- BNP's only lack was on the capital requirement (just 20 basis points).
- A good quarter then reinforces our positive expectations.
- We expect an upgrade of the consensus estimates. The company reaffirmed its buyback.
BNP Paribas (BNPQY) (BNPQF) buy case recap was based on the following:
- M&A optionality after the Bank of the West disposal, we also follow up with a specific note on the ABN AMRO rumors.
- A forecast of solid and robust results over the period.
- A limited Russia exposure.
- An upside thanks to our analysis of the Arval division .
Today, we are not surprised to see a positive stock price reaction after that the company released its half-year numbers. BNP's only miss was on the CET1 ratio.
No additional news was reported on BNP's Russian activities and the company does not comment on prospect M&A transactions, but we are delighted to report a few company notes on our two points above:
- Concerning point 2) " In the operating divisions, revenues increased by 9.7% compared to the second quarter 2021 "
- Regarding Arval (point 4): " revenues rose strongly up by 33.6% compared to the second quarter 2021 thanks to used car prices and revenue growth ". This was pretty much in line with Mare Evidence Lab's expectations. We should also note that there was a positive one-off for a total consideration of €40 million due to the hyperinflation registered in Turkey.
Q2 Results
Looking at the three-month numbers, revenues increased by 8.5% to €12.78 billion. The business grew in all the company divisions thanks to a +11.1% in retail banking and +10.6% in the investment banking arm (despite one of the worst financial markets in history). Top-line sales were also driven by the fixed income division which delivered a plus 14.8% in Q2. A positive performance was registered in equity trading which grew by 16.1% due to the market volatility. It is interesting to report the fact that revenue grows at a higher rate than operating expenses, 8.5% versus 7.6%.
The largest bank in France reported a net income up 9.1% to €3.1 billion well beyond analyst consensus expectations that were forecasting €2.7 billion. In addition, the cost of risk stood at €789 million, around €100 million below consensus expectations, while the bank remarked on its " prudent risk management ".
As we already mentioned, the CET1 capital ratio stood at 12.2%, -20 basis points from consensus and -20 basis points quarter on quarter. This was due to an increase in risk-weighted assets. However, we should also note some support by enhanced profitability and a ROTE of over 12%.
The CEO explained that " BNP Paribas' results are solid and reflect its ability to mobilize more than ever all its resources and business lines to support individuals, corporates and institutions in all phases of the economic cycle ". He also added that the company " pursues its growth trajectory, its technological developments, and supports its clients in their transition towards a more sustainable economy "
Conclusion & Valuation
Year to date, BNP Paribas stock has underperformed the European bank's index with a decline of around 26.5% compared to the -22% within the sector. We expect an upgrade of the consensus estimates. Cross-checking our internal estimates, our internal team has left all unchanged. BNP buyback is confirmed and the company is trading at just over 0.5x of its TBV. With a ROTE of 12% confirmed by the recent results, we see no justification to lower our target price that is derived from an average valuation between:
- A sustainable ROTE at 9%
- A TBV of 0.9x
Is BNP Stock A Buy? Conclusion
Yes, we reiterate our Buy rating at 72€ per share.
Risks to our target price are:
- Asset quality and future provision evolution.
- Capital trend (since organic capital generation was limited in the first half of the year).
- Sensitivity to macro developments (interest rates, potential recession, etc.).
- Asset management trends and return on capital.
For further details see:
BNP Paribas: Better-Than-Expected Profits