Summary
- BNP Paribas is set to release its quarterly earnings report on Tuesday, the 7th of February.
- Key variables suggest BNP Paribas' Q4 report could surprise the market, with its held-for-trading securities leading the way.
- The bank's balance sheet possesses little maturity mismatch. However, BNP Paribas' Value-at-Risk could remain elevated amid sustained volatility in the FX and Bond markets.
- Despite the ongoing market risk, BNP utilizes a significant amount of derivatives for non-hedging purposes, which could yield benefits in a highly volatile environment.
- BNP Paribas' ex-post dividend yield of 8%+ is accommodated by a price-to-book ratio of merely 0.72. Although we expect the bank's dividend attributes to stagnate, we think BNP Paribas provides investors with a cyclical value gap.
BNP Paribas ( BNPQF ) is scheduled to release earnings on Tuesday, the 7th. The stock's more than 15% year-to-date surge and its 8.23% ex-post dividend yield lend researchers a compelling investment case study.
Furthermore, European stocks and BNP Paribas, in particular, have recently experienced significant systemic support from a marginally abated recession and depleted valuation multiples.
However, two primary questions beckon: Will BNP Paribas deliver a robust quarterly earnings report, and more importantly, will its stock sustain its recent momentum?
Let us delve into a deeper discussion.
Reflecting On BNP Paribas' Operations
Segment Risk Weights & Geographic Exposure
A simplistic overview of BNP's operations suggests BNP Paribas is a diversified bank, as 48% of its turnover derives from interest-bearing activities, while 52% of its revenue stems from non-interest-bearing operations.
Examining BNP Paribas' risk-weighted asset allocation provides a more comprehensive understanding of a bank's business interests.
Commercial and personal banking services complete 56% of BNP Paribas' risk-weighted asset mix, with global markets and global investment banking hosting 14% and 20% of the bank's risk-weighted business activities. In addition, the bank is exposed to various other industries, such as insurance, Fintech, and leasing, which make up a minor portion of the firm's income.
Furthermore, BNP's geographic footprint is diverse, with approximately half of its commercial and personal banking endeavors based in the Eurozone. The rest of its banking activities span globally, including emerging and developed markets.
Theoretically speaking, banking and services are less risky than market-related activities. However, trading activities often host inter-related products. For example, a bank might trade fixed-income instruments, which closely correlate to its loan origination business.
RWA by Business Unit (BNP Paribas Investor Presentation)
Looking at Group Performance
A retrospective view of BNP Paribas' earnings provides a baseline for future estimates.
BNP Paribas' third-quarter income statement conveys gains for its interest income segment amid rising global interest rates. However, an interesting feature of the bank's previous earnings report pertains to its increased income from securities and asset management services, which was achieved during a depleted financial market environment.
P&L - Group (BNP Financial Statements)
Looking toward BNP Paribas' fourth-quarter report, we expect trading revenues to come in strong amid equity and bond market rebounds across the globe.
BNP Paribas' balance sheet shows that many of its assets are held for trading purposes. The bank trades a high volume of non-hedging derivatives, which adds volatility to its profit and loss statement, yet, it could bolster net earnings, assuming prudent trade execution.
Furthermore, BNP trades most of its securities instead of holding the instruments to maturity. Supportive equity markets, especially in the Eurozone, could result in favorable securities trading revenue for BNP Paribas (in its fourth-quarter report and beyond).
In terms of loans and repurchases, continued support from interest rates in the EMEA and North America probably attached more value to the business segment during the company's fourth quarter.
Despite our belief that BNP Paribas' loans portfolio gathered further steam during its fourth quarter, we urge investors to consider the risk of yield curve inversion. We could not find BNP Paribas' loan portfolio, but banks typically lend at longer long durations while borrowing at short-term rates to benefit from higher yields assigned to long-term bonds. However, an overwhelming number of nations currently possess inverted yield curves due to elevated recession risk, which could wreck BNP's debt portfolio unless matters change in the near future.
- For those unaware, the yield curve is a chart that displays implied interest rates.
Assets - Group (BNP Paribas Financial Statements)
An overview of BNP Paribas' liabilities communicates why the bank has sustained impressive performance during a turbulent economic period. A substantial portion of BNP Paribas' liabilities consists of lower-yielding deposits from customers, central banks, and credit institutions, which aligns with the bank's asset base, concurrently resulting in few maturity mismatches. Additionally, readers must remember that deposits provide a stable source of funding; therefore, they are considered a "healthy" source of financing.
In our opinion, BNP Paribas' operations were assisted throughout the bank's fourth quarter by continued liquid sources of financing and maturity matching.
Liabilities - Group (BNP Paribas)
At face value, BNP Paribas' capital adequacy ratios are still above their required thresholds. However, increased market volatility could diminish the bank's capital adequacy in the coming quarters. Our premise relates to broad-based market volatility versus the firm's value-at-risk composition. In our opinion, value-at-risk on commodities could have proliferated during the bank's latest quarter amid a cyclical backdrop of most commodity prices toward the back end of last year.
In addition, foreign exchange markets and interest rate policies remained volatile in the past few months, which could adjust the bank's VaR upward.
In a nutshell, we expect less favorable risk-return metrics from BNP Paribas on Tuesday, which many investors could consider disadvantageous. As such, we urge our readers to consider this risk before making any investment decisions.
Capital Adequacy (BNP Paribas' Investor Presentation) Value-At Risk (BNP Paribas Investor Presentaion)
BNP Stock's Valuation & Dividend Sustainability
BNP Paribas' price-to-book ratio of 0.72 stands out. Investors usually seek financial stocks that have low price-to-book ratios, as they reflect undervalued 'inventory'. Remember, financial companies' inventory primarily consists of quoted or easily measurable assets.
BNP Paribas' compressed price-to-book multiple is likely due to the Eurozone's recent systemic pressure resulting from the Russia-Ukraine war. However, it is believed that the Eurozone abated a recession , which could give rise to some of its beat-down stocks during 2023.
Regarding carry returns, BNP Paribas' dividend yield of 8.83% is considerably high. However, the company's cash from operations is in negative territory, dampening the prospects of sustaining its elevated dividend payouts. Although BNP Paribas' fourth-quarter results could settle toward the upper end of its guidance, dividend depletion remains a risk.
Quantitative Earnings Measures
Observing a company's previous earnings surprises is a simple yet effective way of understanding what is to come.
BNP Paribas' revenue surprises fluctuate with no clear pattern of earnings momentum. Therefore, further examination is required.
The Beneish M-score model provides additional information on the BNP Paribas' earnings pattern, conveying conservative accounting practices. As such, it is unlikely that BNP Paribas' investors will experience unwelcome line item surprises on Tuesday.
Final Word
BNP Paribas is likely to deliver robust fourth-quarter results. The bank's asset composition is aligned to benefit from a recovering equity market and supportive interest rates. Moreover, BNP Paribas' participation in "held-for-trading" derivatives could stem excess returns amid continued volatility embedded in the foreign exchange market.
Furthermore, BNP Paribas' stock is significantly undervalued and yields a lucrative dividend, providing its investors with substantial total return prospects.
- Buy Rating assigned with a 6-month holding period.
For further details see:
BNP Paribas' Earnings Report Could Surprise Many