DBRS Comments on BNP Paribas Q1 2009 Results – BNP Paribas (Canada) Ratings Unchanged

DBRS has today commented on the Q1 2009 results for BNP Paribas (BNPP or the Group). Based on the announced results for the Group, DBRS does not see any impact on the ratings for its subsidiary, BNP Paribas (Canada) (BNPP Canada). The Long-Term Deposits and Senior Debt rating of BNPP Canada is AA (high) with a Negative trend. The Short-Term Debt rating is R-1 (high) with a Stable trend. The ratings of BNPP Canada reflect the strength of its parent, BNPP, which owns 100% of the shares of BNPP Canada and guarantees its rated debt instruments.

Demonstrating the strength of its businesses, BNPP generated net income of EUR 1.6 billion in Q1 2009, a significant turnaround from the prior quarter’s loss of EUR 1.4 billion. This turnaround was driven by the rebound in revenues in the Corporate and Investment Banking (CIB). Also contributing to the strong results, revenues held up in BNPP’s other businesses and expenses were kept under control. Even as the Group made progress on de-risking the balance sheet, revenues improved on a linked quarter basis by 95.4% to EUR 9.5 billion from EUR 4.9 billion. While the cost of risk remained elevated at EUR 1.8 billion, the Group was able to absorb this cost with increased operating income before provisions and taxes (operating IBPT) of EUR 4.1 billion.

The large boost to revenues in CIB came from the Fixed Income business, which generated EUR 2.9 billion in revenues, up 285% on a linked quarter basis, as the Group benefited from an exceptional level of activity in the primary markets with large transaction volumes, wider spreads and strong customer demand. With still volatile markets in Q1 2009, BNPP’s Equity and Advisory business reduced risk and focused on customer-driven flow business, enabling it to generate marginally positive revenues of EUR 33 million; in the prior quarter, this business had outsized negative revenues of EUR 1.9 billion in the disrupted markets.

Quarterly results were helped by solid performance in Retail Banking (RB) and Investment Solutions (IS). In RB, the Group’s home markets of France and Italy successfully maintained revenues and controlled expenses. In both markets, the level of outstanding loans declined on a linked quarter basis reflecting weaker customer demand, but the Group benefited from net asset inflows in life insurance products. Additionally, in France, the Group benefited from a shift in deposits from lower margin term deposits to higher margin products, such as passbook savings and Livret A accounts. IS experienced net asset inflows of EUR 13.4 billion in the first quarter, following net asset inflows of EUR 10.6 billion for the full year 2008, bringing assets under management (AUM) to EUR 510 billion. This evidenced the strength of the customer franchise and improving reputation of these businesses that benefitted from BNPP’s investment in recent years.

While BNPP generates 73% of operating revenues in Western Europe, exposure to the United States and emerging market countries continue to contribute to elevated cost of risk. The weakening of credit quality was evidenced by an increase in doubtful loans in the quarter to EUR 19.2 billion, up 17% versus the prior quarter and 35% from the end of 2007. BNPP has added to reserves to reflect its loss expectations for the increase in nonperforming loans (NPLs), maintaining its coverage ratio at 84%, down marginally from 91% in the prior quarter. Driving the elevated cost of risk for the quarter were provisions related to certain counterparties of EUR 277 million (of which EUR 98 million were related to monoline insurers), exposure to the Ukraine (EUR 127 million), and provisions related to the investment portfolio at BancWest (EUR 79 million). While the Western European economies are generally showing less economic decline, the weakening economies are contributing to BNPP’s elevated cost of risk, with an increase in Personal Finance. This cost was still elevated in France and Italy, though down quarter-over-quarter due in part to seasonal factors.

There was further progress on BNPP’s acquisition of various parts of Fortis Group (Fortis), which was recently approved by both Belgian and Dutch shareholders and is expected to close next week. DBRS views the Fortis businesses that BNPP will acquire as substantially strengthening BNPP’s franchise in a number of key areas. BNPP’s European footprint will gain a sizeable presence with leading deposit positions in two new domestic markets with high income levels, Belgium and Luxembourg. Fortis will also enhance the Group’s position in consumer finance, bancassurance, private banking and investor services. In combining asset management businesses, BNPP will achieve scale with EUR 660 billion in AUM, placing it among the top ten asset managers globally. Fortis also adds to BNPP’s investment banking and corporate banking businesses.

The Group raised its Tier 1 capital ratio to 8.8% as of Q1 2009, up 100 basis points (bps) from Q4 2009, as the EUR 5.1 billion non-voting share investment from the French government bolstered the ratio by 50 bps. The lowering of the floor in 2009, capital generation, and a reduction in risk-weighted assets (RWA) contributed to the additional 50 bps of improvement in this ratio. BNPP was successful in de-risking the balance sheet with a targeted reduction in RWA of EUR 20 billion in 2009, which was completed in Q1 2009. With a portfolio of liquid assets of EUR 120 billion, or 23.8% of RWA, available to be pledged to the central bank for funding, BNPP’s liquidity profile remains solid.

The Group’s success in integrating acquisitions, building up its local franchises and leveraging diverse cultures and brands gives DBRS considerable confidence that BNPP can achieve significant benefits from its Fortis acquisition, once completed. While generally avoiding exposure to the troubled assets that have plagued many other banks over this time period, the Group nevertheless faces increasing headwinds. The Negative trend on BNPP’s long-term rating also recognizes the additional challenges that the large Fortis acquisition will pose for BNPP at a time when the financial market disruption remains extreme, significant weakening in economies is occurring and the Fortis franchise has struggled under the pressure of recent events and the difficult environment.

Notes:
All figures are in euros unless otherwise noted.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.