BNP investors deserve bigger slice of M&A windfall
LONDON, Feb 7 (Reuters Breakingviews) - Can a bank be a growth stock? Or should big lenders simply funnel spare capital straight back to shareholders? The question has crystallised at BNP Paribas (BNPP.PA), whose Chief Executive Jean-Laurent Bonnafé has just pocketed an 11.6 billion euro windfall after selling the French lender’s U.S. business. A low valuation implies that investors would like more of the money themselves.
The capital windfall landed in Bonnafé’s pocket last Wednesday after he closed the sale of BancWest to Canada’s BMO Financial (BMO.TO). The boost to BNP’s common equity Tier 1 capital (CET1), according to a person familiar with the matter, includes about 6 billion euros from shedding American risk-weighted assets (RWAs), a roughly 3 billion euro reward for selling the business above the value at which it was marked on the lender’s books, and a similar-sized gain from getting rid of goodwill, which banks must deduct from their capital.
Alongside full-year results released on Tuesday, Bonnafé confirmed his plans for the money. He’ll give 4 billion euros to investors through share buybacks, which roughly cancels out the hit to BNP’s earnings per share from ditching the U.S. division. The other 7.6 billion euros, or two-thirds of the total haul, will pay for increased lending, investments in technology systems, and small acquisitions. The bank has earmarked most of the funds to expand in relatively capital-light areas including auto finance, insurance, wealth management and steadier bits of wholesale banking, like securities services. Assume BNP uses four-fifths of the money to grow in those businesses, and it could add 51 billion euros of RWAs, applying its 12% CET1 ratio. That’s a 7% increase in total RWAs.
Bonnafé reckons the bank will make a mint. On Tuesday he boosted the group’s 2025 target for return on tangible equity (ROTE) to 12% from 11%, partly citing additional growth from deploying the BancWest money. But investors are sceptical. Even after a 2% share-price bump on Tuesday BNP trades at just two-thirds of expected tangible book value at the end of the year, using analyst forecasts gathered by Refinitiv. That’s a lower valuation than before the pandemic and means investors expect Bonnafé to churn out returns well below the bank’s probable 10% cost of equity. Analysts are only marginally more optimistic. They expect a 10% ROTE this year and 9.7% next year, using Visible Alpha consensus estimates. That’s roughly in line with last year’s level.
If BNP is just about managing to squeeze out a return that exceeds its cost of capital, it’s likely that investors could better use the spare capital elsewhere, which would imply bigger share buybacks. Bonnafé may rate his chances of growing to greatness, but his investors clearly disagree.
Follow @liamwardproud on Twitter
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
BNP Paribas on Feb. 7 said it generated 50.4 billion euros of revenue in 2022, up 9% from the previous year. Operating expenses rose 8.3% to 33.7 billion euros.
The French bank generated a 10.2% return on tangible equity in the year, slightly above the previous year’s 10%.
Chief Executive Jean-Laurent Bonnafé said BNP is now targeting a 12% return on tangible equity in 2025, compared with an 11% target when he unveiled the group’s new strategy last year.
He pinned the increase partly on rising interest rates and partly on planned lending growth funded by the proceeds of BNP’s recently completed sale of its U.S. business. BNP in 2021 agreed to sell BancWest to Canada’s BMO Financial for $16.3 billion in cash (15.2 billion euros).
The French group said its common equity Tier 1 capital would rise by 11.6 billion euros because of the sale, with 4 billion euros earmarked for share buybacks and the other 7.6 billion euros for a lending push, technology investments and small acquisitions.
BNP shares were up 1.3% to 61.61 euros as of 0840 GMT on Feb. 7.
Our Standards: The Thomson Reuters Trust Principles.