DBRS Confirms BNP Paribas’s Senior Ratings at AA (low); Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed BNP Paribas SA (BNPP or the Group)’s Long-Term Issuer, Long-Term Senior Debt and Long-Term Deposits ratings at AA (low). Short-Term Issuer, Short-Term Debt and Short-Term Deposits ratings were also confirmed at R-1 (middle). DBRS also confirmed the Subordinated Debt rating at A and the Senior Non-Preferred Debt rating at A (high). DBRS has also confirmed the Long Term Critical Obligations rating at AA (high) and the Short Term Obligations rating at R-1 (high). The trend on all the above ratings is Stable. BNPP’s Intrinsic Assessment (IA) has been maintained at AA (low) and its support designation at SA3. DBRS has also confirmed the Short-Term Debt rating (renamed from Short-Term Obligations rating) of BNP Paribas Fortis SA/NV at R-1 (middle) and assigned it a Short-Term Issuer rating at the same level; the Trend on both ratings is Stable. The ratings of BNP Paribas Canada were discontinued, following the winding down of its operations.

In maintaining the Group’s IA at AA (low), DBRS takes into account BNPP’s very strong and diversified franchise, its ability to adapt to the difficult and evolving operating environment, robust earnings generation capacity and conservative risk profile with limited exposure to more risky regions or sectors. Funding and liquidity are strong, benefiting from a substantial customer deposit base and good access to markets. While capital is solid, given BNPP’s significant diversification, it remains a key focus taking into account the still evolving regulatory environment. DBRS views positively BNPP’s continuous improvement in asset quality and capital in recent years.

BNPP has a very strong and well diversified franchise, which is an important factor in the ratings. It is one of the largest universal banking groups in Europe and a number of its businesses have a global reach. The fact that even the largest business line, French Retail Banking, was only 15% of 2016 Group revenues, illustrates the Group’s strong diversification. The ability to adapt to an evolving environment has been illustrated by the recent deleveraging of Corporate and Institutional Banking, the run-down of non-core exposures, the exit from certain markets, as well as acquisitions. Within the Group’s universal bank model, Retail Banking & Services (RBS) remains the major contributor. The Group’s retail branch presence spans its Domestic Markets (DM) of France, Belgium Luxembourg and Italy, and International Financial Services (IFS), which incorporates operations in emerging markets and the U.S. The Group’s offering is complemented by a broad range of specialised finance services, a number of which are market leading. Corporate and Institutional Banking (CIB) is one of the top tier players in global capital markets and comprises Corporate Banking, Capital Markets and Securities Services.

BNPP’s earnings benefit from its very strong franchise, revenue diversification, growth supported by exposure to emerging markets and acquisitions, and low cost of risk. Cost efficiency is lagging somewhat behind some of its international peers, but expense control has been an important strategic priority for the Group. The Group reported a solid underlying performance in 1H17. Net income attributable to equity holders was EUR 4,290 million on reported basis, down 1.9% YoY and, when adjusted for exceptionals, EUR 4,384 million, up by a strong 15.5%. The YoY improvement was mainly driven by a strong rebound in CIB revenues, growth in IFS and a decline in the Group’s cost of risk, supported by provision write-backs in CIB.

DBRS views the Group’s risk profile as overall conservative with some higher risk elements. It is dominated by credit risk (72% of end- 2016 RWAs), but BNPP also has exposure to market risk primarily through its capital markets businesses, and to operational risk, highlighted by the recent USD 246 million fine over FX market practices. Credit risk is moderated by significant diversification of the Group and dominated by exposure to countries where DBRS does not anticipate a rapid deterioration. France, the largest market represented 27% of Group exposure, followed by North America (15%) and Belgium (11%). Corporate exposure was 43% as opposed to 30% for retail. The Group is keeping the cost of risk under control, with credit costs at the Group level of 36 basis points (bps) in 2Q17, down from an average of 46 bps in 2016 and 54 bps in 2015. The decline in 2016 reflected mainly an improvement in Italy (10% of exposures) and Personal Finance, where the Group has reduced its risk appetite, while in 1H17 it was driven by CIB write-backs. The doubtful loans ratio as reported by BNPP (share of doubtful loans to customers and credit institutions excluding repos and net of collateral) was 3.4% at end-2Q17, improving from 3.8% and end-2016 and 4.0% at end-2015, while the coverage was 89%. Based on DBRS calculations, the share of doubtful loans in customer loans without netting collateral was 5.7%, also remaining on an improvement trend, and the coverage was 65% at end-2016.

BNPP’s funding profile is strong, benefiting from a sizeable customer deposit base (EUR 765 billion at end-2016), which represented 41% of the prudential balance sheet. The Group’s loan-to-deposit (LtD) ratio was 90% at end-2Q17 vs 97% at end-2015. Typical of universal banks with extensive capital markets businesses, BNPP’s deposit base is accompanied by sizeable wholesale funding, which at end-2016 stood at EUR 265 billion (excluding sterilised short term funding), down from EUR 270 billion a year earlier. Liquidity is solid, with end-2016 liquidity reserves of EUR 213 billion (excluding sterilised short term funding), equivalent to 1.7x of outstanding short-term wholesale debt, and an improvement from 1.5 x at end-2015. BNPP’s reported LCR ratio was 116% at end-2Q17.

DBRS views BNPP’s capital position as solid, taking into account the Group’s significant diversification, robust earnings generation, and a generally conservative risk profile. Continuous improvement in capital in recent years reflects mainly strong earnings generation capacity. BNPP remains committed to RWA optimisation, mainly in its CIB division as encompassed by its Strategic plan. At end-2Q17, BNPP’s CRD IV fully loaded CET1 ratio was 11.7%, up 80 bps compared to end-2015 and the phased-in total capital ratio was 14.7%. Under its 2017-2020 development plan, the Group targets a CET1 ratio of 12% and total capital ratio of 15%, assuming a constant regulatory framework. The fully loaded Basel 3 leverage ratio was 4.2% at end-2Q17.

The Group is subject to a Total Loss-Absorbing Capacity (TLAC) requirement of 20.5% of RWAs in 2019. This translates into c5.5% of RWAs in the form of TLAC-eligible debt above the total capital target. Given 2.5% of MREL eligible debt can be included in the TLAC, BNPP needs to issue at least 3% of RWAs (equivalent to around EUR 19 billion based on end-2016 RWAs) in the form of senior non-preferred debt. DBRS notes that by YTD end-July, BNPP had issued EUR 9 billion of senior non-preferred debt, making good progress towards its TLAC targets and had completed 90% of its planned issuance planned for 2017. While the capital position is strong, capital remains a key focus given the still evolving regulatory environment, including the proposed revisions by the Basel Committee on Banking Supervision (BCBS) of the standardised and the internal ratings based (IRB) approach for credit.

The Grid Summary Grades for BNPP are as follows: Franchise Strength – Very Strong; Earnings Power – Strong; Risk Profile – Strong; Funding & Liquidity – Strong; Capitalisation – Strong.

RATING DRIVERS

Upward pressure on the ratings could result from BNPP strengthening its capital buffers and funding, continuing to enhance its risk profile, and sustaining earnings growth, through revenue expansion and addressing cost efficiency.

Downward pressure on the ratings could result from a weakening of the Group’s capital buffer, funding and liquidity, or an increase in its risk profile. A downgrade could be also driven by a deterioration in BNPP’s franchise and earnings.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). Other applicable methodologies include the DBRS Criteria: Guarantees and Other Forms of Support (February 2017). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, company documents, the ACPR and the Banque de France. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
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Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Tomasz Walkowicz – Vice President, Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: 23 July 2015
Last Rating Date: 14 July 2017

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