BNP Paribas Earnings: Low Interest-Rate Sensitivity Continues to Limit Revenue Growth

BNP Paribas BNP reported a pretax profit of EUR 4.1 billion for second-quarter 2023, 3% below what it disclosed a year earlier but ahead of the consensus estimate for the quarter by the analysts polled by the company. Nonrecurring items continue to distort BNP’s results somewhat; on a normalized basis, pretax profits grew by 7% year-on-year. Even on a normalized basis, revenue growth was limited. As anticipated, securities trading income declined by 13% year-on-year as the trading environment stabilized, especially for fixed-income securities. BNP is less sensitive to interest rates than most European peers, given the regulated nature of interest rates paid on savings deposits in France and its greater exposure to corporate banking. Costs were well controlled; only growing by 2% in an environment with high inflation is a good achievement. Loan-loss provisions are tracking below guidance, with no signs of credit-quality deterioration.

We maintain our EUR 76 per share fair value estimate of BNP and continue to view BNP as undervalued; it currently trades at a 21% discount to our fair value estimate. Like many European banks, BNP continues to trade below the levels it reached before the regional banking crisis hit the United States. This market sentiment remains puzzling. It should be evident now that the U.S. crisis has not adversely affected BNP’s fundamentals. Nor does BNP’s current valuation reflect the structural improvement in BNP’s profitability. Its 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 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.