December 13, 2016 / 9:49 PM / 8 months ago

Fitch Affirms BNP Paribas at 'A+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, December 13 (Fitch) Fitch Ratings has affirmed BNP Paribas's (BNPP) Long-Term Issuer Default Rating (IDR) at 'A+', Short-Term IDR at 'F1' and Viability Rating (VR) at 'a+'. The bank's debt ratings have also been affirmed. In addition, Fitch has assigned BNPP a Derivative Counterparty Rating (DCR) of 'A+(dcr)' as part of its roll-out of DCRs to significant derivative counterparties in Western Europe and the US. DCRs are issuer ratings and express Fitch's view of banks' relative vulnerability to default under derivative contracts with third-party, non-government counterparties. The ratings have been affirmed in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT BNPP's company profile has a high influence on the bank's ratings because its universal bank business model has allowed it to generate resilient earnings even in a more challenging operating environment. BNPP's company profile benefits from strong franchises in several European retail markets, in consumer finance, wealth management and insurance operations. The bank has a leading position in European bond markets and a strong franchise among corporate clients, which benefits its corporate and institutional (CIB) banking activities, where profitability is inherently more volatile. Earnings have demonstrated the benefits arising from BNPP's diversified businesses as profitability has remained among the strongest across peers. We expect revenue generation to remain under pressure, particularly in French retail banking, where low interest rates have resulted in tighter margins. Revenue generation has been stronger in BNPP's international financial services division, and 3Q16 results for CIB benefited from a strong quarter in fixed income, currencies and commodities trading. Because of continuing pressure on earnings, we expect BNPP to concentrate on continued cost control. The IDRs, VR and senior debt ratings also reflect BNPP's sound track record of implementing the bank's strategy and risk appetite, which is in line with its GTUB peers'. This is demonstrated by a successful track record of managing higher-risk exposures, including in emerging markets, without incurring material losses. In Fitch's opinion, BNPP's asset quality remains weaker than that of its GTUB peers, despite improvements over the last few years. At end-1H16, impaired loans stood at 5.8% of gross loans, which is higher than at its purely domestic peers. In line with domestic peers, BNPP generally does not write off loans in its home markets, predominantly France, but also Italy, until they are fully resolved, which partly explains the high gross impaired loan ratio. Coverage of impaired loans stood at 64% at end-June 2016, which compares favourably with peers. However, the bank's reliance on the realisation of collateral, which particularly in Italy often is in the form of real estate assets, exposes the bank to changes in collateral values for a protracted period. BNPP's capitalisation is sound with a Fitch Core Capital (FCC)/risk-weighted assets (RWAs) ratio of 11.7% at end-1H16. The bank's strong internal capital generation mitigates capital ratios that are at the lower end of GTUB peers. At end-1H16, BNPP's fully-applied Common Equity Tier 1 (CET1) ratio stood at 11.4%, and the bank's Basel III leverage ratio was 4%. In November 2016, BNPP disclosed it had been pre-notified by the ECB of its capital requirement for 2017 pursuant to the Supervisory Review and Evaluation Process (SREP). Based on these requirements, BNPP will be subject to a 10.25% CET1 requirement including Pillar 2R (the relevant trigger for the calculation of maximum distributable amounts, MDA) from 1 January 2019, 175bp below the group's 12% CET1 target. BNPP's Short-Term IDR is at the lower of two Short-Term IDRs that map to an 'A+' Long-Term IDR on Fitch's rating scale. This reflects our view that BNPP's liquidity profile is sound, but not exceptionally strong. The Stable Outlook on BNPP's Long-Term IDR reflects our expectation that the bank will retain its ability to generate sufficient capital internally to meet its capitalisation targets, based on continued resilient performance of its diversified businesses, while gradually improving its asset quality metrics. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor reflect our view that senior creditors can no longer rely on extraordinary support from the French sovereign in the event that the group becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) provide a framework for resolving banks that would likely require senior creditors participating in losses, if necessary, instead of or ahead of the sovereign providing support. DERIVATIVE COUNTERPARTY RATING Fitch assigned a DCR to BNPP for its material derivatives counterparty activity. The DCR is at the same level as BNPP's Long-Term IDR because derivative counterparties in France have no definitive preferential status over other senior obligations in a resolution scenario. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid securities issued by BNPP are all notched down from the bank's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Subordinated lower Tier 2 debt is rated one notch below the VR for loss severity, reflecting below-average recoveries. Legacy Tier 1 securities are generally rated four notches below the VR, comprising two notches for high loss severity, and two further notches for non-performance risk due to partly discretionary coupon omission. Basel III-compliant additional Tier 1 instruments are rated five notches below the VR. The issues are notched down twice for loss severity, reflecting poor recoveries. In addition, they are notched down three times for very high incremental non-performance risk due to fully discretionary coupon payments. SUBSIDIARY AND AFFILIATED COMPANY The Long-and Short-Term IDRs and Support Rating of BNPP's BNP Paribas Securities Services, which is rated under Fitch's Global Non-Bank Financial Institutions Criteria, are based on institutional support from BNPP. Its IDRs are equalised with those of BNPP as the subsidiary has a key and integral role within the group and is closely integrated with its parent. BNP Paribas Arbitrage Issuance BV, BNP Paribas US Medium-Term Notes Programme LLC, and BNP Paribas Finance Inc, are BNPP's wholly owned financing subsidiaries, whose debt ratings are aligned with those of BNPP based on Fitch's view of an extremely high probability of support from the parent if required. The IDRs of BNP Paribas Canada Branch are at the same level as those of BNPP as the branch is part of the same legal entity without any country risk restrictions. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT BNPP's IDRs, VR and senior debt rating are primarily sensitive to structural deterioration in the bank's internal capital generation through retained earnings. A weaker earnings capacity would put ratings under pressure as it would make it more difficult for the bank to maintain sound capitalisation and would make it more vulnerable to external shocks. The ratings would also come under pressure if the bank does not continue its gradual progress in reducing impaired loans or if unreserved impaired loans constitute an increasing proportion of FCC. Upside to the ratings is limited, given their high level in relation to peers' ratings, weak asset quality for the bank's rating level and the inherent business model risks of running a large and complex banking group that partly relies on capital market revenues. BNPP's senior debt that will become senior preferred debt could be rated one notch above the bank's Long-Term IDR once the bank has put in place a sufficiently large buffer of qualifying junior debt and senior non-preferred debt, the new debt class that is being introduced through legislation and that can be used to meet total loss absorbing capacity (TLAC) requirements. Given the low volume of qualifying junior debt issued by the bank to date, we expect that it will take the bank several years to build up a sufficiently large buffer. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of BNPP's Support Rating and upward revision to its Support Rating Floor would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. DERIVATIVE COUNTERPARTY RATING BNPP's DCR is currently aligned with the bank's Long-Term IDR and is therefore primarily sensitive to changes to the Long-Term IDR. Under new French legislation, derivative counterparties will rank pari-passu with senior preferred creditors. This means that the DCR will likely be upgraded if the bank's senior preferred debt rating is upgraded. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital ratings are primarily sensitive to a change in the VR of BNPP. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the respective issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example. The ratings are also sensitive to a change in Fitch's assessment of each instrument's loss severity, which could reflect a change in the expected treatment of liability classes in resolution. SUBSIDIARY AND AFFILIATED COMPANIES The ratings of BNP Paribas Securities Services and BNP Paribas Canada Branch are sensitive to changes in BNPP's IDRs. BNP Paribas Securities Services' ratings would also be sensitive to changes in the subsidiary's role within the group. The debt ratings of BNP Paribas Arbitrage Issuance BV, BNP Paribas US Medium-Term Notes Programme LLC, and BNP Paribas Finance Inc are sensitive to the same factors that would drive a change in BNPP's IDR. The rating actions are as follows: BNPP Long-Term IDR: affirmed at 'A+'; Outlook Stable Short-Term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Derivative Counterparty Rating: assigned at 'A+(dcr)' Short-Term debt: affirmed at 'F1' Commercial paper: affirmed at 'F1' Long-Term senior debt: affirmed at 'A+' Market-linked securities: affirmed at 'A+emr' Subordinated debt (lower Tier 2): affirmed at 'A' Upper Tier 2: affirmed at 'BBB+' Hybrid capital: affirmed at 'BBB' Additional Tier 1 debt: affirmed at 'BBB-' BNP Paribas Securities Services: Long-Term IDR: affirmed at 'A+'; Outlook Stable Short-Term IDR: affirmed at 'F1' Support Rating: affirmed at '1' BNP Paribas Arbitrage Issuance BV Senior unsecured debt: affirmed at 'A+' Market-linked securities: affirmed at 'A+emr' BNP Paribas Finance Inc. Commercial paper: affirmed at 'F1' BNP Paribas US Medium-Term Notes Programme LLC Long-Term senior debt: affirmed at 'A+' Market-linked securities: affirmed at 'A+emr' BNP Paribas Canada Branch Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Contact: Primary Analyst Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Luis Garrido Analyst +44 20 3530 1631 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. 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