pre-tax income fell 3% yoy to EUR415 million, reflecting 4% higher operating expenses as a result of the development of the business and lower revenue. Wealth and asset management pre-tax profit improved materially, as sound 5% revenue growth was amplified by a slight decline in operating expenses. In line with global trading and universal bank peers, fixed income trading revenue fell markedly by 24% yoy (at constant scope and exchange rates) reflecting low client activity, which led BNPP's Corporate and Institutional Banking (CIB) division to a 4% yoy pre-tax profit fall (down 2% at constant scope and exchange rates). The bank's franchise in equity derivatives helped lift equities trading and prime services revenue 9% yoy. Within CIB, a 45% yoy pre-tax profit increase in corporate banking, reflecting loan loss provision write-backs and 8% lower operating expenses (at constant scope and exchange rates), helped mitigate the impact of challenging markets. BNPP's Basel III fully-loaded CET1 ratio edged up by 10bp qoq to 11.8% at end-3Q17, approaching the bank's 12% target by 2020. The improvement was largely driven by retained earnings, and foreign exchange fluctuations had no material impact on the ratio. Higher leverage exposure contributed to a 10bp qoq fall in the Basel III Tier 1 leverage ratio to 4.1%, as the bank plans to operate with a ratio above 4%. Contact: Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Luis Garrido, CFA Associate Director +44 20 3530 1631 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on 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. 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