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 rating at AA (low) and the Short-Term Issuer rating at R-1 (middle). DBRS also affirmed the Senior Non-Preferred Debt rating at A (high) and the Subordinated Debt rating at A. The Long Term and Short Term Critical Obligations ratings were confirmed at AA (high) and R-1 (high), respectively. 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. The full list of confirmed ratings is at the end of this press release.

KEY RATING CONSIDERATIONS

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 challenges in the operating environment, robust earnings generation capacity and conservative risk profile. The proportion of impaired exposures is above some peers but asset quality has been consistently improving in recent years. Funding and liquidity are strong, benefiting from a substantial customer deposit base and good access to markets. DBRS views positively BNPP’s continuous improvement in asset quality and capital buffers in recent years. While capital is solid, it remains a key focus taking into account the still evolving regulatory environment.

RATING DRIVERS

Upward pressure on the ratings could result from a substantial strengthening of the capital cushion, continued improvement in the risk profile, and improving cost efficiency.

The rating could come under downward pressure if BNPP were to significantly increase its risk profile, suffer from a deterioration of the franchise in some of its key markets, or experience a significant weakening in its capital cushion.

RATING RATIONALE

BNPP has a very strong and well diversified franchise and is one of the largest universal banking groups in Europe. The Group’s retail branch presence spans its Domestic Markets (DM) activities in France, Belgium Luxembourg and Italy, and International Financial Services (IFS), which covers branch network banking in emerging markets and the U.S. The Group’s offering is complemented by a broad range of specialised finance services, some of which have a global reach or are market leading. Corporate and Institutional Banking (CIB) has a well-established position in European capital markets and comprises Corporate Banking, Capital Markets and Securities Services. BNPP’s ability to adapt to an evolving environment has been confirmed by the deleveraging of its CIB business, derisking of its Italian exposure, the run-down of non-core portfolios as well as bolt-on acquisitions.

Despite a challenging operating environment in recent years, BNPP has continued to generate solid and stable underlying earnings, supported by its well diversified franchise. Revenue growth has been supported by specialised businesses (Personal Finance, Arval, Leasing, Insurance), success of regional business development plans (Asia-Pacific, Germany, CIB-North America) and bolt-on acquisitions. Cost efficiency is lagging somewhat behind international peers, but expense control has been an important strategic priority for the Group, and the cost of risk is low. BNPP reported a solid underlying performance in 2017 with net income group share adjusted for exceptionals increasing by 4.4% YoY to EUR 8,149 million. In 1Q18 BNPP’s net income excluding exceptionals declined 11% YoY to EUR 1,623 million, mainly due to a drop in CIB revenues, reflecting a challenging market context in European Fixed Income, Currencies and Commodities (FICC) and a relatively high base in the same quarter last year. DBRS expects CIB’s performance to stabilise in subsequent quarters.

DBRS views the Group’s risk profile as overall conservative with some higher risk elements. Credit risk is mitigated by significant diversification of the loan book. While the majority of the Group’s exposures are low risk, the Group’s proportion of impaired exposures is above some peers, mainly due to higher risk lending in Italy and Personal Finance, as well as accounting rules that can result in impaired loans remaining on the balance sheet for longer even when fully provisioned. DBRS notes that asset quality has been consistently improving in recent years. Based on DBRS’s calculations, doubtful exposures (without netting of guarantees and collateral) represented 5.0% of customer loans at end-2017, down from 5.7% at end-2016, while their coverage was good at 66% (2016: 65%). Exposure to capital markets activities is moderate with the Global Markets division, representing c10% of the Group’s RWAs.

The Group has a solid funding position, supported by well-established deposit franchises in BNPP’s domestic markets and good market access. At end-1Q18, BNPP’s consolidated customer deposits were EUR 790 billion. The loan-to-deposit (LTD) ratio was 93%, remaining broadly stable over the last year. Typical of universal banks with extensive capital markets businesses, BNPP’s deposit base is accompanied by sizeable wholesale funding, which at end-2017 stood at EUR 271 billion (excluding sterilised short-term funding). Within this, short term funds were EUR 121 billion. The exposure to wholesale funding is mitigated by well diversified funding sources and strong liquidity. At end-2017, the Group had a substantial liquidity reserve (excluding sterilised short-term funding) of EUR 216 billion, equivalent to 1.8x of outstanding short-term wholesale debt. The liquidity reserve consists predominantly of liquid assets meeting prudential regulation requirements. BNPP’s end-2017 LCR ratio was 121%, relatively stable YoY.

BNPP’s capital position is strong. While the Group’s capital ratios are below some of the peers’, DBRS’ view of capital incorporates the Group’s capacity to generate stable and robust earnings, the Group’s solid cushion above the regulatory requirements and its ability to adjust dividends. In recent years, the Group has continued to improve its capital position mainly through retained earnings and DBRS expects some further strengthening of capital in the near to medium term. Despite this, capital remains a key focus given the still evolving regulatory environment, in particular the finalisation of Basel III. At end-1Q18, Basel III fully loaded CET 1 ratio stood at 11.6%. The first-time adoption of the new IFRS 9 accounting standards from January 1, 2018 had an adverse impact of around 10 bps. The Group targets the CET1 ratio of 12% in 2020, which should represent a solid buffer of more than 200bps above the anticipated CET1 requirement of 9.83% from January 1, 2019. The recent increase of the French countercyclical buffer should have a limited impact of around 7bps on the CET1 requirement starting from July 2019. The end-1Q18 phased-in Total Capital ratio was 14.7% and the Basel III fully loaded CRD IV leverage ratio was 4.1%.

Under its 2020 development plan, the Group targets Total Loss-Absorbing Capacity (TLAC) of 21% of RWAs. TLAC requirements are set at 20% of RWA from 2019 and 22% from 2022. At end of May 2018 BNPP had EUR 20 billion of senior non-preferred debt, which, based on DBRS’ calculations and including 2.5% of eligible senior preferred debt, corresponded to a TLAC ratio above 20% (end-2016: 17%), positioning BNPP well with respect to future requirements.

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

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). These can be found can be found at: http://www.dbrs.com/about/methodologies

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

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:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Tomasz Walkowicz, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG

Initial Rating Date: July 23, 2015
Most Recent Rating Update: August 1, 2017

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

DBRS rating definitions and the terms of use of such ratings are available at www.dbrs.com

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.