DBRS Morningstar Confirms BNP Paribas’s LT Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of BNP Paribas SA (BNPP or the Group) including the Long-Term Issuer Ratings of AA (low) and the Short-Term Issuer Ratings of R-1 (middle). The trend on all ratings remains Stable. DBRS Morningstar has also maintained the Intrinsic Assessment at AA (low) and the Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of BNPP’s Long-Term ratings at AA (low) continues to reflect the Group’s leading and diversified franchise, its ability to adapt to challenges in the operating environment, robust underlying earnings generation capacity and conservative risk management. Funding and liquidity remain strong, benefiting from stable customer deposits and good access to wholesale markets. DBRS Morningstar also takes into account the Group’s build-up of loss-absorbing capacity in recent years and a consistent improvement in asset quality. Nevertheless, the rating action also considers the Group’s cost efficiency still lags behind similarly rated international peers, although we recognise BNPP reported positive jaws in 2021 and Q1 2022.

The rating action also reflects BNPP’s continued improvement in asset quality driven by de-risking and sales of NPLs and also supported by the Group’s conservative and well diversified risk profile. DBRS Morningstar views that the unprecedented measures put in place by the domestic and European authorities has delayed the formation of NPLs through the COVID-19 pandemic, and uncertainty remains regarding the full effect on asset quality. In addition, DBRS Morningstar notes that the operating environment could be impacted by Russia’s invasion of Ukraine and its implications for supply chains, energy prices, inflation and interest rates.

RATING DRIVERS

An upgrade of the Long-Term Ratings would occur should BNPP substantially improve cost efficiency and profitability whilst maintaining a resilient credit profile and capital position.

The ratings would be downgraded if BNPP experiences a prolonged material deterioration of its asset quality profile, profitability, or capital buffers. Ratings could also be downgraded in the case of a simultaneous deterioration of the Group’s performance in its main markets, as this would reduce the benefit of the Group’s diversification.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong
BNPP’s ratings are underpinned by its well-established and diversified franchise as one of the leading banking groups in Europe, with a leading position in France, Belgium, Luxembourg and Italy. The Group also benefits from extensive networks in emerging markets and the United States, through BancWest. However, the Group has reached an agreement with BMO Financial Group to sell BancWest, which should be effective by end-2022. The Group carries out a broad range of specialised finance services, some of which have a global reach or are market leading. Corporate and Institutional Banking (CIB) has a leading position in European capital markets and comprises Corporate Banking, Global Markets and Securities Services.

Earnings Combined Building Block (BB) Assessment: Good
DBRS Morningstar considers that BNPP generates solid underlying earnings, supported by its diversified franchise. In our view, this has enabled the Group’s profitability to remain resilient throughout past crises. BNPP reported EUR 9.5 billion net income in 2021, its strongest results in its history. This was mainly driven by the cost of risk falling back to pre-COVID 19 levels and a strong rebound in revenues in all business lines, supported by an improved economic environment. Despite higher operating expenses on the back of business recovery, we expect BNPP to continue managing its cost base efficiently. BNPP reported net attributable income of EUR 2.1 billion in Q1 2022, up 19.2% year-on-year (YoY). Excluding exceptional items for each year, net attributable income was up 37.1 % YoY to EUR 3.4 billion in Q1 2022. Q1 2022 results were driven by a further reduction in cost of risk and higher revenues, in particular due to strong CIB performance, despite growth in operating expenses.

Risk Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views the Group’s risk profile as generally conservative with some higher risk elements. Credit risk is mitigated by significant diversification of the loan book by product and geography. While the majority of the Group’s exposures have shown low risk metrics to date, the Group is exposed to higher risk components such as its business in Italy, Europe-Med and Personal Finance, as well as the approach of retaining impaired loans on the balance sheet for longer, even if this has changed in recent quarters. Whilst the unprecedented measures put in place by the domestic and European authorities have delayed the formation of NPLs following the COVID-19 pandemic, uncertainty remains regarding the full effect on asset quality. In addition, the macroeconomic outlook has been made less clear by Russia’s invasion of Ukraine, although BNPP has very limited exposure to both countries. The Group’s asset quality has been consistently improving in recent years, driven by de-risking and more marginally sales of NPLs. The Group’s reported doubtful loans ratio stood at 1.9% at end-Q1 2022 with a coverage ratio at 73.3%. Based on DBRS Morningstar’s calculations, the share of Stage 3 exposures in loans and advances to customers at amortised cost was 2.9% at end-2021 compared to 3.1% at end-2020.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
The Group has a solid funding position, supported by well-established deposit franchises in BNPP’s domestic markets and good access to capital markets. At end-March 2022, BNPP’s consolidated customer deposits were EUR 1.0 billion up from EUR 957 billion at end-2021. The loan-to-deposit (LTD) ratio was 83%, improved from 85% at end-2021. Typical of universal banks with extensive capital markets businesses, BNPP’s deposit base is accompanied by sizeable wholesale funding, which at end-2021 stood at EUR 298 billion (excluding sterilised short-term funding). Within this, short term funds were EUR 108 billion. The exposure to wholesale funding is mitigated by well diversified funding sources and strong liquidity. At end-2021, the Group had a substantial liquidity reserve of EUR 452 billion, covering amply outstanding short-term wholesale debt. The liquidity reserve consists predominantly of liquid assets meeting prudential regulation requirements. As of end-March 2022, BNPP reported a solid LCR ratio of 132%.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views BNPP’s capital position as strong overall and its underlying earnings generation capacity as good. While the Group’s capital ratios are below those of some peers, DBRS Morningstar’s view of capital incorporates the Group’s very stable earnings, solid cushion above the regulatory requirements and its ability to adjust dividends. The Group had a phased-in CET1 ratio of 12.4% at end-Q1 2022, down 50 bps from end-2021 and phased-in total capital ratio of 16.0 % at end-March 2022, down from 16.4% at end-2021. This provides the Group with distances of 305 bps and 260 bps over the Maximum Distributable Amount. The Basel 3 leverage ratio was 3.8% at end-March 2022. The TLAC ratio strengthened to 25.9% without including eligible Senior Preferred debt, positioning BNPP well against TLAC requirements of 22.03% of RWAs in Q1 2022.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/398977

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) - https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The sources of information used for this rating include Morningstar Inc. and Company Documents, BNPP 2021 and Q1 2022 Reports, BNPP 2021 and Q1 2022 Press Releases, BNPP 2021 and Q1 2022 Presentations, BNPP 2021 Pillar III Document, BNPP 2021 Universal Registration Document and BNPP 2021 Integrated Report. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/398976

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman – Managing Director, Head of European FIG – Global FIG
Initial Rating Date: July 23, 2015
Last Rating Date: June 29, 2021

DBRS Ratings GmbH
Neue Mainzer Straße 75
Tel. +49 (69) 8088 3500
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.