BNP Paribas: Q3 Results Disappoint The Market, Perhaps Unfairly

seekingalpha11-02

The market wasn't impressed with BNP Paribas' third quarter results, sending the shares down roughly 5% on the day.Headline income statement figures either matched or beat consensus, but beneath the ...

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AdrianHancu  The market did not receive BNP Paribas SA's (OTCQX:BNPQY, OTCQX:BNPQF) third quarter results well. With the shares down around 5% on the day, yesterday's price action compounds a fairly disappointing year-to-date for the stock, with the ADSs only returning around 4% so far. In contrast, European financials, represented here by the iShares MSCI Europe Financials ETF (EUFN), have returned almost 20% in that time. Data by YCharts I last covered BNP Paribas in August, rating it a “Buy,” as I have done for around three years now. The crux of the investment case hasn't changed much in that time: the stock trades at a fairly wide discount to tangible book value (it was below 0.7x last time out), yet the bank earns a respectable double-digit return on tangible equity. BNP's earnings have also tended to be pretty stable over the years, with that partly a result of it being one of the least interest rate sensitive names I cover. Given Eurozone interest rates are now falling, I thought this aspect of the bank could come in useful over the next year or two, possibly leading to some much-needed outperformance for the stock. Source: BNP Paribas Q3 2024 Results Presentation  My overall view of things hasn't really changed. While third quarter results were poorly received, the group-level income statement basically reflected pre-results consensus. As for the stock, BNP is now around the same price relative to tangible book value as it was at previous coverage. With earnings still holding up fine, I don't see any reason to change my stance. I keep my “Buy” rating in place. Q3 Results: Not Quite As Bad As The Market Implied A 5% fall post-earnings usually implies a poor set of results relative to sell-side expectations. Frustratingly, that wasn't really the case here, at least in terms of the “major” income statement lines (revenue, costs and, of course, earnings). With that, BNP Paribas reported third quarter net income of €2.87 billion, beating consensus by around €10 million. “Beats” can obviously come in various forms, and some just aren't as well received as others. Lower taxes and loan loss provisions typically don't cut it versus, let's say, better-than-expected revenues. BNP was somewhere in the middle last quarter. Technically, revenue and costs (both operating and credit-related) either matched or beat consensus. Revenue was €11.94 billion, in line with €11.93 billion pencilled in by analysts, while operating expenses of €7.21 billion also landed very close to consensus. At ~€770 million, the group provisioning charge was actually around €90 million better than expected. Asset quality remains very robust, with Stage 3 loans (that is, impaired loans) stable at 1.7% of total lending. This ratio remains near historical lows. Data Source: BNP Paribas Quarterly Results Releases While the headline figures were fine, the market was a bit worried about BNP's revenue composition. Revenue was in line with consensus overall, but it was buoyed by trading income in the bank's fixed income, currency, and commodities division (“FICC”). FICC revenue rose 12% year-on-year to €1.2 billion, offsetting worse-than-expected figures in BNP's French and Belgian retail banking businesses, and in Arval, its vehicle leasing company. Other highlights include its investment bank, where Capital Markets revenue was up over 12%, and Asset Management, where revenues rose 8% due to positive net flows and strong markets boosting assets under management. Source: BNP Paribas Q3 2024 Presentation I have gone over the issues facing BNP's French retail banking business in previous pieces. Aside from possibly being naturally liability sensitive, the ongoing mix shift from current accounts to more expensive interest-bearing ones has been a headwind for some time now. Furthermore, BNP's French and Belgian retail operations actually skew more to commercial and affluent customers. These clients are typically more interest-rate sensitive than mass-market retail, exacerbating this general mix-shift trend. The French retail business accounted for around 13% of total group revenue last quarter, while the Belgian retail bank was another 7%. Data Source: BNP Paribas Quarterly Results Releases Last quarter, current account balances in France fell 0.5% quarter-on-quarter to €117.5 billion, while savings account balances rose 0.3%. It was a similar story in Belgium, where current account balances fell 0.7% sequentially and term balances rose nearly 7%. At the same time, the higher interest rate environment has generally sapped demand for credit. French retail lending volumes were virtually flat quarter-on-quarter at around €208 billion, while Belgian volumes dipped slightly to €142 billion. With short-term interest rates now falling in the Eurozone, these issues should abate. Like management, I expect the French and Belgian retail businesses to clock in a stronger performance next year. Arval has been hurt by a different issue. There, third quarter revenue was €858 million, down around 10% year-on-year, while pre-tax income of €440 million was down around 20%. Now, Arval is actually still reporting positive underlying growth, but it is being stung by the ongoing normalization of the used-car market, which surged post-COVID due to inflation and supply chain issues. As vehicle sales form a core part of the leasing business model, this is temporarily weighing on comps. This issue should naturally resolve itself over time. Turning to the balance sheet, BNP Paribas remains well capitalized. After the bank sold its U.S. business, Bank of the West, in 2023, its CET1 regulatory capital ratio rose to 13.6% from 12.3%. BNP has been steadily working this back down towards management's 12% 2025 target ratio, using part of the sale proceeds to fund organic growth. Relatedly, the bank also recently announced a potential €5.1 billion acquisition of AXA's (OTCQX:AXAHY, OTCQX:AXAHF) asset management arm. Combined with BNP's existing asset management business, this would significantly increase the bank's scale in this area, with pro forma assets under management more than doubling to around €1.5 trillion.  Source: BNP Paribas Q3 2024 Presentation Because BNP would be buying AXA's asset management business using its insurance arm, BNP Paribas Cardif, a regulatory quirk means that this transaction would only swallow around 25bps of its regulatory capital ratio. As a result, BNP's CET1 would still be comfortably above management's target range post-merger. The deal will also slightly increase the bank's overall revenue mix toward non-interest income at a time when interest rates are falling.  Valuation Still Attractive When I last covered it, BNP stock had contracted from around 0.75x tangible book value per share (“TBVPS”) to 0.67x. Despite falling after Q3 results, the ADS price is still up around 3% to $34 in that time, while TBVPS has risen by roughly the same amount. That leaves the TBVPS multiple roughly unchanged at just under 0.7x. (Note: one ordinary share traded in Paris maps to two ADSs). Given BNP is earning a ~11% return on tangible equity, this basically implies a price-earnings ratio of around 6.5x. As management earmarks 50% of earnings for the cash dividend, this also equates to a dividend yield of ~7.5%. I still think that is very cheap. BNP is retaining 50% of its net income to fund growth and a modest amount of share buybacks, and sell-side analysts see this fueling around 20% EPS growth over the next couple of years relative to 2024 consensus (~$5.20 per ADS). Throw in a ~7.5% dividend, and that would be good for roughly mid/high-teens annualized total returns overall, easily clearing my usual 10% hurdle rate.  Summing It Up BNP Paribas reported a somewhat mixed quarter. While there was nothing really wrong with the headline figures as such, there were some areas of disappointment beneath the hood, particularly at Arval and the bank's core Eurozone retail operations. These businesses should begin to show tangible signs of improvement in the coming quarters. Meanwhile, the stock still trades at a wide discount to tangible book value, and that looks unjustified relative to the bank's earnings power. With implied total returns still comfortably in the double-digit area, BNP Paribas stock continues to look attractively valued. I leave my longstanding “Buy” rating unchanged.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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