May 4, 2017 / 9:04 AM / in 3 months

Fitch: Loan Loss Reserve Releases Help BNPP's Resilient 1Q17

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(The following statement was released by the rating agency) LONDON, May 04 (Fitch) BNP Paribas S.A.'s (BNPP) 1Q17 results remained sound in a seasonally strong quarter despite intensifying pressure on net interest income from low interest rates in the bank's domestic markets, says Fitch Ratings. The magnitude of the recovery in trading revenue from a historically weak 1Q16 also highlighted the relative strength of BNPP's corporate bond franchise in Europe. In 1Q17, pre-tax profit rose 15% yoy to EUR2.6 billion, excluding own credit and debt valuation adjustments and non-recurring gains on sale. Also excluding restructuring costs, this amounted to a strong 10.4% return on equity, according to the bank. Falling loan impairment charges, including material loan loss reserve reversals, were a material contributor to the improvement. We expect cost flexibility to be an important factor in preserving domestic markets' profitability, and the quarter included EUR90 million costs related to the implementation of the announced cost plan. Low interest rates negatively affected domestic markets, as a marginal 0.3% yoy revenue decline and a 0.8% increase in operating expenses excluding the impact of banking levies led to a 6% fall in pre-impairment operating profit. The division benefitted from low loan impairment charges (36bp of gross loans), including provision reversals, notably in Belgian retail, leading to a 2% yoy increase in pre-tax profit to EUR707 million (excluding PEL/CEL, provisions for home loan purchase schemes). Further developing fee businesses will be important to offset the impact of low interest rates and meet the targeted divisional average revenue growth of 0.5% by 2020. Within domestic markets, French retail's pre-tax profit excluding PEL/CEL fell by 11% yoy to EUR319 million, led by a 4% fall in net interest income. The latter accounted for 56% of French retail revenues in 1Q17, whose decline was only partly offset by 3% growth in commission income. The largest absolute yoy fall in loan impairment charges was in Italian retail activities, which generated a small positive pre-tax profit in 1Q17. We expect asset quality in Italy, which at end-2016 accounted for 42% of BNPP's defaulted exposures, to improve only gradually. The 7% yoy fall in Italy's pre-impairment operating profit despite growth in business volume demonstrated the pressure on revenue from low interest rates. Positively, pre-tax profit in Belgian retail rose by 10% yoy to EUR96 million, driven by loan loss reserve releases, which broadly offset gross loan impairment charges. Sound loan growth partly offset the impact of low interest rates, which continued to weigh on revenue generation despite resilient fee income growth. Domestic markets' specialised businesses, car financing and leasing, and retail banking in Luxembourg contributed a material EUR274 million pre-tax income in 1Q17, 9% higher yoy, also reflecting falling loan impairment charges. International financial services (IFS) posted sound results and generated the largest share (45%) of the group's pre-tax profit excluding the corporate centre. Underlying revenue growth was positive across businesses, largely reflecting higher business volumes in international retail and personal finance. Pre-tax profit in IFS rose 16% yoy to EUR1.2 billion, mostly helped by improved market conditions from a subdued 1Q16, which boosted insurance, wealth and asset management revenues. These also benefited from sound net new money growth during the quarter. Personal finance saw 6% yoy pre-tax profit growth on the back of continued business development and partnership agreements. A EUR40 million loan loss reserve release led to a 13% pre-tax profit increase for retail operations in Europe-Mediterranean, while pre-impairment operating profit was adversely impacted by exchange rate fluctuations. BancWest's pre-tax income fell by 20% yoy, but would have risen excluding non-recurring gains on sale in 1Q16. Profitability recovered sharply in Corporate and Institutional Banking (CIB) in 1Q17, against an industry-wide subdued 1Q16. Pre-tax profit nearly doubled yoy to EUR778 million (29% of the group excluding the corporate centre), reflecting improvements across corporate banking, sales, trading and transaction banking. BNPP's sales and trading revenue growth outperformed European global trading and universal bank (GTUB) peers, as fixed income, currencies and commodities rose 32%, and equities 36%. We believe the bank's strong franchise in the European bond market benefited revenues in rates and bond issues, while the rise in equities revenue (around a third of trading revenues in 1Q17) reflected a strong rise in prime services and higher client appetite for derivatives. Corporate banking benefited from a pickup in advisory and loan loss reserve reversals. BNPP's fully-loaded Basel III CET1 ratio increased 15bp qoq to 11.6% at end-1Q17, largely driven by the impact of the sale of 20.6% in the bank's stake in First Hawaiian Bank in February 2017. The fully-loaded Basel III Tier 1 leverage ratio fell by around 30bp qoq to 4.1% at end-1Q17, reflecting seasonally low client activity at year-end and the subsequent increase in leverage exposure during 1Q17. BNPP aims to maintain this ratio above 4.0%, and we believe it is on track to meeting a 12% CET1 ratio well ahead of its 2020 target. The bank's capital ratios remain at the lower end of GTUB peers, but this is offset by strong and consistent internal capital generation. Contact: Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Luis Garrido Associate Director +44 20 3530 1631 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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