BNPQF - BNP Paribas: Continued Positive News Clear Buy

2023-07-31 02:14:16 ET

Summary

• BNP Paribas exceeds Q2 profit expectations, reporting a net profit of €2.81 billion.
• The bank's organic growth compensates for Bank of the West's sale.
• Solid CET1 ratio, tasty DPS, better-than-expected results, and an ongoing buyback makes BNP a buy.

In 2022, it was an excellent call to overweight the EU banking sector, and again, in 2023, after SVB and Credit Suisse challenges, BNP Paribas ([[BNPQF]], [[BNPQY]]) has always been a Buy Opportunity . Our long-standing investment was supported by BNP's ongoing " Buyback to Unlock Shareholder Value ," a lower complexity and earning volatility structure (given Bank of the West disposal), Arval division contribution, and supportive results from the Italian division.

Q2 results

In detail, the largest bank by market capitalization in the euro area delivered a Q2 net profit of €2.81 billion, beating analysts' consensus, estimating an average of €2.49 billion. Net of non-recurring items, the bank increased its net income by 16.4%. Organic growth acceleration and net interest margin ((NIM)) offset the Bank of the West divestment. Cross-checking Wall Street analysts' numbers, BNP recorded a 13% bottom-line beat. Revenue came ahead by 2%, while the company delivered higher cost vs consensus by 3%. Going down into the P&L analysis, we should mention that provisions were at a very low level, and the cost of risk was at only 31 basis points, which is well below BNP internal guidance of >40 basis points. All in all, despite

Source: BNP Paribas Q2 results presentation

Despite the non-positive performance of the Investment Banking division (which still was very resilient given the market slowdown), the company's pre-tax beats were driven mainly by specialized businesses (Arval) and Commercial Banking activities. While Asset Management, as expected, and France missed consensus.

Q2 results reflect the intrinsic bank value and constitute a solid basis for the 2025 objectives. What is also essential to report is the TLTRO €44 billion repayment to the ECB. Despite that, the liquidity ratio improved by four basis points to 143% in Q2. In addition, looking at the bank's solvency, the CET1 ratio came at 13.6%, ten basis points ahead of consensus. On a negative note, on top of TLTRO charges for €430 million and higher litigation provisions, the bank reported restructuring costs of approximately €151 million, with a €80 million provision related to Poland.

Conclusion and Valuation

Here at the Lab, we expect a positive market reaction to the results and a rating upgrade from the sell-side analysts. We continue to value the bank with a buy rating of €80 per share with a tangible book value slightly below 1x. In addition, the company received approval for the second €2.5 billion buyback tranche. The leading French bank confirmed its 2023-25 targets and is committed to paying 60% of 2023 distributable net income, with 50% paid in cash dividends and 10% in share repurchases. Therefore, we apply no changes in our internal estimates.

Even if it is still not priced in, BNP confirmed a RoTE target of 12% by 2025, implying an EPS of +12% over the period. According to BNP, Bank of the West capital redeployment has the potential to generate 3 billion of additional sales by 2025. The company also trades a 2024 P/E of just 6.2x with a 0.65x tangible book value. BNP is a clear buy with a tasty dividend of 6.7% and a buyback yield of 6%. Downside risks to our target price include economic slowdown, credit risks, capital return, and regulatory changes at the European level.

For further details see: