EuroBusiness Media (EBM): BNP Paribas, one of Europe's largest banks, reports 2009 first-quarter earnings. Baudouin Prot, welcome. You are the CEO of BNP Paribas. What are your comments on the bank's performance in the first-quarter?
Baudouin Prot (BP): BNP Paribas posted a €1.5bn net income in 1Q09 in an environment that remains very challenging. This very good performance was achieved, despite a rise in the cost of risk due to the further deterioration of the economic environment, thanks to a positive contribution from each of our 3 activities: Retail Banking, Corporate and Investment Banking and Investment Solutions.
All businesses recorded strong momentum thanks to the teams’ efforts combined with the strengthening of the attractiveness of the Group’s franchise. This is typified by the very strong net asset inflows of €13.4bn over the first quarter.
This very good performance illustrates the Group’s ability to rapidly adapt to the new environment and in doing so enable it to significantly reinforce its Tier 1 ratio which reached 8.8% at the end of March.
EBM: What would you say is your main subject of preoccupation today? Where do things stand on the issue of derisking, risk weighted assets reduction, and cost-cutting?
The planned significant reduction of risks in our capital markets activities has already been achieved.
The persistence of the high level of the volatility made it necessary to move swiftly. Our main concern today is the impact of the deterioration of the economic environment and its consequences in terms of cost of risk.
Our 2 domestic markets, namely France and Italy, are probably the best places to run banking activities today thanks to sound commercial practices and household indebtedness at the lower end of the European average. However, the situation in some businesses or in some countries where the Group runs significant activities (notably the US and Ukraine), remains a concern and requires us to monitor the situation closely, on a day to day basis.
Both the Group’s diversified and integrated business model as well as its continued efforts to improve operating efficiency will enable us to absorb the high cost of risk resulting from the present economic environment.
EBM: In the first quarter, EPS recovered quicker than expected and risk-weighted assets decreased significantly. Does this make you confident that BNP Paribas can spare itself a capital increase than some analysts were predicting as necessary to shore up your capital adquacy ratios?
The implementation of the Action Plan to help the Group withstand challenges in 2009 is already well on track:
_ - operating expense stabilisation vs 2008, excluding variable compensations and on a like-for-like basis, was achieved without delay in 1Q09 thanks to measures taken by all divisions;
_ - significant risk reduction in our capital markets activities has also been achieved;
_ - risk-weighted assets have been cut by approximately 20bn€, in line with our target for 2009.
All these achievements combined with a strong sales and marketing drive, allowed BNP Paribas to significantly reinforce its capital base, through earnings generation and the participation in the second stage of the French plan. The Tier 1 ratio as of end of March stands at 8.8%, up 100 bp compared to year end, well above our floor of 7.5% and therefore providing a significant buffer.
Therefore, I am confident that we will avoid resorting to a capital increase.
EBM: How sustainable is the rebound in CIB activities that we saw in the first-quarter, notably in fixed income? In which market segments, and to what extent, were you able to gain market share across your CIB platform?
The sharp rebound in CIB activities in the first quarter is due to the very sustained client business in fixed income. We enjoyed record volumes, notably in interest rates and foreign exchange activities, particularly on flow products. CIB also ranked n°1 on euro bond issues which illustrates a more general increase in our market shares.
This strong increase in volumes was accompanied by the reduction of the number of competitors in the market as well as the repricing of both risk and liquidity.
Most probably client demand for hedges should continue supporting volumes over the months to come.
EBM: Since the end of 2008, you've been adjusting the business model of CIB, reducing the exposure to structured products and increasing the exposure to flow products. What are your comments on how the business model is evolving in CIB, and what is becoming of the equity derivatives business in the new mix?
We decided to reduce our exposure to complex structured products. This risk reduction process has been achieved, as illustrated by the 46% decrease in value at risk over the first quarter.
The CIB business model will remain client-centric with a strong derivatives arm.
The product mix is shifting from complex products to products easier to hedge. This shift, combined with further development of flow products, is adapted to the new market environment.
As for our equity derivative platform, the adjustments we implemented since December consist both in reducing risks and costs to be in line with the new market environment without damaging the franchise. Our ambition is to adapt the franchise in order to remain one of the leaders in this activity.
EBM: Despite the difficult market environment, your asset management business posted positive net inflows in 2008. In Q1, Investment Solutions still had net inflows of capital, in part thanks the recent drop in interest rates. What's your outlook for the collection trend in Investment Solutions for the rest of the year?
The very strong net asset inflows in Q1 of €13.4bn, after the €10.6bn collected in 2008 despite the very unfavourable market environment for financial assets clearly illustrates the growing attractiveness of the Group’s franchise. In addition, it is worth noting that with such a level of net asset inflows, positive in all the businesses of Investment Solutions, namely Asset management, Wealth management and Insurance, we have outperformed our peers.
Beyond the low short term interest rates environment, the growing attractiveness of the Group’s brand should help attract net new money.
EBM: Looking beyond the decline of profitability observed in the first-quarter in your retail banking business -- because the cost of risk increased faster than revenues -- what trends you are seeing today across your various retail networks? Does the dynamic of the various networks make you confident that you'll still be able to increase the gross operating income of retail in 2009?
Total Retail Banking revenues were up +5.2% compared to the first quarter of 2008, to €4.5bn despite the deteriorating environment. Cost growth in Retail Banking was contained at +2.9% year on year thanks to group-wide cost discipline leading to an +8.8% year on year rise in gross operating income to €1.9bn and therefore creating a better position from which to cope with a rise in the cost of risk.
In the first quarter, French Retail Banking, BNL bc and Personal Finance were well in line with their full year targets to improve operating efficiency.
EBM: Regarding your personal finance business, should we anticipate a few more quarters of increased risk as unemployment rises, and would it be fair to say that there is a strong correlation between non-performing loans and unemployment rates? And, in Spain in particular, at what level do you think that your losses will peak, and what visibility do you have on the timing of the peak losses in 2009?
Rising unemployment in continental Europe affects both credit demand and customers’ ability to repay their debts.
However you should not underestimate how swiftly Personal Finance reacted to early signals of risk deterioration that appeared mid 2007, well before unemployment became an issue. Since then scoring grids have been adapted where appropriate, front office staff redirected to recovery functions, marketing costs reduced, partnerships renegotiated.
As a result, in 1Q09 gross operating income in Personal Finance jumped +28,1% year on year as revenues rose +14.6% against a mere +3.6% expense growth.
In Spain, for Cetelem, new loan production has been reduced by more than half. Recovery staff levels were more than tripled since the end of 2007 whilst the cost income ratio was brought down. As a result of these measures the consumer finance cost of risk appears to be stabilising in Spain.
EBM: What will be the shape of provisionnings throughout the year for BNP Paribas as a whole? Is a stabilization foreseeable, or will the increase continue throughout the course of 2009?
The cost of risk rose this quarter for BNP Paribas as a whole and reached 128bp of risk weighted assets (Basle 1), a level higher than the average for 2008 which stood at 105bp.
In line with this trend, credit risk will be higher in 2009 than in 2008 but BNP Paribas will continue to benefit from its geography and industry diversification. Not all industries or countries see their risk peak at the same time.
This upward trend in credit risk is going to be mitigated somewhat by the fact that counterparty risk is now receding.
Beyond the benefits of the risk reduction actions undertaken and of diversification, BNP Paribas is well positioned for the challenges of 2009 as its 1Q09 cost income ratio, at 56,1%, for operating divisions is down to its lowest level of these last 2 years giving the bank a strong capacity to absorb cost of risk.
EBM: Now that the Fortis acquisition is finally going ahead, what can you tell us about your strategic rationale for this deal ? And how long will it take for this acquisition to become accretive to your EPS?
The strategic rationale has not changed: with Fortis we will create the #1 Euro-zone bank in terms of deposits, with four domestic markets in major countries of the European Union. BNP Paribas will become the market leader in retail banking in Belgium and #2 in Luxembourg, two wealthy countries.
Moreover, Fortis will help BNP Paribas roll out its successful business model into Belgium, Luxembourg. All the businesses of our Investment Solutions and CIB divisions will also benefit from the deal and contribute to its success.
With a 25%-stake in Fortis Insurance Belgium we will enter into a strategic partnership with this company, therefore also benefiting from its leadership positions in Belgium and Luxembourg.
We are happy to welcome Fortis staff and customers to the BNP Paribas Group and to extend to them the safety and the opportunities that only a major and solid financial institution can offer. We are very excited by the challenge of extending our group, three years after the successful acquisition of BNL in Italy.
We look for the deal to be accretive on the EPS as from 2010, excluding the restructuring costs. By that time we expect only part of the synergies to have been realised. The full completion of the synergies is expected for 2012, due to the delays in the completion of the deal.
EBM: What is your evaluation of the state of the franchise of Fortis Bank in Belgium today, as compared to when the negotiations first began?
The uncertainty about the final outcome has certainly weighed on the franchise. Both the clients and the staff were concerned over the fate of Fortis Bank. But I am confident now that these concerns will be rapidly alleviated. BNP Paribas will provide the Fortis franchise with all the necessary means to regain attractiveness in the Belgian market.
Clients will continue to deal locally with the bank. However clients will notice the improvements BNP Paribas will bring in terms of international scope and additional expertise.
EBM: Fortis' structured products are guaranteed by the State, but what visibility do you have today on Fortis' credit portfolios? How confident are you that there won't be any skeletons in the closet post-acquisition?
Over the last 7 months, we have had the opportunity to run an in-depth due diligence on the credit portfolio via our appointed auditor.
Loan portfolios in Belgium and Luxembourg benefit from the good diversification one would expect from strong domestic retail franchises. And as such they are also dependant on the general evolution of the economy in those countries.
We were more concerned over the credit quality outside the two domestic markets, so we will book significant provisions, which are part of the purchase accounting adjustments we have already disclosed. After these adjustments, we do believe that Fortis Bank’s credit portfolio is reserved adequately.
EBM: Baudouin Prot, CEO of BNP Paribas, thank you very much.
BP: You’re welcome.
