OREANDA-NEWS. February 09, 2015. Fitch Ratings says that BNP Paribas' (BNPP; A+/Stable/a+) 4Q14 and FY14 results demonstrate the group's healthy earnings generation as the bank managed to maintain a stable Basel III common equity Tier 1 (CET1) ratio yoy at 10.3% despite hefty fine expenses in 2Q14. However, we believe that the bank will continue to face challenges in improving its profitability as revenue in most of its core retail businesses remain under pressure. BNPP's ability to generate strong earnings, which benefits from its diversified company profile, underpins its Viability Rating (VR), and failure to maintain robust profitability and retain earnings could put the VR under pressure. The results have no immediate effect on BNPP's ratings.

BNPP reported EUR2.3bn 4Q14 pre-tax profit, adjusted for charges of EUR11m for changes to the fair value of own debt and EUR297m for goodwill impairment of its main subsidiary in Italy, BNL, and EUR50m of additional costs related to the 2Q14 comprehensive settlement with the US authorities. Adjusted pre-tax profit was up 28% yoy and down 8% qoq (excluding the charge related to the comprehensive settlement with the US authorities in 4Q13 and 3Q14). BNPP generated a 7.7% return on equity in 2014 excluding these litigation costs.

Revenue in BNPP's specialised businesses and in businesses outside its home markets continued to be resilient, partly boosted by bolt-on acquisitions in 2014 (BGZ in Poland, DAB in Germany and Laser in Europe). Nonetheless, we believe that pressure on revenue from its core retail markets is likely to persist, mainly in France and Italy, which together contributed around a quarter of the group's earnings in 2014. Additional regulatory costs, which the bank estimates at about EUR500m per year, will also weigh on profitability. However, the bank has increased its costs savings target by EUR200m to EUR3bn for FY16 (EUR1.8bn achieved at YE14).

In line with our expectations, BNPP's revenue from its French and Italian retail business was under pressure in 4Q14, down 2% yoy in both countries. This was due to lower interest rates and a continued loan portfolio decline in Italy. Lending volumes in France stabilised after falling for several quarters, although we do not expect a material rise in lending as economic growth prospects for the country remain weak. Nonetheless, returns continued to be satisfactory in 4Q14 (20% on an annualised basis), helped by still low loan impairment charges (LICs; 30bp of customer loans in 4Q14 on an annualised basis), for which we do not anticipate any material rise. LICs slightly decreased in Italy (167bp of customer loans in 4Q14 on an annualised basis versus around 180bp in 9M14), but BNL will not return to more adequate profitability until these have significantly abated. BNL posted a small EUR3m pre-tax profit in 4Q14 (EUR23m in 2014).

BNPP's corporate and investment bank, which includes its capital markets and corporate banking activities, saw mixed results. In capital markets, BNPP's fixed income business revenue was up 9% yoy at constant exchange rates and was more resilient than its US global trading and universal bank peers, which experienced a decline in fixed income trading in the quarter. Foreign exchange sales and trading and bond issues were the main drivers of the increase. Revenue in the equities and advisory business (down 31% yoy compared with a solid 4Q13 and 19% qoq) suffered from lower client activity in structured products, which BNPP particularly relies on as its cash equities business is more modest than at larger players.

In corporate banking, the bank's profitability continued to be supported by low LICs but revenue was flat yoy. The business generated EUR405m pre-tax profit in 4Q14, up 65% yoy but down 3% qoq as BNPP released EUR68m from LICs in 3Q14. Revenue growth continued to be driven mainly by Asia, as contribution from the energy and commodity sector in Europe, which is an important sector for BNPP, declined. We expect BNPP to continue to report satisfactory cost efficiency in corporate banking (53% cost-income ratio in 4Q14 and FY14).

BNPP continued to post robust recurring pre-tax profit in its investment solutions business, at EUR521m in 4Q14. Revenue was up 2% yoy at constant exchange rates in 4Q14 as contribution from the securities services (+10% yoy) and the insurance businesses (+1% yoy) more than offset a decline in wealth and asset management (-2% yoy). Net new money (NNM) inflows returned to more modest levels after an uptick in 3Q14. They amounted to EUR1.8bn in 4Q14, with a positive contribution from wealth management and insurance more than offsetting outflows in asset management (EUR1.5bn outflows). We believe that it will remain challenging for BNPP to deliver on its strategy to attract EUR40bn of NNM in asset management and around EUR70bn in private banking by 2016.

BNPP's fully-applied Basel III CET1 ratio rose by 20bp qoq to 10.3% at end-4Q14, largely due to earnings retention as risk-weighted assets grew by EUR7bn qoq. BNPP announced that it would resume issuing Tier 1 instruments in 2015 (around EUR0.5bn per year). BNPP's Basel III leverage ratio was 3.6% at end-2014, and included around 0.35 percentage points of additional Tier 1 instruments that are not Basel III compliant. BNPP's ability to maintain its CET1 ratio during 2014 despite the fine related to US sanctions underlines its healthy earnings generation. However, we consider the bank's CET1 ratio target of above 10% less ambitious than some of its main peers'. Failure to maintain capitalisation in line with peers would place the ratings under pressure.

We believe that reaching total loss-absorbing capital (TLAC) requirements, although final rules are not finalised yet, might be more challenging for BNPP than for banks that started earlier to issue hybrid capital instruments or for those with holding company structures. According to first estimates by BNPP, a 16% TLAC minimum ratio (excluding G-SIB and conservation buffers) would require the bank to issue EUR34bn of additional TLAC-eligible instrument, assuming that senior unsecured debt up to 2.5 percentage points of risk-weighted assets is eligible for inclusion in TLAC.

BNPP also published its liquidity coverage ratio for the first time, which stood at 114% at end-2014. The ratio benefits from the bank's utilisation of the ECB's TLTRO, where BNPP obtained EUR14bn, and we expect that part of this funding will be used in the bank's businesses. Nevertheless, we expect the group to comfortably meet regulatory liquidity requirements.