EuroBusiness Media (EBM): Baudouin Prot welcome! What are your comments on the Group’s performance in Q4, and overall in 2010? Which divisions gave you particular satisfaction in Q4, with their ability to deliver in spite of a challenging environment?
Baudouin Prot (BP): In 4Q10, BNP Paribas proved again its capacity to achieve a solid performance across all of its businesses.
The Group’s revenues totalled 10.3 billion euros, up by 2.6% compared to the fourth quarter of 2009, despite one-off items having a cumulative negative impact of 358 million euros.
This includes a one-off depreciation of around 500 million euros of our stake in AXA, for accounting reasons, although part of it has already been recouped with an unrealised gain of more than 350 million euros as at the end of January 2011.
All the Group’s operating divisions contributed positively to this performance. Their revenues increased by 7.9% thanks to a very strong sales and marketing drive. Gross operating income reached 3.8 billion euros, up 7.5%. Thanks to a Cost of Risk that declined by 34.5%, pre-tax income increased by 57.5% year-on-year.
Overall for 2010, for the first time in its new dimension including Fortis, revenues totalled 43.9 billion euros, with a sustained level of business activity and 9.2% growth over 2009. Cost of risk strongly decreased by 42.6% over 2009, in an improved economic environment.
All this gave the Group a strong profit generating capacity, with a net income attributable to equity holders of 7.8 billion euros up 34.8% from 2009, and a Return on Equity of 12.3% against 10.8% in 2009.
Book value per share stood at 55.5 euros, up by 9.0% against end of 2009.
Consequently, in terms of solvency, the Group’s common equity Tier 1 ratio rose by 120bp to 9.2% at the end of 2010, from 8.00% at the end of 2009, after a 260bp increase in 2009.
EBM: What is the situation today with regards to the growth of your three European domestic retail banking franchises, in France, Italy and BeLux?
BP: France, Italy, Belgium and Luxembourg are sound and wealthy domestic markets, all of which exhibited dynamic growth in business volumes in the last quarter of 2010.
As for outstanding loans, France and BeLux continued to benefit from a good momentum, with a nearly 5% increase compared to the fourth quarter of 2009, supported strongly by record mortgage loan demand. BNL bc experienced loan growth of 2%, driven in particular by a recovery in SMEs and Corporates, which is an encouraging trend.
On the deposit side, overall the fourth quarter demonstrated an impressive rise in volumes in France and Belux, resulting in positive trends on a full-year comparison basis, even for BNL bc. Net interest margin benefited from this trend.
This good sales and marketing drive was accompanied by a decrease in the cost of risk leading to an increase in pre-tax income for French Retail up 8.4%, BNL up 16.7% and BeLux up 29.3%.
EBM: Regarding Fortis, you are well ahead of your synergy targets. Is there any room left for an upside revision and, if so, could you give some colour on the update, notably in Turkey?
BP: Thanks to the widespread commitment of all teams from all of the Group’s businesses and regions to this ambitious project, we are indeed ahead of our synergy targets.
Hence, I am happy today to announce that the planned synergies have been revised upwards. The total cumulative synergies initially planned to be delivered by 2012 have been increased by a third, from 900 million euros to 1.2 billion euros.
This is mainly due to three elements:
_ - first, more cross-selling and higher cost synergies within CIB;
_ - second, higher than expected cost synergies within Investment Solutions and,
_ - third, the inclusion of the contribution from Turkey in retail banking, after the effective merger of TEB and Fortis Bank Turkey which should generate 86 million euros of synergies by 2013 in this dynamic and attractive country.
EBM: How are you affected by the recent political turmoil in Tunisia and Egypt?
BNP Paribas’ exposure to North Africa stands at roughly 1% of total Group commitments.
We are following the situation very closely in order to ensure the continuity of our operations, to support our clients, and of course ensure the security of our staff, when and where needed.
EBM: In CIB, Corporate Investment Banking, how do you explain your good performance in Q4? What is your outlook for CIB revenue growth in 2011 compared to 2010?
Once again in Q4, even though markets have remained challenging, the key ingredients of CIB’s resilient performance were:
_ - a client centric approach,
_ - less market risks compared to peers,
_ - operational efficiency which remains the best in the banking industry. CIB’s cost income ratio stands at 53.7%,
_ - and a rebalanced contribution between business units.
This enabled CIB to produce solid results with a pre-tax income close to 1.1 billion euros, up 23.1% against 4Q 2009.
Capital Markets revenues totalled 1.7billion (up 19.7% vs 4Q 2009), thanks to a good level of primary issuances for big European corporates, and sustained business activity with institutional investors while Financing businesses contributed a recurring revenue base, at 1 billion euros, in particular for E&C businesses, and asset financing.
All in all, in 2010 pre-tax income increased by 9% compared with 2009.
As for the outlook in 2011, the target of 2.5 to 3.5 billion euros of revenues per quarter set for 2010 is still valid.
EBM: Given that you made it through the crisis years in good shape, and now that the last phase of the Fortis integration is nearly completed, what are your next big strategic priorities and objectives for the Group in terms of acquisitions, disposals or restructurings regarding certain products or geographies?
BP: The integration of Fortis is a major industrial project that is still ongoing and will remain time consuming until 2012 for almost all business units.
In a constrained capital environment due to Basel 3, retaining two third of earnings will essentially fund our Risk Weighted Assets growth.
As far as we know, in the countries that may be of interest to the Group, we do not foresee any opportunity meeting our strict financial criteria.
EBM: By how much do you expect provisions to decrease in 2011, in particular in Retail Banking? What is your outlook for the evolution of the cost of risk in Retail in the next 24 months?
BP: In 2010, the Group’s cost of risk at 4.8 billion euros, or 71 basis points of customer loans, was down 50% compared to 2009 on a like for like basis.
This decline was mainly due to an improvement in corporate financial health as well as improving conditions at BancWest, Personal Finance and in Ukraine.
As for 2011, we expect the cost of risk to decline slightly in our domestic markets overall and Personal Finance’s cost of risk to keep declining.
EBM: Your asset gathering activities achieved a good performance this quarter. What are the drivers of this performance? More specifically, what is your ambition for the asset management division in the current phase of consolidation of the asset management industry?
BP: Total assets under management reached 901 billion euros at year end 2010, and increased across all businesses during the year.
Likewise, revenues increased by 14%, up across all business units, with each feeding the other.
Including significant investments to consolidate business development, all business units enjoyed a positive jaws effect and pre-tax income grew by more than 40% against 4Q 2009.
As for the asset management division, the integration of BNP Paribas Investment Partners and Fortis Investment is a transforming transaction leading to the creation of a strong player in Europe with a significant position in emerging markets. The significant cost synergies resulting from the integration will further improve the cost competitiveness of the platform.
EBM: How much more are you paying for wholesale funding on average today compared to a few years ago? Are you able to pass on the increase to customers?
Pre-crisis funding costs did not reflect a differentiation between players.
Even if wholesale funding is more expensive today, BNP Paribas remains in a strong position relative to its peers, with a large and diversified access to liquidity, thanks to
_ - a large deposit base (553 billion euros, mainly in its euro core markets),
_ - and 160 billion euros of available collateral reserves eligible to Central Banks.
Hence, BNP Paribas benefits from competitive issuing conditions in terms of maturities and prices.
Our internal transfer pricing system updates, the rates charged to our asset production teams, on a regular basis, according to the evolution of our cost of funding. This impacts the pricing of credits, right from their origination, but in a competitive market.
EBM: The new Basel III guidelines make it clear that ECB eligible collateral is not necessarily recognized as liquid asset under Basel III liquidity rules. How does this impact your liquidity ratios?
BP: The definition of high quality liquid assets eligible as collateral is indeed very restrictive as it refers mostly to govies and supras and excludes obviously liquid assets such as eligible collateral and also listed equities.
Government bonds are considered as « highly liquid assets » while recent events have shown that this has not always necessarily been the case, and the same can be said for GSE papers.
The Basel Committee has acknowledged that part of these rules may be changed before implementation in 2015.
Whatever the final rules, BNP Paribas will be LCR compliant in due course. The monitoring of all these parameters has already started.
EBM: Some local country regulators, in Sweden or Switzerland for example, are adding their own extra safety buffer above the Basel III minimal Core Tier One requirements. Are the Basel III minimum requirements enough for you, or do you foresee say a 20-30% buffer above the minimum requirement?
BP: SiFi buffers are a tool kit at the disposal of supervisors and we do not want to guess what regulators will actually implement.
The new requirements in terms of solvency are already quite high as they combine a more restrictive definition with a significant increase of the minimum ratio.
Thus, not only is the 7% core Tier 1 Basel 3 ratio high enough, but also it does not take BNP Paribas’ diversification and risk profile into consideration.
EBM: There is a lot of speculation about a new round of stress tests in March or April this year. Given that some Irish banks went belly up even after the first round of stress tests, how much credit should we give to the next round, and what are the implications of the new tests for the banking sector as a whole?
BP: We disagree on the comments in some newspapers. These tests were based on severe economic and capital markets downgrade scenarios. That being said, it appears that in certain countries, the figures given were not necessarily accurate.
Some banks emerged as particularly solid and BNP Paribas, with a capital buffer of 25 billion euros, the fourth highest, is certainly one of them, which did not come as a surprise.
EBM: Baudouin Prot, CEO of BNP Paribas, thank you very much!
BP: You’re welcome!
