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Fitch: BNPP's 2020 Plan Builds on Sound 4Q16
February 9, 2017 / 11:58 AM / 10 months ago

Fitch: BNPP's 2020 Plan Builds on Sound 4Q16

(The following statement was released by the rating agency) LONDON, February 09 (Fitch) Fitch Ratings says that BNP Paribas' (BNPP) 4Q16 results were sound but highlight diverging momentum in its core businesses, as continued growth in its personal finance, insurance and global markets businesses more than offset lingering revenue pressure in French retail banking, which we expect will continue well into 2017. The bank presented its business plan for 2020, which focuses on digitalisation and envisages achieving EUR2.7 billion gross savings annually from 2020. BNPP expects that the necessary restructuring costs will be more than offset by savings achieved by 2019. BNPP confirmed its 12% CET1 ratio target for 2020, which we expect it could reach in 2017. The group typically generates capital equivalent to 50bp of risk-weighted assets (RWAs) annually through retained earnings, of which around 35bp could be consumed for business growth. We expect the bank to manage its CET1 ratio closely around 12% once it reaches that level, leaving room for bolt-on acquisitions or to absorb regulatory headwinds. We view BNPP's revenue growth assumptions as conservative (2.5% cumulative annual growth), but we expect the domestic markets division will struggle to meet its targeted average revenue growth of 0.5% at least in 2017. The bank generated a 9.3% return on equity in 2016 and targets a 10% return by 2020 on a higher basis of a 12% CET1 ratio. We expect the bank could attain this if the cost reduction programme is successful. In 4Q16, pre-tax profit rose 22% yoy to EUR2.5 billion, excluding own credit adjustments, goodwill impairment, non-recurring gains and a EUR52 million contribution to the resolution of four Italian banks. The group's revenues rose 2% yoy, reflecting broad-based positive contributions from various businesses with the exception of the domestic markets division. Pre-tax profit in the bank's domestic markets division, which includes retail banking in its home market and leasing, fell 8% yoy to EUR622 million in 4Q16. Overall, the division accounted for 30% of pre-tax profit for FY2016 (excluding the corporate centre). Improved results in fleet finance and leasing and Italian retail's return to profitability offset a 14% pre-tax profit fall in French retail banking, leading to a 1% yoy increase in domestic markets' pre-tax profit for 2016. Net interest income continued to be under pressure in French retail banking as it fell 5% yoy in 4Q16 and 3% in FY2016, reflecting the lasting impact on profitability of loan renegotiations in a low interest rate environment. The division's pre-tax profit fell 36% yoy to EUR177 million in 4Q16, as a single large loan impairment charge exacerbated the impact of flat operating expenses and falling revenue. Fees and commissions accounted for 43% of French retail revenues in 2016, and we expect the bank will continue to develop these to mitigate net interest income pressure. Financial fees were lower overall in 2016, but grew 5% yoy in 4Q16 excluding a non-recurring distribution fee adjustment paid in 4Q16. Italian retail banking revenue also fell 5% yoy in 4Q16, partly reflecting the bank's strategy to focus on lower credit risk corporate clients. Loan impairment charges were 24% lower yoy, consistent with the reduction seen in the rest of the year. This contributed to a smaller EUR27 million operating loss in 4Q16 and a return to positive annual pre-tax profit (EUR127 million in 2016, including EUR37 million related to private banking). As part of its 2020 strategy, the bank expects loan impairment charges in the Italian retail banking division to fall to around 50bp of average loans, which is significantly lower than the 124bp seen in 2016. Achieving this reduction will in our view be challenging despite the shift to better corporate clients, given the bank's record of lengthy recovery processes in the country. Italy accounted for around 43% of the bank's non-performing exposures at end-2015 Sound loan growth in Belgian retail banking contributed to a 3% revenue increase in 4Q16, but EUR80 million restructuring charges resulted in a 13% yoy rise in operating expenses, leading to a 6% yoy fall in pre-tax profit. Luxembourg retail banking and the specialised leasing subsidiaries saw 4% revenue growth. The additional scope linked to Arval's acquisition of GE Fleet Services Europe helped revenue momentum in 2016. International financial services, which include personal finance, international retail banking, insurance and wealth and asset management, together generated 44% of the group's pre-tax profit in 2016, excluding the corporate centre. Higher volumes and a continued focus on lower-risk products in personal finance, as well as good performance in insurance, were the main contributors to the division's 3% pre-tax income increase to EUR1.2 billion in 4Q16. Retail operations in the Mediterranean region saw a 10% pre-tax profit decline in 4Q16, reflecting a 10% depreciation of the Turkish lira against the euro and, to a lesser extent, higher yoy loan impairment charges in Turkey. Costs related to regulation and the partial sale of First Hawaiian Bank (FHB) led to a 3% pre-tax profit decline for BancWest in 4Q16, despite 8% revenue growth reflecting higher volumes. We expect cost containment will be important for BNPP's wealth and asset management business, which in line with recent quarters saw revenues unchanged yoy in 4Q16 despite net new money growth, and a 5% pre-tax profit fall. Strong performance in the insurance business and revenue momentum fuelled by protection insurance helped offset the negative trend in wealth and asset management. In 4Q16, revenues grew in fixed income (23% yoy) and equity (20% yoy) sales and trading, which together represented 12% of the group's revenues and 46% of the corporate and institutional banking (CIB) division. Fixed income results benefitted from the bank's leading European corporate franchise and saw a good quarter for rates and credit. Pre-tax income in corporate banking was 9% lower yoy, reflecting fewer transactions compared with an exceptionally strong 4Q15 and higher impairment charges linked to one client. Higher transaction volumes and operating cost control helped securities services nearly double 4Q16 pre-tax income to EUR88 million. BNPP's Basel III fully-loaded CET1 ratio rose 10bp qoq to 11.5%, led by retained earnings and stood only 50bp below its 2020 12% target. We expect the sale of a 17.9% stake in FHB in January could lead to a 10bp increase in the group's CET1 ratio in 1Q17. A combination of balance sheet management and seasonally lower client activity in 4Q16 led to sharp reduction in leverage exposure, contributing to a strong 40bp qoq increase in BNPP's Basel III Tier 1 leverage ratio to 4.4%. Contact: Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Luis Garrido Analyst +44 20 3530 1631 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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