BNP Paribas Earnings: After Solid Growth and Bullish Guidance, We Increase Our Fair Value by 13%

BNP Paribas BNP recently reported solid results, reaffirming its bullish guidance for top-line growth and confirming a EUR 5 billion (7% of its current market value) share buyback. After incorporating this into our model, we increase our fair value estimate for BNP to EUR 76/share—13% higher than our previous estimate of EUR 67/share. Our fair value estimate is equal to 0.9 times BNP’s net tangible book value on March 31, and 9 times what we expect BNP will earn per share for 2023. Over the past decade, BNP has traded at around 0.7 times its tangible book value and 9 times its earnings. We estimate that BNP will generate a midcycle return on tangible equity of 10%, higher than the 8.5% BNP recorded over the past decade. The return to structurally positive interest rates and higher net interest margins are the main driver of the step change in profitability. We believe that this justifies a higher price/tangible book value multiple compared with its historical valuation.

Like the valuation of most other European banks, BNP’s current valuation does not seem to reflect the structural improvement in BNP’s profitability. BNP’s share price is currently 10% lower than five years ago, yet we anticipate that BNP will report 62% higher earnings per share for 2023 compared with 2018. We also estimate a 2% higher return on tangible equity for 2023 compared with 2018, despite being better capitalised (current common equity Tier 1 ratio of 13.1% versus 11.8% in 2018). Supporting this improvement is what we view as a structural change in interest rates. In 2018 European interest rates were negative, with no prospect of a return to positive interest rates.

We estimate that BNP will record 12% per-year growth in EPS over the next three years, driven by net income growth of 8%, with the balance coming from share buybacks.