The BNP Paribas (OTCQX:BNPQY) (OTCQX:BNPQF) buy case summary was based on the following:
- M&A option after Bank of the West divestiture, we are also following up with a specific note on ABN AMRO rumours.
- A solid forecast and robust results over the period.
- An exhibition limited to Russia.
- An advantage thanks to our analysis of the Arval division.
Today, we’re not surprised to see a positive stock price reaction after the company released its half-year numbers. BNP’s only failure concerned the CET1 ratio.
No additional news has been reported on BNP’s Russian operations and the company does not comment on potential M&A transactions, but we are happy to report some notes from the company on our two points above:
- Regarding point 2) “In the operating divisions, revenue increased by 9.7% compared to the second quarter of 2021“
- Concerning Arval (point 4): “revenues increased sharply by 33.6% compared to the second quarter of 2021 thanks to used car prices and revenue growth“. This was roughly in line with Mare Evidence Lab’s expectations. It should also be noted that there was a positive one-off for a total consideration of 40 million euros due to the hyperinflation recorded in Turkey.
Looking at the three-month figures, revenues increased by 8.5% to 12.78 billion euros. Business grew in all of the company’s divisions thanks to +11.1% in retail banking and +10.6% in investment banking (despite one of the worst financial markets in history). High-end sales were also driven by the fixed income division which posted a 14.8% increase in the second quarter. A positive performance was recorded in equity trading which rose by 16.1% due to market volatility. Interestingly, revenues are growing at a faster rate than operating expenses, 8.5% versus 7.6%.
The first bank of France announced a net profit up 9.1% to 3.1 billion euros well beyond the expectations of the consensus of analysts who expected 2.7 billion euros. Furthermore, the cost of risk stood at 789 million euros, i.e. approximately 100 million euros below consensus expectations, while the bank noted on itsprudent risk management“.
As we have already mentioned, the CET1 capital ratio came in at 12.2%, -20 basis points compared to consensus and -20 basis points quarter-on-quarter. This is due to an increase in risk-weighted assets. However, it should also be noted that there was some support from better profitability and a ROTE above 12%.
The CEO explained that “BNP Paribas’ results are solid and demonstrate its ability to mobilize more than ever all of its resources and businesses to support individuals, companies and institutions in all phases of the economic cycle.“. He also added that the company “continues its growth trajectory, its technological developments, and supports its customers in their transition to a more sustainable economy“
Conclusion and evaluation
Since the beginning of the year, the BNP Paribas share has underperformed the European banking index with a decline of around 26.5% compared to -22% for the sector. We expect consensus estimates to be revised upwards. Cross-checking our internal estimates, our internal team left everything unchanged. The BNP takeover is confirmed and the company is trading at just over 0.5x of its TBV. With a ROTE of 12% confirmed by recent results, we see no justification for lowering our price target based on an average valuation between:
- A sustainable ROTE of 9%
- A TBV of 0.9x
Is the BNP share a buy? Conclusion
Yes, we reiterate our buy rating at €72 per share.
The risks weighing on our target price are:
- Asset quality and future development of provisions.
- Capital trend (since organic capital generation was limited to the first half).
- Sensitivity to macro developments (interest rates, potential recession, etc.).
- Asset management trends and return on capital.