OREANDA-NEWS. Fitch Ratings has affirmed BNP Paribas's (BNPP) Long-term Issuer Default Rating (IDR) at 'A+' and its Short-term IDR at 'F1'. Its Viability Rating (VR) has been affirmed at 'a+' and its senior debt at 'A+'/'F1'.

A full list of rating actions is available at the end of this rating action commentary.

The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs), which comprises 12 large and globally active banking groups. Fitch's outlook for the GTUBs is stable as we expect the stable outlook for the groups' commercial banking and wealth and asset management businesses in 2016 to mitigate pressure on earnings from capital markets activities, particularly in fixed income trading.

As globally active universal banks, the 12 GTUBs are among the most affected by evolving regulation, which is bringing capital and resource constraints to some businesses. This means that business models are being adjusted. Specific changes and their timing vary by bank. In the medium term, we believe that the GTUBs with the strongest franchises in their core businesses, with sound business models and clear strategies are best placed in this environment, and these company profiles are an important rating factor for many of the GTUBs.

KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
BNPP's IDRs, VR and senior debt ratings are based on the bank's diversified business mix with sound franchises in European retail banking, corporate and institutional banking (CIB), and wealth management, which allows the bank to generate solid and modestly volatile earnings.

The ratings also reflect BNPP's adequate but lower capitalisation than peers, sound funding profile and adequate liquidity. They further take into account the bank's high gross impaired loans ratio and significant exposure to a weak Italian economy.

BNPP's diversified operations are a key strength as they have allowed the bank to generate adequate results and avoid undue risk concentration, and BNPP's company profile has a high influence on its VR. Earnings generation has been steady as the bank generated an operating return on average equity between 10% and 12.5% since 2011 (12.1% in 9M15). 9M15 was a good example of the strength of BNPP's diversified franchise, as performance in international financial service businesses continued to improve, and, together with strong earnings in CIB, more than offset lower earnings from some of the bank's core markets (mainly Italy and France).

Since we do not expect loan impairment charges (LICs) to abate significantly in the near term, we believe that delivering profitability targets through the cycle will remain dependent on continued profitability improvement in BNPP's international financial service businesses, and on revenue generation in CIB, which is volatile by nature. Cost control will also be key, as higher compliance and regulatory expenses are weighing on the bank's cost base. BNPP's cost-income ratio was 67% in 9M15, slightly down yoy but above its 63% 2016 target.

BNPP's capitalisation remains adequate, but is weaker than some of similarly rated and most of GTUB peers'. BNPP's Basel III leverage ratio was 3.8%, up 20bp over the first nine months of 2015. While the ratio includes additional Tier 1 instruments that are not Basel III-compliant (equivalent to around 30bp), we expect BNPP to continue issuing AT1 when legacy instruments are called, which over time should lead to improvements in its leverage ratio.

Given BNPP's healthy earnings generation, we also expect the bank to be able to maintain an adequate common equity Tier 1 (CET1) ratio despite a likely upward momentum in RWA as regulators re-assess the risk weights associated with several exposures and activities. The Stable Outlook on BNPP's Long-term IDR reflects our expectations that the bank will continue to generate adequate profitability to support internal capital generation, and that the bank's capital ratios will not deviate materially from its similarly rated peers'. BNPP's Basel III fully-applied CET1 ratio was 10.7% at end-3Q15, up 40bp from end-2014.

We view BNPP's asset quality as acceptable, but the bank's gross impaired loan ratio remains high compared with peers' (6% at end-June 2015). This partly reflects the bank's policy in its core markets (mainly France and Italy) not to write the impaired loans off before they are fully resolved, which contrasts with a generally swifter write-off policy at US or some European banks. BNPP's unreserved impaired loans accounted for 24% of its Fitch core capital, which exposes the bank to collateral realisation, although BNPP has a sound track record in recovering impaired loans as underlined by the absence of material LICs spikes through the cycle.

We do not expect material asset quality deterioration in any of BNPP's main markets, although the bank will remain sensitive to developments in Italy. Italy concentrated around 40% of the group's impaired assets at end-June 2015. Exposure to Italian risk is largely booked through its subsidiary BNL (A-/Stable/bbb-), whose gross impaired loan ratio (net of repo) reached 18% at end-June 2015. While we expect gradual improvement in BNL's LICs, the latter should continue to absorb most of the pre-impairment profit in the near future (EUR54m pre-tax profit in 9M15).

SUPPORT RATING AND SUPPORT RATING FLOOR
Similar to peers, BNPP's Support Rating and Support Rating Floor reflect Fitch's view that senior creditors cannot longer rely on receiving full extraordinary support from the French sovereign in the event that the group becomes non-viable. In Fitch's view, the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) are sufficiently progressed to provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

In the EU, BRRD has been effective in member states since 1 January 2015, including minimum loss absorption requirements before resolution financing or alternative financing (eg, government stabilisation funds) can be used. Full application of BRRD, including the bail-in tool, is required from 1 January 2016.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid securities issued by BNPP are all notched down from its 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 relative to average recoveries, and two further notches for non-performance risk, reflecting that coupon omission is not fully discretionary.

Low trigger contingent capital Tier 1 instruments are rated five notches below the VR. The issues are notched down twice for loss severity, reflecting poor recoveries as the instruments can be written down well ahead of resolution. In addition, they are notched down three times for very high non-performance risk, reflecting fully discretionary coupon omission.

SUBSIDIARY AND AFFILIATED COMPANY
The Long-and Short-term IDRs and Support Rating of BNPP's BNP Paribas Securities Services are based on an extremely high probability of support from BNPP, if needed. Its IDRs are equalised with those of BNPP as we view it as a core subsidiary, given its importance to and integration with the parent.

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.

BNP Paribas Arbitrage Issuance BV, BNP Paribas US Medium-Term Notes Programme LLC, and BNP Paribas Finance Inc, are wholly owned financing subsidiaries of BNPP whose debt ratings are aligned with those of BNPP based on an extremely high probability of support from the parent if required.

RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
Significant asset quality deterioration, which we do not expect in the near term, could lead to a downgrade of BNPP's VR and IDRs. Ratings could also come under pressure from a failure to maintain sound capital and leverage ratios in line with peers or if solid internal capital generation deteriorates following a structural decline in operating profitability. Given its current high level, Fitch does not expect to upgrade BNPP's VR in the near term.

SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade to 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.

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 issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example.

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 strategic importance to the rest of 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+'; Stable Outlook
Short-term IDR: affirmed at 'F1'
Viability Rating: affirmed at 'a+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No floor'
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+'; Stable Outlook
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
Short-term debt: affirmed at 'F1'
Long-term senior debt: affirmed at 'A+'
Market-linked securities: affirmed at 'A+emr'

BNP Paribas Canada Branch
Long-term IDR affirmed at 'A+'; Stable Outlook
Short-term IDR affirmed at 'F1'