EuroBusiness Media (EBM): BNP Paribas, one of Europe’s largest banks, just reported full-year profit. Baudouin Prot welcome: you are the CEO of BNP Paribas, what are your comments on the company’s operational and financial results for 2007?
Baudouin Prot (BP): Well, basically I have to say that I’m very happy with the way BNP Paribas has weathered overall the crisis in 2007. Certainly, despite an unprecedented crisis, BNP Paribas is boasting a record set of results, with € 7.8 billion group profits, up 7% compared to 2006. By the way, our figures today are exactly in line with the estimated results we produced on the 30th of January, so there has been absolutely no bad surprise on how we eventually closed our accounts. Regarding BNP Paribas CIB, I’m really very satisfied that in the second half of the year, CIB at BNP Paribas has been, in pre-tax income, the third best in the world -- certainly the best in Europe -- and only behind Goldman Sachs and Lehman’s at worldwide level. So I think it has been a superb performance. All other divisions have also done well. Also in French retail, revenues are up 4.1% y/y, very much in line with the guidance we have given to the market. BNL bc becomes a very powerful engine for profit growth at BNP Paribas. And Asset Management Services, in my view, had a superb year, with positive net inflow in the fourth quarter - a rare thing in this world – and also certainly a very strong - above 20% - growth in pre-tax income for the year. So I think we can be proud of this result and I’m very proud of what the staff at BNP Paribas have achieved with their hard commitment all throughout the year. They really deserve to be proud to have delivered such a performance, which in my view enhances very much the competitive position of BNP Paribas, and certainly the credibility of its business model within the industry.
EBM: Regarding your CIB operations, you remain profitable in spite of a difficult environment in the financial markets. Looking ahead to more challenging times perhaps in 2008 in the financial markets, are you satisfied with the current position of CIB within your business mix? Does the change in the liquidity environment today make it necessary to rethink the business model of CIB?
BP: Well, first of all, I really think that - given the excellent performance we have had last year in CIB - we certainly don’t belong to the club of CIBs who had disastrous results last year and who are certainly spending a lot of time rethinking their business model. So, we are not there. That said, once again, let me say that we are setting ourselves ambitious targets for next year. Our key target for next year is to repeat once again the record revenues that we had in 2007. So that’s what we want to repeat in 2008. Given the very challenging and extremely volatile market, this is certainly an ambitious target. Let me stress the reasons why I think that, although ambitious, it is a target that BNP Paribas can set for itself for 2008 in terms of CIB. First of all, we have a very limited dependence on proprietary trading revenues. The second thing is that the activities that are most and directly affected by the crisis --namely structured credit derivatives, securitization and LBO origination -- make less than 10% of the revenues of CIB at a worldwide level. The third thing is that certainly our business -- and even more our geographic mix -- is very favourable compared to most of our peers. And, last but not least, the group’s financial strength is a key competitive advantage in this kind of environment, with AA+ rating -- only four banks in the world enjoy such a strong rating -- an increased capital base, and certainly a cheap access to funding. This means that we are certainly keen to continue to accompany our clients and, especially on a day-to-day basis, to continue to lend to customers. Of course, we will continue to drive this growth in a prudent manner, making sure that the price reflects the new pricing environment that we have now in this market. We are going to maintain, certainly, the rigorous credit standards and our vision towards all types of risks, including operational risks. We have a stable and sustainable risk/reward profile over the cycle and it has been the signature of BNP Paribas and you can expect this to remain.
EBM: Your cost of risk remains limited, which is a good surprise in today's environment. One wonders however if there are, in your credit portfolio, any elements at all which could make you want to increase your level of provisions?
BP: Well, first of all, our cost of risk remains very limited indeed. For 2007, it stands at 36 basis points against risk-weighted assets, compared with a very low 19 basis points in 2006, which shows that we are certainly not immune. What we really see is deterioration, no doubt, in the US retail, in commercial real estate portfolio, and we have already increased provisions on a portfolio basis for BancWest in the third and fourth quarter. We are also watching very closely our exposure to mono-lines, and we have booked sizeable credit adjustments on our counterparty risk rating, relating to this industry. We also see some deterioration in consumer credit in Spain. But what is very important is that group exposure to all of these specific areas of concern remains, all in all, fairly limited. More generally, the quality of group assets remains very good, with a strong risk culture, which is well shared across all regions and divisions of the group. So we are confident that, should the credit cycle further deteriorate, we should continue to perform better than most of our peers, whether in French retail, in CIB or in other divisions of the group.
EBM: Compared to your peers, you were relatively unscathed by the collapse of CDO's. Should we fear that this crisis will catch up with you? And inversely, you are more exposed to the LBO market than some of your peers -- is this the next area for concern, in the US in particular?
BP: Well, in reality our LBO exposure is very limited, and rather moderate. In terms of our LBO underwriting exposure compared to our peers, it stands at € 2.5 billion now, down from € 3.7 billion at the end of September 2007. This is not a significant area of concern for us. We have made the necessary adjustments: our final take portfolio is very healthy, and let me remind you that over 2/3rds of that portfolio is in Europe, which makes us much less exposed to the US economy than most of our peers.
EBM: Regarding BNL in Italy, the growth of net banking income at BNL is converging to the level of growth for France. Do you still stand by the notion that Italy will grow at double the rate of France? Is this merely a bump in the road or does it call into question your whole strategy in Italy today?
BP: First of all, let me take this opportunity to squash some rumours that have been around the market that BNP Paribas might even consider selling BNL. This is absolutely ridiculous! Regarding BNL, I think the first thing is that we are really happy, and I am really happy, that we bought BNL. I think that the timing of the acquisition and the fact that it was done in Italy was a very good move. If anything, we are seeing, in price of banking assets, that Italian banks have resisted better than any other asset, so I’m glad that we bought in Italy, and that we made Italy our second home market two years ago by moving to acquire BNL. The second thing is that the integration of BNL is proceeding excellently, since we are ahead of plan. We will implement all of our synergies this year, ahead of 2009 - and the integration of BNL within the group is now very powerful and very advanced. The third thing is that we would certainly be keen to accelerate and increase the size of BNL by add-on acquisitions, but as you can expect from BNP Paribas, we would only do it at a reasonable price. Let me say that anyway BNL has the critical size, because we have access to urban affluent customers all over Italy, with the set-up we already have, so BNL can also leverage the group range. For example, BNL will soon take advantage of the best CRM system of all Italian banks, in my view. On top of that, Italy is also generating a significant boost to other divisions of BNP Paribas, and for example CIB customer revenues in Italy have increased by 25% compared to 2006 last year. With this in mind, we are planning to generate, over the next few years, revenues up 6% on average with 5 full points of positive “jaw” effects. Therefore BNL, very much in line with 2007, is going to continue to be a significant growth contributor to the group profit. So, in one word and to conclude, BNL is a strategic asset for BNP Paribas, very much integrated to the group strategy.
EBM: In the US, provisions at BancWest have tripled, while earnings have been halved. Does this acquisition continue to remain as strategic to you as before? What's the rationale for keeping BancWest in your perimeter?
BP: We do not believe, and I do not believe, that selling BancWest would be in the best interest of our shareholders. Let me explain to you why. The first reason is that we remain convinced that on a medium-term basis the Western United States remains one of the best places in the world to do business in retail banking, for demographic reasons, for medium-term sustainable growth rates, and also because the overall business environment there is very good. The second thing I want to point out is that even in a very challenging year, like last year, or for all other years, the pre-tax return on equity for BancWest stands at 25%, so it is not a distressed asset at all. And the third thing is that we certainly understand that we need to work harder to improve the performance of the BancWest platform, as we do for every platform in the group and we are certainly committed to doing so.
EBM: Valuations have taken a beating across the entire sector. Does this afford you some interesting opportunities to make acquisitions at a good price? Do you see consolidation in the sector picking up as a result of low valuations today?
BP: I think that in such a period it remains very, very important to continue to apply our strict discipline as to what relates to acquisitions. We feel no pressure to move into any new large acquisitions in the near term, the main reason being that we have the capacity to deliver both substantial growth and value creation to our shareholders, developing organically very much as we have shown in 2007. We are not looking for size, for the sake of getting bigger - this is of no interest for BNP Paribas - and, especially in the current market environment, I think that you should really stay in full control of what you do. In any case, we would certainly not go into any transactions which, given the price, given the potential for synergies, or given the level of execution risks, would not be value creative for our shareholders.
EBM: Still on the question of consolidation, the market is obsessed with the idea of a BNP Paribas-Société Générale tie-up. For the record, what are your views today on whether or not this should be seriously considered?
BP: Well, with regard to Société Générale, which obviously is an important player in the banking industry, the events that have happened are absolutely unprecedented. The repercussions of this situation are very complex to assess, particularly given the current market conditions. In this context, the developments are not obvious at this point. To comment would only feed the rumour mill, so I will say nothing further on the subject.
EBM: And finally, looking ahead to 2008, and from a macro-economic viewpoint, we're hearing very contrasted messages from CEOs of different banks, ranging from rather confident to very prudent. Where do you place yourself on the scale of outlooks for 2008, and what are the reasons underlying your viewpoint? How do you justify that BNP Paribas has weathered the crisis better than most peers?
BP: Most probably, the environment for 2008 will remain very challenging and the market exceptionally volatile. That being said, BNP Paribas is very well positioned and should continue to do better than its peers. Our focus is to leverage and expand our client base, whether in retail or wholesale, adapting our product range to the new and changing demands of customers. It is also to continue to manage our risk rigorously and it will certainly not be an easy ride. But I am confident that we have the financial strength, the skills and the business model to deliver again a good performance in 2008.
EBM: Baudouin Prot, CEO of BNP Paribas, thank you very much.
BP: You’re welcome.