BNP Paribas - Q3 2016 Results

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In the third quarter, BNP Paribas achieved good results and confirmed its strong capital generation. Operating division revenues rose 4.8% despite the low interest rate environment, confirming once again the relevance of the Group's integrated and diversified business model. Operating division costs increased less than revenues, reflecting both higher activity levels in some businesses and higher regulatory costs. Our Simple & Efficient cost savings plan also helped offset natural cost drift. The Group's cost of risk fell significantly to 43 basis points, declining or remaining low in most businesses. Net income attributable to the Group rose 3% to nearly 1.9 billion euros. Excluding exceptional items, it rose 15%. For the first nine months, excluding exceptional items, return on equity improved to 9.8%, and tangible return on equity to 11.7%. As I indicated, the Group confirmed in Q3 its strong and recurring capital generation, with a significant improvement in its fully loaded Common Equity Tier 1 ratio to 11.4%, up 30 basis points this quarter, mainly thanks to Q3 net income, but also about 5 basis points from the first tranche of the First Hawaiian Bank IPO.

Domestic Markets held up well in the low interest rate environment. The gradual improvement in credit demand was confirmed and strong deposit growth continued across all our businesses. In Q3, Domestic Markets confirmed its commercial momentum and continued to evolve its digital offering. We are thus merging our Wa! app with Fivory, developed by Crédit Mutuel, to propose from next year a common multi-service mobile payment solution integrating payment, loyalty programs and promotional offers, in partnership with major players such as Carrefour, Auchan and Total. As you can see, major banking and retail players are joining forces to offer customers an innovative solution. In terms of customer journey, we continue to enrich our offering across all our networks, both for our Retail & Private customers and for our Corporate customers. For example, we have launched new online applications in Belgium and France that allow home buyers to obtain a credit simulation and complementary services. In terms of results, revenues remained stable at 3.9 billion euros. Low rates continue to weigh, but specialized activities and Retail in Belgium both performed well. Operating costs recorded a moderate increase, while the cost of risk decreased significantly, especially in Italy. As a result, pre-tax profit reached 1 billion euros in Q3, up 9% year-on-year. In summary, an increase in profit, thanks to the decline in cost of risk, for Domestic Markets, which continues to relentlessly develop its digital offering.

Personal Finance showed good activity in Q3, with a 9% increase in outstandings on a comparable basis, supported by a recovery in demand in the euro zone and the positive effect of new partnerships. Auto finance activity continued its good development. Furthermore, the digitalization of the business continues. Thus, electronic processing of files is being extended to several countries. Revenues rose nearly 1% on a comparable basis, thanks to volume growth combined with an increasing shift toward products with a better risk profile. This quarter, the Belgian and Italian markets performed particularly well. Costs remained well controlled, and the cost of risk recorded a significant decline. The trend of lower cost of risk was indeed confirmed in Q3, given lower interest rates and a progressive shift toward products with a better risk profile, such as auto finance. This led to a significant increase in pre-tax profit to 411 million euros, an increase of 13.5% at constant scope and exchange rates. In conclusion, Personal Finance continued to grow strongly in Q3, confirming its commercial momentum and its significant contribution to the Group's results.

Let's start with the Europe-Mediterranean region, where activity is progressing well in all regions, both in terms of loans and deposits. In this region, our digital banks continue to grow their customer base: in Turkey, Cepteteb reached 320,000 customers, while in Poland, BGZ Optima is close to 200,000. On a comparable basis at constant scope and exchange rates, revenues are progressing well, thanks to an increase in volumes and margins. Costs increased mainly due to the new bank tax in Poland; excluding this effect, they increased by only 1.6%, confirming good overall control and the positive impact of cost synergies in our Polish operations. Overall, the contribution of Europe-Mediterranean to the Group's results increased significantly to 165 million euros. Moving on to BancWest in the United States, one of the quarter's highlights was indeed the IPO of First Hawaiian Bank, of which we successfully placed 17.4% on the market in early August. As I said, this disposal strengthened our fully loaded common equity tier 1 ratio by about 5 basis points in Q3. BancWest's activity remained strong, with deposits up more than 10% and loans up more than 9%. We also continued to steadily increase the amount of assets under management in our private bank, to $11.4 billion, up $1.6 billion from the previous year. On a comparable basis at constant scope and exchange rates, revenues grew 4.4% thanks to strong volume growth, partially offset by lower rates compared to last year in the United States. Management fees were higher due to increased compliance costs, charges related to the First Hawaiian IPO, and investments to strengthen the commercial set-up. Given a particularly low cost of risk, BancWest's pre-tax profit amounted to 210 million euros in Q3, slightly below last year.

This quarter, our total assets under management crossed the one trillion mark for the first time, reaching 1,004 billion euros. This good performance is explained by strong net inflows across all our businesses, as well as a high performance effect. Let's first look at the Insurance business: Q3 revenues increased by 17%, due to a positive market evolution compared to a low comparison base in Q3 2015, as well as a strong increase in realized capital gains. Costs increased due to the ongoing development of the business, while the contribution of equity-accounted companies improved. Thus, insurance pre-tax profit improved significantly to 427 million euros in Q3. In Wealth & Asset Management, our revenues showed good overall resilience despite an unfavorable context. Costs increased mainly due to investments in the Wealth Management business, leading to a decline in pre-tax profit this quarter to 161 million euros. In summary, our insurance business showed a strong improvement in revenues this quarter, while our Wealth & Asset Management businesses held up well in a still unfavorable context.

In Q3, Corporate & Institutional Banking showed sustained activity, which translated into higher results. CIB is actively implementing its Transformation Plan, in line with the planned schedule, and cost-saving measures have been launched in all regions. Revenues reached 2.9 billion euros, a strong increase of 13% year-on-year, with good performance across all three businesses. Let's review them and start with Global Markets, which recorded a strong performance in Q3, with an increase of nearly 20% in revenues. Fixed Income was the main driver this quarter, with very good performance across all its activities compared to a weak quarter last year in rates and FX. We confirmed our number one position for euro bond issuances and we rank 9th for international issuances. The equities business declined compared to a high comparison base last year. Securities Services grew about 3% driven by volume growth, both in custody assets and assets under management. In Corporate Banking, revenue growth exceeded 9%, driven by volume increases in all regions and a good contribution from fees. Transaction banking activities such as cash management and trade finance progressed well this quarter. Costs increased due to higher activity but were overall well controlled, thanks to cost-saving measures. In summary, a very good quarter for CIB, whose activity continues to develop favorably.

Yes, we have received the SREP from the ECB. The Common Equity Tier 1 ratio requirement for BNP Paribas next year is 8% on a phased-in basis; taking into account a G-SIB buffer of 1%, a Conservation buffer of 1.25% and a Pillar 2 requirement of 1.25%. This figure does not include the Pillar 2 guidance request, which remains confidential between the bank and the supervisor. Today, with a phased-in Common Equity Tier 1 ratio of 11.6%, BNP Paribas significantly exceeds these minimum requirements. Consequently, the expected requirement for the fully loaded Common Equity Tier 1 ratio for 2019 is 10.25%, based on a phased increase of the Conservation buffer to 2.5% and an assumed G-SIB buffer of 2%. As I have already said, this does not include Pillar 2 Guidance. This Common Equity Tier 1 requirement level represents the constraint applicable from 2019 in terms of restrictions on the maximum distributable amount (MDA). BNP Paribas maintains its fully loaded Common Equity Tier 1 ratio target of 12%.

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