EuroBusiness Media (EBM): BNP Paribas, one of Europe’s largest banks, reports results for the second quarter of 2012. Jean-Laurent Bonnafé welcome, you are the CEO of BNP Paribas. What are your comments on the Group’s second quarter results?
BNP Paribas showed good results in this second quarter despite a challenging economic context. Net income for the Group stood at 1.8 billion euros which becomes 4.7 billion for the first half of 2012. This positions BNP Paribas as one of the most profitable banks among its peers.
Revenues were lower but topped 10 billion euros while cost adaptation to the new environment continued in all business lines as shown by the 4% decrease compared to the second quarter 2011. Cost of risk remained low at 50 basis points, essentially in line with the trend of previous quarters excluding Greece..
Despite slowing client demand, Domestic Markets continued to show increasing volumes especially in terms of deposits which were 2.8% higher with growth in each single market.
The Group continued to successfully implement its adaptation plan which can be considered virtually completed as we have already reached 90% with six months to go. This in turn translates into very solid solvency ratios with our common equity Tier 1 ratio standing at 10.9% under Basel 2.5 and already at 8.9% under Basel 3 fully loaded. This means that our target of achieving 9% full Basel 3 at year end is virtually achieved.
All this also means that we continued to grow our book value per share which now stands at 59.5 euros, having risen at an average of 6.8% over the past three and a half years.
EBM: Can you comment on the trend in your loan loss provisions? How do you see it evolving over the second part of the year?
As I mentioned, cost of risk remained low and essentially stable if compared to previous quarters excluding Greece.
In the Domestic Markets, cost of risk remained moderate with a manageable rise in Italy resulting from the economic slowdown while in France and Belgium we continued to experience low levels of cost of risk.
BancWest continued to benefit from the improving economic situation in the US and Personal Finance continued to benefit from our stringent and selective lending approach.
CIB’s cost of risk was very low, thanks to the underlying quality of the portfolio.
In the second part of the year, the weakening economic situation in the Euro zone is expected to continue to put some pressure on cost of risk especially in Italy but in other business areas such as BancWest and Personal Finance we should continue to see some improvement compared to last year.
Therefore, bearing in mind the high quality of BNP Paribas’ assets and based on the current situation, we only expect a moderate increase in cost of risk in the second part of the year.
EBM: Are you confident in the resilience of your retail banking activities in Europe in the second half of the year? What differentiates you from your peers in this regard - is it the business model for example?
Our European activities, which are mostly represented by our Domestic Markets division, were very resilient in the first part of the year. In Domestic Markets loans increased by 1.7% in the second quarter and deposits were up 2.8% - as I have said - with an increase in deposits in every market.
The Euro crisis and the deteriorating economic environment is causing a slowdown in demand but overall we remain confident of the resilience of our retail banking activities in Europe in the second part of the year.
As you know, our business model is client centric and based on close articulation between retail banking and the different business lines of the Group allowing strong cross selling. In my view this is a major strength and competitive advantage that we retain in this challenging environment.
Synergies are also significant between networks. Just as an example, through our “One Bank for Corporates” initiative, in the first half of the year the corporate clients of our Domestic Markets opened some 700 new accounts in the global network of BNP Paribas.
More generally, and despite the current crisis of the Euro zone, I’d also like to reiterate my confidence in the Euro zone. I remain convinced that it is in everyone’s interest to solve the outstanding issues. In this respect I am very pleased with Mario Draghi’s recent statement confirming that the Euro is irreversible.
EBM: If we estimate that organic growth in retail banking in Europe will remain low, will you be seeking growth outside of Europe, or acquisitions in Europe? In your view, which of these routes would be less risky or less costly for your shareholders?
Let me answer your question by saying that as long as rules on solvency and liquidity are not finalized, we cannot realistically consider any major acquisition.
As such, our focus is to continue to develop our presence in growing markets or businesses.
As you probably know, we have been present in the Asia-Pacific region for more than 150 years with an extensive client franchise that we are progressively developing. We already generate some 13% of our non-Retail revenues in this region and we continue to increase it. Our presence in the region allows us to capture the fast growth in Asia by assisting our global clients in their Asian activities while at the same time providing valuable support to Asian clients which are looking at opportunities in the Western world.
Another market in which we have been sizeably investing is Turkey. The Turkish economy has been growing at a fast pace and TEB is today the 9th bank in Turkey and has over 500 branches. Volume growth remained very significant in the first half of 2012 with loans increasing by 24% and deposits by 40%. This in turn translated into significant revenue growth which contributed to a sizeable improvement of the operating efficiency from 83% to below 70% in the first half 2012.
Looking at businesses, there are two other growth areas I would like to focus on: Insurance and Securities Services.
In Insurance through BNP Paribas Cardif we have a major player on the global market for personal insurance that is continuing to invest in Asia and Latin America while at the same time developing its offer in the Domestic Markets and in Turkey. Insurance continued to perform strongly in the first part of the year with revenues increasing by over 6% at constant scope.
Securities Services is a top 5 global provider in its field and the number 1 in Europe. It’s a growing and profitable business which is creating synergies for the Group with institutional clients. Here again, the performance remained very encouraging in the first half with revenues growing by 5%.
As you can see, BNP Paribas already has a significant presence in growing markets and continues to invest in them.
EBM: What is your update on the recovery of your business in the US, and what is your appetite today for growing BancWest’s market share?
First of all, let me remind that our target to reduce US dollar funding needs at Group level by 65 billion dollars was fully completed in March 2012. At the same time, and thanks to this proactive action, we managed to create a significant excess of stable US dollar funding which now stands at 38 billion dollars.
Despite the implementation of this plan and the adaptation of our balance sheet as for example through the sale of our Reserve Based Lending activities in Houston, BNP Paribas retains a strong US Corporate & Investment Banking franchise with significant positions in several businesses as well as top teams of professionals that I wish to publicly thank today for their dedication.
On the west coast, BancWest is continuing to improve its results through volume growth and an improvement in the cost of risk as it benefits from a more favourable economic environment. BancWest continues to invest in private banking while capitalizing on business investments in the SME and Corporate segments. Its contribution to Group results is quite significant and steadily increasing with pre-tax income for Q2 reaching 232 million euros, up 10% on the previous year at constant exchange rate, even more in euros given the current strength of the dollar
EBM: What are the trends in your asset management business in Q2, and where do you stand with regard to your adaptation plan for this business?
The asset management business remained challenging in Q2 as inflows seen in the first part of the year were reversed in the second quarter. Despite lower managed assets compared to the previous year, asset management remained profitable in Q2 with revenues in excess of 230 million euros and a pre-tax income of 64 million.
As you have correctly mentioned, we are implementing an adaptation plan for this business which consists of reshaping and streamlining its organisational structure across certain geographies and divisions. At the same time we are optimising resource allocation on countries, client segments and investment strategies providing the highest potential for continued growth.
This plan is already generating benefits in terms of cost savings as shown by the 3.3% reduction in operating costs compared to the previous year. Further improvement is expected over the coming quarters.
EBM: Could you comment on your CIB activities in Q2? Should we consider 2012 as a transition year?
Q2 was marked by very difficult market conditions.
Capital market revenues decreased in the context of eurozone and market crises. In this difficult environment, businesses were managed cautiously as shown for example by the low level of our VaR. Rate and Forex posted a good performance, but Fixed Income was impacted by the low level of primary bond issues. In this context, we managed to successfully maintain our number 1 ranking in terms of “All Bonds in Euros”. Equity was characterized by low volumes due to a reduced clients’ demand.
Corporate banking revenues decreased in line with the reduction of our credit portfolio as a result of our deleveraging plan. However, we maintained our strong position in origination, ranking first for number of syndicated loans in Europe at the end June.
At the same time we booked some landmark transactions in our “originate and distribute” approach by successfully combining our strengths in specialised financing with those of our fixed income.
In addition, our cash management gained several large mandates from corporate clients in Europe and Asia.
The achievements I have just illustrated confirm that our transition to a new model is well on track thanks to the full commitment of the whole CIB team that was instrumental in generating a pre-tax profit in excess of 800 M€ in Q2 despite a very challenging operating environment.
EBM: Is the political prospect of a new regulation in France regarding the split of speculative activities a threat for your universal banking model?
Let me start by mentioning Standard & Poor’s recent report on the French banking sector. The rating agency reminded that it is highly stable and that French banks have a recurrent profit generation capacity with a moderate risk appetite. With specific reference to the French economy, it specified that it is wealthy, diversified and stable and that loan portfolios are generally of very good quality.
In terms of regulations, generally speaking BNP Paribas welcomes the idea of a new legislation that will stabilise the operating framework for the banking sector. We are closely monitoring this evolution and we are pleased to have started a constructive dialogue with the relevant authorities on this issue.
However, I presume that we shall probably wait to hear the conclusions of the Liikanen report which are expected in the autumn. With respect to the regulations preventing speculative activities, I remind you that BNP Paribas’ business model is client centric and client driven, and hence what could be considered as speculative activities is very marginal.
EBM: You are committed to reaching a 9% Basel III Core Tier One ratio at the beginning of 2013. Is there a risk that more stringent requirements under Basel III would make your target more challenging?
We are already virtually there six months in advance. In fact I remind you that we are at 8.9% under fully loaded Basel 3 which makes BNP Paribas one of the best capitalised banks in the world.
In any case I believe we are sufficiently in advance to ensure that we will achieve our year-end target.
EBM: Jean-Laurent Bonnafé, CEO of BNP Paribas, thank you very much!
Jean-Laurent Bonnafé: You’re welcome!