BNP Paribas: Results Remain Robust; Shares Get Cheaper

seekingalpha08-15

Shares of French banking giant BNP Paribas have been relatively weak since my last update, with political developments in France taking the shine off solid financial results.Q2 results were robust. ...

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Net income beat consensus, with equities trading a particular highlight. BNP is pretty insensitive to interest rates, so those earnings should prove relatively stable.These shares are now back under 0.7x tangible book value. With the bank earning an 11-12% return on tangible equity, the implied P/E is only around 6x.Cineberg Shares of French banking giant BNP Paribas (OTCQX:BNPQY)(OTCQX:BNPQF)(\"BNPP\" hereafter) have been a little soft since my last update back in April, underperforming European financials (EUFN) by around five points in that time. While short-term returns often represent little more than the vagaries of the market, the catalyst in this case is fairly clear, with BNPP's recent sell-off coinciding with the call of snap French parliamentary elections in June. Data by YCharts Domestic political uncertainty is obviously a legitimate concern here. French government bond spreads have widened as shown below, and if the bonds of French banks were to show a similar trend, that could mean higher wholesale funding costs and reduced profitability for the sector. I would note that BNPP doesn't have the kind of cheap deposit-led funding profile that some of its peers do, meaning it does lean more on wholesale financing to fund its balance sheet. Data by YCharts There are a few counterpoints to consider. Firstly, BNPP is more of a European-focused multinational than a pure French bank. Of the roughly €46 billion it booked in revenue last year, only around €11 billion was allocated to its home country. Secondly, earnings continue to be robust judging by Q2 and H1 numbers, and sell-side consensus has that continuing over the next couple of years. Finally, with the stock back under 0.7x tangible book value, I would argue that there is a significant margin of safety on offer for prospective investors. I leave my 'Buy' rating unchanged. Results Are Still Robust I mentioned last time out that BNPP is not really geared to interest rates. This is a function of two things. Firstly, BNPP's universal banking capabilities map to significant fee and commission income, with net interest income only around 42% of its top line. Secondly, certain characteristics of the French retail banking market have severely curtailed BNPP's interest rate sensitivity in its domestic retail banking unit. Note that French retail banking NII accounts for around 18% of total group NII, or a roughly 7% of total group revenue. With that, BNPP continues to show its indifference to the wider interest rate environment. Q2 net income was €3.4 billion, roughly flat year-on-year but good for a circa 15% beat versus consensus. That brought BNPP's earnings for the first half of the year to €6.5 billion, equating to a healthy 12.5% annualized return on tangible equity (\"ROTE\") despite the ECB cutting rates by a quarter point in June. This is slightly above management's 2025 (11.5%-12% ROTE) and 2026 (12% ROTE) targets. BNPP's investment banking wing (\"CIB\") was the standout performer last quarter, with CIB revenues up just over 12% year-on-year. Within that, FICC trading revenue continued its fairly weak trend from prior coverage, falling around 7% to €1.1 billion and missing consensus by a similar amount. On the flip side, Equities & Prime Services revenue of €1.15 billion was up almost 60% year-on-year. While BNPP has admittedly been investing in this area, this strong performance was nonetheless a surprise, easily clearing the consensus estimate of €775 million. Source: BNP Paribas Q2 2024 Results Presentation Capital Markets is a little more mixed. BNPP is definitely one of the strongest European investment banks, with a number one share in EMEA debt capital markets and indeed all Euro-dominated bonds. However, its European tilt means it still tends to lag the big U.S. universal banks. With that, a 12% year-on-year rise in Capital Markets revenue looks good in isolation, though less good when compared to the 30-60% increases seen at Bank of America (BAC), JPMorgan (JPM) and Citigroup (C). BNPP's global retail and commercial banking arm remains more subdued, with revenue basically flat year-on-year at just under €6.8 billion. French retail banking continues to be a drag here. As I briefly set out last time, the problem for French retail banks recently has been that the yields on certain types of loans and deposits are heavily regulated by the state, and this has compressed NII severely in the recent hiking cycle. BNPP's French retail NII was €816 million last quarter, down around 11% year-on-year. The Outlook French political uncertainty and interest rate cuts in the Eurozone are two issues likely to be on readers' minds. I went over the former in the introduction, but I will add another point, which is that, given BNPP's significant trading income, volatility could even be a tailwind for the firm if it leads to increased activity and wider bid-ask spreads. On the latter, BNPP's significant fee and commission income is basically rate-agnostic, and certain lines, like Capital Markets, may even benefit from rate cuts. Data Source: BNP Paribas Quarterly Results Releases I also expect its French retail banking business to be fairly receptive to rate cuts, given the dynamics I outlined in the previous section. Although NII was down 11% year-on-year, quarter-on-quarter performance was much flatter, only declining by around 0.6%. This was the best sequential performance in a year, and with the forward curve pointing to ongoing easing ahead, I expect income to pick up in 2025. Valuation BNP shares currently trade for €59.70 apiece in Paris trading ($32.91 per ADS), down from €67.90 at previous coverage ($36.34 per ADS) despite solid Q2 and H1 results. As a result, the stock's price to tangible book value (\"P/TBV\") has slipped from 0.75x to 0.67x over the same period. Note that one ordinary share traded in Paris represents two ADSs. Management guidance has net income exceeding the €11.2 billion that the bank earned last year. Given strong results for the first half, this now looks pretty likely to me. Tangible book value is currently somewhere around the €100 billion mark, so even flat year-on-year net income would see ROTE above 11%. Dividing this into a 0.67x multiple of TBV points to a P/E of just over 6, or an earnings yield of roughly 16%. As BNPP's capital returns policy includes a 50% dividend payout ratio (plus another 10% from buybacks), investors are essentially looking at a circa 8% pre-tax dividend yield here. Previously, I laid out my expectations for around 6% annualized growth in TBV per share over the next few years. Another way to look at that is, with BNP only paying out 60% in dividends plus buybacks, earning an 11-12% return on the retained would power around 4.5% annualized growth in net income, with the contribution from buybacks increasing that to around 6.5% in per-share terms. Sell-side consensus has 2026 net income at €12.2 billion, which would indeed represent roughly 4.5% annualized growth from 2024 guidance. Likewise, 2026 consensus EPS of around €11.20 ($6.17 per ADS at current USD/EUR) implies around 7% annualized growth. Given the dividend should grow in line with EPS, this basically implies around 7% annualized DPS growth out to 2026. Attached to an 8% starting yield, this would map to a mid-teens pre-tax annualized return all else equal. I do continue to expect TBV multiple expansion to add to this, but hopefully the above demonstrates that it is not necessary to achieve attractive total returns. Just to add a bit more color to that point, I first wrote about BNPP three years ago, at which point it also traded for around 0.7x TBV per share. The stock has returned a little over 10% annualized in that time. Data by YCharts Summing It Up BNP Paribas stock has been a pretty disappointing performer in recent months. That's not the fault of the business, which is actually slightly over-earning with respect to management's medium-term financial targets, rather it is a reflection of recent political developments in France. BNPP isn't recently a domestic bank as such, and with significant trading income, it could actually be a beneficiary of increased volatility. These shares once again trade for less than 0.7x tangible book value, implying a P/E of around 6 based on the bank's low double-digit ROTE profile. With a 50% payout ratio pointing to a commensurate 8% yield and 6-7% annualized growth on top, these shares offer investors attractive total return potential even if multiple expansions remain elusive. I keep my longstanding 'Buy' rating in place.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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