September 28, 2017 / 9:10 PM / 19 days ago

Fitch Affirms BNP Paribas at 'A+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 28 (Fitch) Fitch Ratings has affirmed BNP Paribas S.A.'s (BNPP) Long-Term Issuer Default Rating (IDR) at 'A+', Short-Term IDR at 'F1', Viability Rating (VR) at 'a+' and Derivative Counterparty Rating at 'A+'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is available at the end of this rating action commentary. The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. KEY RATING DRIVERS IDRS, VR AND SENIOR NON-PREFERRED DEBT The IDRs, VR and long-term senior non-preferred debt rating of BNPP reflect Fitch's view that the bank's universal banking model has allowed it to generate sound and resilient earnings even in more challenging operating environments. The bank has strong franchises in several European retail markets, as well as consumer finance, wealth management and insurance operations. BNPP's leading position in European bond markets and strong franchise among corporate clients benefits the group's corporate and institutional banking activities. Earnings stability is underpinned by business, product and geographical diversification. Retail banking operations span multiple geographies and generate a material share of earnings. None of BNPP's businesses contributed more than 15% of pre-tax profit in the 12 months to June 2017, while inherently volatile trading revenue accounted for the lowest share of pre-tax profit among GTUB peers. We expect international retail, insurance and consumer finance to remain key contributors to earnings growth, as any improvement in French retail revenue will depend on cost control and the development of additional fee and commission income. Despite falling domestic housing loan renegotiation rates, their margins are likely to have settled at a lower level. BNPP's strategic plan focuses on digitalisation and aims to reduce operating expenses by EUR2.7 billion from 2020 while maintaining similar divisional revenue growth targets compared with the previous plan. Fitch considers asset quality a weakness at BNPP's rating. The gross impaired loan ratio was 5.1% at end-1H17, materially higher than GTUB peers', despite improvements over recent years. Loan loss provisions covered a satisfactory 64% of impaired loans, partly reflecting the availability of collateral, often real estate. We believe material improvements in asset quality depend on positive economic momentum in Italy, which accounted for around 40% of the bank's defaulted exposures at end-2016, and this could take time. While the high level of impaired loans partly reflects the bank's practice of not writing off loans in domestic markets (mainly France and Italy) until they are fully resolved, this exposes the bank to changes in collateral values for a protracted period. BNPP has a good record in implementing its strategic objectives, including in developing revenue in Asia Pacific and capital market activities in the US. The bank has successfully managed some higher risk exposures, including in emerging markets, without incurring material losses, and continues to slightly adapt its targeted future client base towards lower-risk segments, notably in Italy and personal finance. Strong and consistent internal capital generation mitigates BNPP's low regulatory capital ratios compared with GTUB peers'. At end-1H17, the bank's fully-loaded Basel III CET1 ratio was 11.7%, and Tier 1 leverage ratio was 4.2%. BNPP plans to pay around half of earnings in dividends, with a further 35% earmarked for organic growth, leaving a further earnings buffer against unexpected shocks. Capital encumbrance from unreserved impaired loans is improving and manageable, but is among the highest in the peer group. The bank's 2020 targets include a 12% CET1 ratio, a 15% total capital ratio and a leverage ratio above 4%. This leaves a buffer above the 13.75% total capital requirement that would apply from 1 January 2019 absent further changes to the bank's Pillar 2 requirements, reviewed annually by the ECB, or to capital buffers. BNPP's Short-Term IDR is at the lower of two Short-Term IDRs that map to an 'A+' Long-Term IDR on Fitch's rating scale. This reflects our view that BNPP's liquidity profile is sound, but not exceptionally strong. The Stable Outlook reflects our expectation that the bank will continue generating sufficient capital internally to meet its capitalisation targets while gradually improving its asset quality metrics. BNPP's senior non-preferred debt is the reference liability for the bank's Long-Term IDR and is therefore rated at the same level. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor reflect our view that senior creditors can no longer rely on extraordinary support from the French sovereign in the event that the group becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) provide a framework for resolving banks that would likely require senior creditors participating in losses, if necessary, instead of or ahead of the sovereign providing support. DERIVATIVE COUNTERPARTY RATING AND SENIOR PREFERRED DEBT BNPP's DCR and senior preferred debt rating are at the same level as the bank's Long-Term IDR because the stock of qualifying junior debt (QJD) and senior non-preferred debt, which at end-1H17 stood at around 5% of RWAs, is not sufficiently large to recapitalise the bank after a resolution without causing losses to senior preferred creditors. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid securities issued by BNPP are all notched down from the bank's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Subordinated lower Tier 2 debt is rated one notch below the VR for loss severity, reflecting below-average recoveries. Legacy Tier 1 securities are generally rated four notches below the VR, comprising two notches for high loss severity, and two further notches for non-performance risk due to partly discretionary coupon omission. Basel III-compliant additional Tier 1 instruments are rated five notches below the VR. The issues are notched down twice for loss severity, reflecting poor recoveries. In addition, they are notched down three times for very high incremental non-performance risk due to fully discretionary coupon payments. SUBSIDIARY AND AFFILIATED COMPANY The Long-and Short-Term IDRs and Support Rating of BNPP's BNP Paribas Securities Services, which is rated using Fitch's Global Non-Bank Financial Institutions Criteria, are based on institutional support from BNPP. Its IDRs are equalised with those of BNPP as the subsidiary has a key and integral role within the group and is closely integrated with its parent. BNP Paribas Arbitrage Issuance BV, BNP Paribas US Medium-Term Notes Programme LLC, and BNP Paribas Finance Inc, are BNPP's wholly owned financing subsidiaries, whose debt ratings are aligned with those of BNPP based on Fitch's view of an extremely high probability of support from the parent if required. The IDRs of BNP Paribas Canada Branch are at the same level as those of BNPP as the branch is part of the same legal entity without any country risk restrictions. RATING SENSITIVITIES IDRS, VR AND SENIOR NON-PREFERRED DEBT BNPP's IDRs, VR and long-term senior non-preferred debt rating are primarily sensitive to structural deterioration in the bank's internal capital generation through retained earnings. A weaker earnings capacity would put ratings under pressure as it would make it more difficult for the bank to maintain sound capitalisation and more vulnerable to external shocks. The ratings would also come under pressure if the bank does not continue its gradual progress in reducing impaired loans or if unreserved impaired loans constitute an increasing proportion of Fitch core capital. Upside to the ratings is limited, given their high level in relation to peers' ratings, weak asset quality for the bank's rating and the inherent business model risks of running a large and complex banking group that partly relies on capital market revenue. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the Support Rating and upward revision to the Support Rating Floor would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. DERIVATIVE COUNTERPARTY RATING AND SENIOR PREFERRED DEBT BNPP's DCR and senior preferred debt ratings are primarily sensitive to changes to the Long-Term IDR. They could be rated one notch above the Long-Term IDR if the buffer of QJD and senior non-preferred debt sustainably exceeds our expected recapitalisation amount of 8%-9% of RWAs. As the bank targets to operate with a buffer of AT1 and Tier 2 instruments of around 3% of RWAs and senior non-preferred debt of around 3% of RWAs from 1 January 2019, we do not expect it to build a sufficiently large buffer to warrant a one-notch uplift for the DCR and senior preferred debt ratings in the medium term. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital ratings are primarily sensitive to a change in the VR of BNPP. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the respective issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example. The ratings are also sensitive to a change in Fitch's assessment of each instrument's loss severity, which could reflect a change in the expected treatment of liability classes in resolution. SUBSIDIARY AND AFFILIATED COMPANY The ratings of BNP Paribas Securities Services and BNP Paribas Canada Branch are sensitive to changes in BNPP's IDRs. BNP Paribas Securities Services' ratings would also be sensitive to changes in the subsidiary's role within the group. The debt ratings of BNP Paribas Arbitrage Issuance BV, BNP Paribas US Medium-Term Notes Programme LLC, and BNP Paribas Finance Inc are sensitive to the same factors that would drive a change in BNPP's IDR. The rating actions are as follows: BNP Paribas S.A. Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'a+' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Derivative Counterparty Rating affirmed at 'A+(dcr)' Senior preferred long and short-term debt rating affirmed at 'A+'/'F1' Commercial paper affirmed at 'F1' Senior non-preferred debt long-term rating affirmed at 'A+' Market-linked securities affirmed at 'A+emr' Subordinated debt (lower Tier 2) affirmed at 'A' Upper Tier 2 affirmed at 'BBB+' Hybrid capital affirmed at 'BBB' Additional Tier 1 debt affirmed at 'BBB-' BNP Paribas Securities Services: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Support Rating affirmed at '1' BNP Paribas Issuance B.V. Senior unsecured debt affirmed at 'A+' Market-linked securities affirmed at 'A+emr' BNP Paribas Finance Inc. Commercial paper affirmed at 'F1' BNP Paribas US Medium-Term Notes Programme LLC Long-term senior debt affirmed at 'A+' Market-linked securities affirmed at 'A+emr' BNP Paribas Canada Branch Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Contact: Primary Analyst Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Luis Garrido Associate Director +44 20 3530 1631 Committee Chairperson Christopher Wolfe Managing Director +1 212 908 0771 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. 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