Company Reports

BNP Paribas recorded a strong rebound in its first-quarter 2024 earnings, comfortably beating the company-compiled consensus estimates of revenue, operating expenses, and credit costs. Along with Lloyds Bank, BNP is one of our preferred names for investors who want to invest in European banks. We believe BNP's discount rating relative to the average valuation of the European banking sector is unjustified. We expect BNP's midcycle profitability to lag the European banking sector average slightly, but BNP has one of the most stable earnings track records of the European banks that we cover. Given its lower interest rate sensitivity, we view BNP as a defensive option in the face of potentially lower interest rates.

BNP Paribas has reported remarkably consistent earnings over the past decade—in an environment where many of its peers suffered from great earnings volatility. Reported earnings have not grown by much, on average, over this period and return on tangible equity was in the mid- to upper-single-digit range. However, interest rates have been at or below zero for most of the past decade. The return to normal monetary policy in the eurozone will support a structural increase in profitability for BNP Paribas to a low double-digit return on tangible equity. BNP Paribas’ midcycle profitability and earnings growth prospects are broadly in line with the average of the rest of the European banks that we cover, but its stable track record indicates it is a less risky prospect than many of its peers.

BNP Paribas has reported remarkably consistent earnings over the past decade—in an environment where many of its peers suffered from great earnings volatility. Reported earnings have not grown by much, on average, over this period and return on tangible equity was in the mid- to upper-single-digit range. However, interest rates have been at or below zero for most of the past decade. The return to normal monetary policy in the eurozone will support a structural increase in profitability for BNP Paribas to a low double-digit return on tangible equity. BNP Paribas’ midcycle profitability and earnings growth prospects are broadly in line with the average of the rest of the European banks that we cover, but its stable track record indicates it is a less risky prospect than many of its peers.

We increase our fair value estimate for BNP Paribas by 11% to EUR 85/share, which equals its net tangible book value at the end of 2023 and 9.5 times what we expect it to earn for 2023. We believe BNP can generate a midcycle return on tangible equity of around 10%—in line with our cost of equity estimate.

BNP Paribas reported a pretax profit of EUR 3.8 billion for the third quarter of 2023, 6% ahead of what it disclosed a year earlier but in line with the consensus estimate for the quarter by the analysts polled by the company. With interest rates close to their peak, BNP's future drivers of revenue growth are unclear. Second-hand car prices are set to normalize, which should pressure revenue in BNP's leasing businesses. BNP believes that securities trading income is close to normalized levels, but this remains a volatile line item. BNP is shutting down some of its smaller personal finance operations, although the impact of this on the bottom line will be limited. The aggressive launch of sovereign bonds aimed at retail savers in Belgium led to an outflow of deposits in BNP's Belgian operations. It could lead to margin pressure as Belgian banks must improve pricing on their deposit products. However, BNP has excess liquidity and a limited need to chase deposits with improved pricing.

The most damaging impact of the surprise windfall tax announcement by the Italian government will not be the hit to the earnings of Italian banks, but the higher risk premium that investors will demand to compensate them for the risk of future government intervention. The haphazard manner of the announcement, where the government changed the terms of the tax at least three times in one day, will do little to restore investor confidence. Many investors already view European banks as seminationalised institutions, and we believe this goes a long way to explain the continued steep discount that European banks trade at relative to the broader market. Following a similar windfall tax in Spain and a ban on dividend payments during the coronavirus pandemic, investors will be even more concerned about the risk of arbitrary intervention from governments and regulators. We do not expect other major European governments to follow Italy and Spain, especially after seeing the fallout from the Italian debacle. We estimate that the hit to FactSet 2023 consensus earnings estimates will be 10% for Intesa Sanpaolo and 6% for UniCredit. BNP Paribas and Credit Agricole are the other European banks we cover with the most significant exposure to Italy. We calculate that the impact on group earnings for both would be below 2%. We do not plan to change our fair value estimates for BNP Paribas (EUR 76/share) and Credit Agricole (EUR 14.50/share). We have not resumed coverage of Intesa Sanpaolo and UniCredit yet.

BNP Paribas 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.

BNP Paribas 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.

BNP Paribas has reported remarkably consistent earnings over the past decade—in an environment where many of its peers suffered from great earnings volatility. Reported earnings have not grown by much, on average, over this period and return on tangible equity was in the mid- to upper-single-digit range. However, interest rates have been at or below zero for most of the past decade. The return to normal monetary policy in the eurozone will support a structurual increase in profitability for BNP Paribas to a low double-digit return on tangible equity. BNP Paribas’ midcycle profitability and earnings growth prospects are broadly in line with the average of the rest of the European banks that we cover, but its stable track record indicates it is a less risky prospect than many of its peers.

BNP Paribas reported a rather messy quarter with several restatements. Normalised earnings increased by 55% year on year and 33% compared with the final quarter of 2022. Helpfully, BNP Paribas included some slides in its presentation highlighting its solid liquidity and limited exposure to commercial real estate. BNP Paribas did indicate that it expects to exceed its guidance for revenue, earnings, and profitability over the next three years. In a further sign of confidence, it confirmed that it would execute a EUR 5 billion (7% of its current market value) share buyback in two equal tranches this year. We expect to increase our fair value estimate of EUR 67 by more than 10% after incorporating the results into our model.

Stress has returned to the European banking system less than a week after a solution for Credit Suisse had been announced. Shares in European banks have traded down through March 24 around midsingle digits, with Deutsche Bank taking the brunt of it, down 15% at its lowest point intraday. We maintain our fair value estimates and moat ratings across our European banking coverage. Allianz remains our Best Idea. Admiral is one of our top picks

With Credit Suisse shoring up liquidity, concerns around a banking crisis spreading in Europe have been firmly planted. While we expect that the next days and weeks will remain volatile, we do not currently see a liquidity crisis spreading through the European banking system. The issues at Credit Suisse are idiosyncratic in nature and we believe containable for now even in a worst-case scenario. With capital and liquidity levels high across the board, asset quality still good, and regulators much better equipped than 15 years ago to quell any sparks, we believe European banks are solid. The major caveat being that developments are currently happening at a rapid pace and views we form today may be stale tomorrow. We believe investors are best placed in European banks with a greater retail focus and a sound profitability outlook. We would highlight BBVA, Handelsbanken, ING, and Lloyds.

We do not believe investors should view the collapse of U.S.-based Silicon Valley Bank as a read-through of the health of European banks' balance sheets. Nevertheless, banks remain highly reliant on the confidence of depositors and other funders. It would be foolish to say there is no contagion risk for European banks, especially if other global banks run into trouble. The current uncertainty could also push up the cost of funding and increase the rate at which European banks pass on higher interest rates to depositors. But we believe it is vital for investors to take note of the contrasts between European banks' and SVB's balance sheets.

BNP Paribas has reported remarkably consistent earnings over the past decade--in an environment where many of its peers suffered from great earnings volatility. Reported earnings have not grown by much, on average, over this period and return on tangible equity was in the mid- to upper-single-digit range. We do not anticipate this will change materially. BNP Paribas’ midcycle profitability and earnings growth prospects are broadly in line with the average of the rest of the European banks that we cover, but its stable track record indicates it is a less risky prospect than many of its peers.

No-moat BNP Paribas reported a 10% year-on-year increase in attributable net income to EUR 2.8 billion for the third quarter of 2022, while year-to-date attributable net income grew by 12%. The robust growth is a good start for BNP Paribas to meet its target of a 7% attributable income annualized growth rate between 2021 and 2025. The 11.4% return on tangible equity that BNP Paribas has generated year to date is also ahead of its 11% 2025 target. BNP Paribas generates a more significant portion of its earnings from investment banking activities than the average European bank. While securities trading revenue declined sequentially in the third quarter, we calculate that BNP Paribas' year-to-date securities trading revenue is still 47% higher than its annualized quarterly average since 2017. In our opinion, the ongoing normalization of securities trading revenue is the significant potential headwind facing BNP Paribas. Net interest margin expansion on the back of higher interest rates should offset most of the reduction in investment banking income, even though BNP Paribas is not as rate-sensitive as most European banks. With credit fundamentals deteriorating, BNP Paribas management's high degree of confidence during the earnings call that it will not exceed its guidance of loan-loss provisions remaining below 40 basis points of loans, stood out to us.

No-moat BNP Paribas booked a net attributable profit of EUR 3.2 billion for the second quarter of 2022, up 9% from the EUR 2.9 billion it reported last year. Income generation was solid, up 10%, outpacing 8% higher operating expenses leading to a positive jaw effect. We maintain our EUR 67 fair value estimate.

No-moat BNP Paribas reported a net attributable profit of EUR 2.1 billion for the first quarter of 2022 compared with EUR 1.8 billion a year earlier. The 19% year-on-year growth in earnings was driven by a 10% increase in operating income and a 49% decline in loan-loss provisions. We maintain our EUR 67 fair value estimate.

BNP Paribas has reported remarkably consistent earnings over the past decade--in an environment where many of its peers suffered from great earnings volatility. Reported earnings have not grown by much, on average, over this period and return on tangible equity was in the mid- to upper-single-digit range. We do not anticipate this will change materially. BNP Paribas’ midcycle profitability and earnings growth prospects are broadly in line with the average of the rest of the European banks that we cover, but its stable track record indicates it is a less risky prospect than many of its peers.

The direct exposure of European banks to Russian and Ukrainian clients is insignificant. According to the Bank for International Settlements, claims on Russian counterparties from the major developed European countries' banks amount to 0.7% of the European banks' total claims reported to the BIS.

No-moat BNP Paribas reported a net attributable profit of EUR 2.3 billion for fourth-quarter 2021, 45% higher than the EUR 1.6 billion it disclosed a year earlier and 13% ahead of the EUR 2 billion expected by the consensus of analysts polled by BNP Paribas. However, the earnings beat was solely the result of loan-loss provisions coming in 47% lower than expected. BNP missed the EUR 3.7 billion preprovision consensus estimate coming in 10% lower at EUR 3.3 billion with revenue lower and costs higher than anticipated. Loan-loss provisions are unlikely to decline materially in the future, making earnings growth more challenging to achieve.