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BNP Paribas : Staying on course in the storm

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08/12/2019 | 02:56pm EDT

The largest bank in the eurozone is valued at only half of its equity and seven times its profits.

These indicators, that are well below market averages, reflect how little trust investors have in the European banking sector.

Despite the bank’s encouraging results, BNP is clearly not immune to this mistrust.




For a general overview, check out our article How Does a Bank Work. However, for the details, we have to go further than that and focus on the essentials. But like all, gigantic, so-called universal banks, the BNP Group is perfectly impossible to analyze and value, even with an approximate degree of precision, both in its banking and insurance segments. 

There is total opacity; the group has thousands of subsidiaries - consolidated or not - on all continents some of which are domiciled in tax havens. And then there are hundreds of billions of euros of assets whose value can quickly vary from simple to fivefold - upwards or downwards - especially for the most illiquid ones among them.

However, when it comes to investments, we can sometimes ignore sophisticated reasoning in favour of simplicity. In other words, in this case, ignore the insurmountable complexity of the file to retain only one thing: a bank's profits are 99% of the time indexed to the good health of the economy.

It is of course common knowledge that the euro zone is slipping away. Rates are at record lows, squeezing the margins of the lenders; the growth in major economies remains sluggish and is even criticized in Germany and the United Kingdom; so-called "non-performing" loans - taken out by barely solvent borrowers - remain a recurring problem in Southern Europe; and there are fears that the regulator may further increase capitalization ratios, forcing banks to store their profits instead of redistributing them. 

Faced with these difficulties, it is difficult to imagine that the European Central Bank will decide to raise its rates. The opposite is even likely to happen, as the need for a new stimulus will be pressing. In this context, the end of the tunnel for the banks may still be a way to go.  

As it stands, the only ones that still seem to be in the good graces of investors are the Swiss banks, particularly thanks to their income-generating asset management activities, even when they are on autopilot, and their restructuring efforts that are carried out faster than those of their peers in the euro zone.

However, it could make sense to adopt a contrarian way of thinking. On the one hand, if the worst-case scenario is avoided, the valuation of banks will immediately be adjusted upwards. On the other hand, the bad news is already reflected in the price. Except for a catastrophe, the safety margin therefore appears substantial.

Over the long cycle, i.e. over the last decade, BNP has distinguished itself for the overall stability of its results. It managed to emerge from the last major crisis in Europe without too much difficulty and it has overcome the crisis much better than its peers Crédit Agricole and Société Générale. The group has steadily increased both the value of its equity and the dividend payments to its shareholders.

BNP's strength lies in the relative stability of its traditional lending activities to households, local authorities and businesses. Less adventurous than Crédit Agricole - which is too exposed to Southern Europe - and Société Générale - which is too dependent on its investment banking activities - the group seems to be navigating wisely for the time being in a new and demanding environment.  

Indeed, the fee and commission income from its service activities made it possible to offset the reduced margins on lending activities, while the group’s investment banking activities, which used to be less strategic, are fully benefiting from the difficulties of rivals such as Deutsche Bank - which is in the midst of a collapse - and Société Générale.

It’s by the way these investment banking activities that are boosting the group's latest results. This trend is expected to continue in the coming quarters.

It should be noted that BNP has recently sold non-strategic holdings - for example in the American bank First Hawaiian and the Indian insurer SBI - to increase its capitalization ratios. Nevertheless, the group still has a relatively high leverage, almost twice as high as that of its restructured American peers - which, coincidentally, trade at twice the valuation levels.

(The author is not a shareholder.)

Neelie Verlinden
© 2019
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Size 2019e 2020e
Capitalization 56 577 M € -
Valuation 2019e 2020e
P/E ratio (Price / EPS) 7,36x 7,21x
Capitalization / Revenue 1,29x 1,27x
Yield (DPS / Price) 6,80% 7,00%
Price to book (Price / BVPS) 0,58x 0,56x
Profitability 2019e 2020e
Operating Margin (EBIT / Sales) 30,6% 33,0%
Operating Leverage (Delta EBIT / Delta Sales) 3,83x 5,62x
Net Margin (Net Profit / Revenue) 17,9% 17,8%
ROA (Net Profit / Asset) 0,38% 0,39%
ROE (Net Profit / Equities) 8,11% 7,98%
Rate of Dividend 50,0% 50,5%
Balance Sheet Analysis 2019e 2020e
CAPEX / Sales   0 0
Cash Flow / Sales - -
Capital Intensity (Assets / Sales) 47,0x 46,3x
Financial Leverage (Net Debt / EBITDA) - -
Income Statement Evolution
EPS & Dividend
EPS Revisions
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Mean consensus OUTPERFORM
Number of Analysts 25
Average target price 51,74  €
Last Close Price 45,30  €
Spread / Highest target 51,2%
Spread / Average Target 14,2%
Spread / Lowest Target -21,5%
Consensus revision (last 18 months)