BNP Paribas – BNPP
Description: BNP Paribas SA was created in 2000 as a result of the merger of Banque Nationale de Paris and Paribas. It’s France’s largest publicly traded bank, and operates in four core businesses: Retail Banking, Corporate & Investment Banking, Investment Solutions and Other Activities. In November 2013, the company launched ‘Hello Bank!’, a mobile, digital bank operating in France, Belgium and Germany. While BNP Paribas has operations in about 80 countries, it considers its two home markets to be France and Italy. It also owns BancWest in the United States.
At the macro level, the European banking market has little structural growth embedded in its core market; therefore, the banking business has limited organic growth opportunities. Additionally, the sector is subject to considerable stricter capital and due diligence requirements than other regions of the world. With the deleveraging process already well-advanced, the sector is now ready for the next challenge: achieving sound long-term growth. Given the local size of banking businesses are limited on the upside; maintaining profitability levels will only be achievable through leaner business processes, strict control of costs, and geographical expansion.
A further aspect to consider, based on regulatory assessment, is a bank’s expected capital shortfall. Based on the latest available figures, European banks presently, on average, have a capital shortfall of about €4.9 billion. While a large number of banks will be able to replenish their capital base through the retention of profits, others will be required to enter into large undertakings in the market, eventually placing some stress on the market.
We believe that BNPP has the potential to excel in this environment. It got through the financial crisis with one of Europe’s strongest capital bases and is now in a position to focus on effectiveness and geographical expansion. In this respect, last year it announced a €2bn efficiency improvement program. In absolute terms, this represents about 14% of its 2012 pre-provision profits. In other words, these savings will generate over term, at a P/E of 8x, 20% of BNP’s market cap. Furthermore, BNP has a strong foothold in many non-European countries which helps it choose the most appropriate growth opportunity for retail banking. It also has a proven track-record of executing such projects better than its peers.
With limited competition in its key markets (France, Italy, and Belgium), about 40% of the bank’s pretax income is easily secured. And with interest rates finally on the rise, the retail business arm will continue to add substantial pretax returns to the company. The development of the other business units is less enthusiastic. Past growth occurred mostly due to acquisitions (e.g. BNL & Fortis) and not due to well thought out organic expansion plans. Key figures such as “New assets under management” were rather erratic, but to BNPP’s benefit we note that its focus on client-driven service lead to a high client retention ratio during periods when its peers’ client retention ratios declined.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- BNPP focuses on achieving a cost/income ratio of 60%,
- Its management has a proven track record in retail banking expansion,
- Given its large retail exposure, BNPP remained profitable during the most difficult periods of the financial crisis,
- BNPP has the unexploited potential to up-sell to its large retail customer base,
- Credit quality and capital market activity have been well-managed in the past.
Weaknesses:
- Worsening sovereign debt levels will negatively impact the bank’s overall business,
- Higher funding costs could erode profits,
- Geographical expansion would lead the bank into unknown territory; therefore, pretax profits could be penalized,
- BNP has strong exposure to weaker members of the EU (France, Italy, and Belgium). These countries are unlikely to have any organic growth in the coming years, which negatively impacts BNPP’s long-term outlook,
- In financial services, consumer protection is increasing which could have negative impacts on the medium- to long-term expansion plans.
Company profile, investment opportunity and asset management integration:
| Metric | Rating |
| Operational risks: | Above average |
| Expected growth: | Average |
| Long term value creation: | Above average |
| Positive competitive advantage: | Average |
| Management excellence: | Average |
| Financial strength: | Average |
| Investment orientation: | Group “Best-in-Class”: Banking |
Price ranges:
| Buy: | Only forcustomers |
| Sell | Only forcustomers |
| Stop-loss: | Only forcustomers |
| Fair-value: | Only forcustomers |