OREANDA-NEWS. Fitch Ratings has assigned BNP Paribas' (BNPP; A+/Stable/a+) EUR750m perpetual fixed-rate resettable additional Tier 1 (AT1) notes a final rating of 'BBB-'.

The final rating is in line with the 'BBB-(EXP)' expected rating Fitch assigned to the notes on 8 June 2015.

KEY RATING DRIVERS - HYBRID SECURITIES
The notes are AT1 instruments with fully discretionary interest payments and are subject to write-down on breach of a consolidated 5.125% common equity Tier 1 (CET1) ratio, calculated on a 'phase-in' basis.

The rating of the securities is five notches below BNPP's 'a+' Viability Rating (VR), in line with Fitch's criteria for assigning ratings to hybrid instruments. The securities are notched twice for loss severity to reflect the write-down feature of the notes, and three times for non-performance risk.

The notching for non-performance risk reflects the instruments' fully discretionary coupon payment, which Fitch considers as the most easily activated form of loss absorption. Under the terms of the securities, the issuer will be prohibited from making interest payments if the amount of distributable items at BNPP is insufficient, if BNPP is not in compliance with minimum capital adequacy requirements, or if the regulator requires the group not to make payments. We expect a heightened risk of non-payment of interest should BNPP's consolidated CET1 ratio fall below the bank's combined buffer requirement that will be phased in between 2016 and 1 January 2019.

We expect BNPP's minimum CET1 requirement from 1 January 2019 to be at least 9%, made up of the 4.5% CET1 requirement under Pillar 1, a capital conservation buffer of 2.5% and a 2% G-SIB buffer. This means BNPP's AT1 instrument's non-performance by way of non-payment of interest is likely to occur well before BNPP breaches the notes' 5.125% CET1 conversion trigger. BNPP's combined buffer requirement could increase if additional buffers, e.g. countercyclical buffers, are introduced or if Pillar 2 requirements that have to be met with CET1 capital are established by the European Central Bank as supervisor once it has carried out a comprehensive review of capital requirements for eurozone banks.

At end-March 2015, BNPP reported a 10.3% fully loaded CET1 ratio, above its 10% target. At the same date, its phase-in CET1 ratio, which is relevant for triggering a write-down, stood at 10.5%, providing a buffer of about EUR9bn before the group would breach a 9% CET1 ratio. The absence of additional notching for non-performance for BNPP's AT1 instrument reflects our view that BNPP has solid earnings generation capacity, which should help the bank maintain adequate capitalisation. It also includes our expectation that BNPP would be able to align its capitalisation with any increased regulatory capital requirement given its ability to generate capital.

Fitch has assigned 50% equity credit to the AT1 notes, which reflects their full coupon flexibility, their permanent nature and their subordination. The equity credit of 50% rather than 100% reflects our view that a write-down of the securities would not occur well in advance of the bank's point of non-viability.

RATING SENSITIVITIES - HYBRID SECURITIES

As the securities are notched down from BNPP's VR, their rating is primarily sensitive to a change to the issuer's VR. The securities' rating is also sensitive to changes in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in BNPP's VR. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example.