BNPQF - BNP Paribas: Another Buy Opportunity

2023-03-29 02:29:34 ET

Summary

• Taking advantage of the recent EU banks sell-off, BNP Paribas is a solid buy.
• Solid Common Equity Tier 1 ratio and a compelling yield (considering the buyback and its DPS).
• Based on BNP tangible book value, we reaffirm our previous valuation.

Yesterday, we analyzed the Italian banking sector providing investor relief and positive comments for UniCredit (UNCFF) and Intesa Sanpaolo (ISNPY) (both buy-rated by our team). Today, we are looking back at BNP Paribas ( OTCQX:BNPQY ) ( OTCQX:BNPQF ). Why?

1. In just a few weeks, the global capitalization of banks decreased by about $500 billion with the US banking sector index falling by 18% while the European one by 15%;
2. Credit Suisse's forced merger with UBS has temporarily eased worries about the European banking sector. However, the Fed's dovish hike and fears of a credit crunch in the US led to a sharp drop in US Treasury yields (the 10-year yield is 3.47%);
3. This week the key data will be the Eurozone inflation report, which will be out on Friday. Markets expect another record core inflation. In detail, the core inflation is expected to rise to another all-time high, and European banks appear to be in better shape than their US counterparts. Therefore, here at the Lab, we expect the ECB's hike campaign to continue, which should be positive for the eurozone. Doubtful rumors about Deutsche Bank and general nervousness led the euro to give up gains last week, demonstrating the volatility and nervousness of markets, but we believe this trend will reverse;
4. In the mind time, the European Central Bank raised its key interest rates by 50 basis points. This increase entails better prospects for banking margins but also leads to the devaluation of portfolio securities;
5. Looking at the past, there may have been good reasons for negative sentiment. However, we believe this approach is no longer valid. Credit Suisse and US regional banks suffered from idiosyncratic inheritance problems and regulatory shortcomings that culminated in a liquidity crisis, with little impact on EU banks. Unlike US regional banks, Old Continent banks are subject to liquidity and interest rate risk regulation and have lower risks and large capital buffers;
6. AT1 bond markets are in turmoil following the unorthodox approach applied in the merger with UBS and Credit Suisse. Hypothetical rolling of AT1s to wider spreads or even replacing them with shares would dilute earnings per share by 2-10%. But sticky inflation makes further rate hikes more likely than cuts and this will totally offset this negative takeaway (that we are not pricing in);
7. EU banks' dividends and buybacks are still implied by the Street. Therefore, we see limited contagion to European banks from US regional banks/Credit Suisse, with sound fundamentals supporting robust cashback policies;
8. At the aggregate level, we are estimating a return on tangible equity of 11% in 2023 and 12% in 2024 for European banks, slightly above analysts' consensus forecasts. Despite we are forecasting a recession and applying a cost of risks of 2% in the EU and 1% in the US, we are convinced that the interest margin of European banks is discounting a terminal rate lower than 2%, and this is not justified;
9. Despite the recent de-rating indicating a financial crisis, the absolute and relative valuations of the sector are very attractive. We see EU banks trading at 0.8x price/tangible capital multiple for a RoTE of 11-12.5% and 5-6x price/earnings multiple in 2023-2024, yielding 7%, twice the general market (considering also the buybacks). Banks are at a 50% discount to the market P/E, in line with an all-time low in industry relative valuation. While it's hard to predict how long the storm might last, we think it's best to navigate through national samples. We position ourselves on those shares where the return of capital is visible, and we believe that there is a solid appreciation potential from the current sell-off for BNP Paribas.

Since SVB and Credit Suisse's crisis, the bank lost more than 15%. We are positive on the Macro side, but why BNP is still a buy on a Micro basis?

For further details see: