BNP Paribas SA (“BNP”) is one of the largest banking groups in Europe with over EUR 2.86 trillion of total assets as at 31 March 2022. Headquartered in Paris, the French bank is located in 65 countries with more than 190,000 employees worldwide. BNP mainly operates through 3 core segments, namely 1) Corporate & Institutional Banking, 2) Commercial, Personal Banking & Services as well as 3) Investment & Protection Services.
The Group offers a wide variety of products and services through its business segments, including everyday banking services, financing, investments, savings and protection solutions. The Group mainly derives its revenue from Europe, of which it operates in 4 key markets in Belgium, France, Italy and Luxemburg. It is also considered as a systemically important bank by the Financial Stability Board due to its size and strong global presence. The Group carries investment grade ratings of Aa3/A+/AA- by Moody’s/S&P/Fitch. As of 2021, the Belgian government is the largest shareholder with ~7.7% ownership, while the remaining shareholders are dispersed among institutional investors.
The tier 2 (“T2”) subordinated bond has an expected issue rating of Baa2/BBB+/A- by Moody’s/S&P/Fitch respectively. The final price guidance of the T2 bond is at 5.25%, and it is first callable and resettable on 12 July 2027. If not redeemed on its first call date, the coupon shall be reset based on the prevailing 5-year SORA-OIS plus initial margin. Investors should also take note of its loss absorption feature, where in the event if a loss absorption event has occurred, the principal amount may be written-down or converted into common equity of the issuer.
For the first quarter ended 31 March 2022 (“1Q22”), total revenue increased 11.7% year-on-year (“YoY”) to EUR 13.2b, led by a robust performance of its Corporate & Institutional Banking division (+28.1%), as well as Commercial, Personal Banking & Services growth (+8.5%) as a result of higher fees and improvement in net interest income. A significant portion of stronger revenue performance in 1Q22 was also led by a gain in the Group’s market share and strategic developments in the Equities and Securities Services business lines. 1Q22 gross operating income was up 10.3% YoY to EUR 3.57b despite higher operating expenses, as BNP managed to achieve a positive JAWS effect (difference between revenue growth and cost growth) across its core businesses.
Going forward, BNP will look to continue its “Growth, Technology & Sustainability 2025” plan, by targeting >7% annual growth in net income to raise its return on tangible equity (“ROTE”) to more than 11% while maintaining a fully-loaded common equity tier 1 (“CET1”) ratio of 12% in 2025 after the Basel 3 finalisation (CRR3). Meanwhile, the sale of its subsidiary, BancWest, is expected to be completed by the end of this year, and the bank expects to redeploy ~EUR 11b of capital released and engage in share buybacks to compensate for the expected EPS dilution in the months after the sale completion.
As of 31 March 2022, BNP’s CET1 ratio stood at 12.4%, 0.5 percentage points (“ppt”) lower from the previous quarter due to accelerated growth and bolt-on acquisitions on risk-weighted assets, higher market volatility and updating of risk models and regulations. Nonetheless, it still remains well-above its regulatory capital requirements of 9.31%, with ~EUR 22.7b of buffer above its Maximum Distributable Amount Restrictions level.
The bank’s immediate available liquidity reserve increased from EUR 452b as of 31 December 2021 to EUR 468b in 1Q22, while its liquidity coverage ratio remains healthy at 132% despite being slightly lower from a year ago (31 March 2021: 136%). Overall, BNP’s financial position is still robust and well-capitalised with buffers looking solid, and its pay-out ratio for the next 3 years is targeted at 60%.
Moving on to relative valuation, we think that the new issue looks more attractive as compared to its existing secondary market T2 SGD bond. Notably, BNP issued a 3.125% SGD T2 bond earlier this year in February that is callable on 22 Feb 2027 and matures on 22 Feb 2032 if not redeemed. The yield-to-call (“YTC”) and yield-to-worst (“YTW”) of the 3.125% subordinated notes are approximately 4.92% and 4.55% respectively. At a final price guidance (“FPG”) of 5.25%, the new BNP issue offers a yield pickup over its existing secondary market bonds. As such, investors who are looking for a subordinated T2 SGD bond may consider the BNP new issue.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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