OREANDA-NEWS. August 04, 2015. Fitch Ratings says that BNP Paribas' (BNPP; A+/Stable/a+) solid 2Q15 results benefited from a strong quarter in corporate and institutional banking (CIB) and a sound performance of the retail banking business in most of the bank's markets. BNPP reported improved capitalisation as its CET1 ratio and its leverage ratios strengthened, but leverage ratios remain weaker than peers'. The results have no immediate effect on BNPP's ratings.

BNPP reported EUR3.2bn pre-tax profit for 2Q15, adjusted for an EUR80m gain from changes in the fair value of own debt and for EUR420m capital gains on the sale of non-strategic equity stakes. Adjusted pre-tax profit was up 12% yoy and 35% qoq, partly due to a material depreciation of the euro against the US dollar in 2Q15 and the integration of entities acquired in 2H14 (LaSer, Bank BGZ and DAB Bank). All divisions reported increasing underlying revenue, including retail banking where solid performance in Belgium and international markets offset continued pressure on two of BNPP's home markets, Italy and, to a lesser extent, France.

BNPP generated a 10.1% annualised return on equity in 1H15, excluding the adjustment items mentioned above and restructuring costs of EUR347m, which is in line with its 2016 10% target, although we expect 2H15 to be seasonally weaker.

BNPP reported a 1.9% yoy increase at constant scope in retail banking revenue in its home markets (France, Belgium, Itay and Luxembourg), driven primarily by higher lending volumes in Belgium and in the bank's specialised businesses (revenue up 8% and 11% yoy at constant scope in 2Q15 respectively). BNPP continues to generate solid returns in Belgium - a 22% annualised return on allocated equity in 1H15 with particularly low loan impairment charges (LICs) during the quarter - which is the second largest contributor by country to the division's pre-tax profit. BNPP's home markets retail banking division generated 32% of the group's pre-tax profit in 2Q15, excluding the corporate centre. We expect costs in the division to remain under control. Its 60% reported cost-income ratio in 2Q15 compares well with domestic peers'. LICs should remain modest, except in Italy, where they decreased yoy in 2Q15 but still depleted nearly all of pre-impairment profit (EUR23m pre-tax income in 2Q15).

In France, bank profitability remains constrained by a low interest rate environment since deposit funding costs, largely influenced by regulated savings rates, have not declined by the same extent as long-term interest rates. BNPP's 2Q15 revenue in French retail banking declined 2% yoy as net interest income fell 6% yoy. The recently announced cut in the regulated savings rate to 0.75% from 1%, effective from 1 August 2015, should provide some short-term relief to the net interest margin, although we expect continued renegotiation on loan rates to limit the effect over time (see 'Fitch: French Banks - Only Short-term Benefit from Livret A Cut' published on 24 July 2015). More positively, BNPP's outstanding loans in France grew 0.8% yoy in 2Q15. While the rise is small and mainly driven by housing loans, there was an uptick in loans to corporates (up 0.4% yoy at end-2Q15) which, if confirmed in the next quarters, could relieve some pressure on revenue.

BNPP's international financial services business, which includes its consumer finance, non-home retail banking, insurance and wealth management businesses, generated 38% of the group's pre-tax income (excluding corporate centre) in 2Q15 and reported a satisfactory 21% return on allocated equity in 1H15. Revenue at constant scope and exchange rate was up 5% yoy, particularly benefiting from sound growth in insurance, wealth and asset management, and the US and Turkish retail banking businesses. In wealth and asset management, BNPP continued to post higher net new money inflow (EUR14bn in 1H15) after more mixed results in 2014. Operating expenses in this business rose faster than revenue as BNPP is developing its set-up, resulting in a 12% yoy decline in pre-tax profit, but we expect the bank continue to generate satisfactory returns.

Performance in BNPP's Europe-Mediterranean retail banking segment remains adequate. The exposure is mainly to Turkey (45% of total loans at end-2Q15) and Poland (31%), which drove the business' loan book 14% higher yoy at constant scope and exchange rate in 2Q15. In Turkey, LICs remained manageable at around 100bp in 1H15 and we expect risk-adjusted profitability to remain adequate.

BNPP's CIB business, which includes its capital markets, securities and corporate banking activities, posted strong revenue growth in 2Q15, partly helped by the material euro depreciation against the US dollar. The division's pre-tax profit, up 12% yoy at constant exchange rate in 2Q15, benefited from resilient performance in capital markets and loan-loss releases in corporate banking. The equity and prime services business posted a solid 22% yoy revenue growth in 2Q15 at constant exchange rate on higher volumes in both flow and structured products. Unlike most of its peers, BNPP's fixed income revenue rose, albeit by a modest 4% yoy at constant exchange rate to EUR992m, as higher volumes in the foreign exchange and commodities businesses offset pressure on credit and rate products.

In corporate banking, BNPP has used its balance sheet more intensively as outstanding loans grew 17% yoy to EUR126bn at end-2Q15, largely in the US. This resulted in a 4% yoy rise in revenue at constant exchange rates. The cost-income ratio was satisfactory and further declined 4% qoq to 59% despite impact from higher regulatory costs, notably with the set-up of an intermediate holding company in the US to house its local subsidiaries.

BNPP's fully-applied Basel III common equity Tier 1 (CET1) ratio improved 30bp qoq to 10.6% as retained earnings increased (+20bp impact, net of planned dividend payments) and risk-weighted assets declined (RWA; +10bp impact). We expect the decline in RWA to be only temporary as it mainly related to a reduction in capital markets activities following higher volatility in 2Q15. BNPP's Basel III leverage ratio also improved, by 30bp qoq, to 3.7% at end-2Q15. BNPP's reported leverage ratio includes additional Tier 1 (AT1) instruments that are not Basel III-compliant.

The bank's capitalisation remains adequate, but its leverage ratio remains weaker than its global trading and universal banks peers'. We expect BNPP to continue issuing AT1 when legacy instruments are called, which over time should lead to improvements in its leverage ratio. Given its sound internal capital generation, we also expect the bank to be able to maintain its target CET1 ratio despite a likely upward momentum in RWA as regulators re-assess the risk weights associated with some risks or activities.