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BNPP: Q1 2020 Down on COVID-19 Related Provisions and Revenue Hit in CIB and Insurance

BNP Paribas SA (BNPP or the Group) reported a EUR 1,282 million net attributable profit in Q1 2020, down 33.2% year-on-year (YoY) from EUR 1,918 million net profit in Q1 2019. This was mainly driven by ex-ante provisions to cover the expected deterioration in economic conditions as a result of the Coronavirus Disease (COVID-19) and its impact on revenues in Equity and Prime Services and Insurance. This was partly offset by a strong decrease in operating costs on the back of the Group's cost savings plan, whilst revenues in Domestic Markets (DM) and Corporate and Investment Banking (CIB) were fairly resilient. DBRS Morningstar expects the COVID-19 crisis to continue to impact the Bank’s profitability and asset quality in coming quarters.

The crisis has affected the Bank's cost of risk, which was up 85.4% YoY to EUR 1,426 million compared to EUR 769 million in Q1 2019. The impact of COVID-19 on the cost of risk was EUR 502 million, mainly on anticipated provisions for expected losses. The cost of risk at group level was 67 bps, incorporating the future deterioration in economic conditions. Within this, provisions driven by the COVID-19 pandemic were equivalent to 23 bps. The impact was particularly notable in CIB, with the cost of risk increasing to 52 bps compared to 10 bps in Q1 2019, as well as Personal Finance (PF), where the cost of risk reached 240 bps compared to 145 bps in Q1 2019. BNPP´s NPL ratio stood at 2.1%, down 10 bps QoQ. Nonetheless, we expect to see asset quality deterioration in coming quarters.

The Group's revenues deteriorated by 2.3% YoY to EUR 10.9 billion, mainly due the impact of COVID-19 in 1Q 2020. International Financial Services' (IFS) revenues decreased 5.4% YoY, despite revenue growth in different geographies, impacted by EUR 384 million of negative accounting impact on Insurance revenues marked at fair value. DBRS Morningstar understands that this impact could be reversed if markets were to recover. CIB revenues held up thanks to good performance in FICC, Corporate Banking and Securities, but incorporated EUR 184 million of negative impact on Equity and Prime Services revenues linked to the widespread cancellation of 2019 dividends. Revenues were resilient in Domestic Markets despite the ongoing low rate environment, driven by growth in the specialised services.

Operating expenses were down 3.5% YoY, on the back of the Group's cost savings plan in IFS and CIB. This more than offset revenue deterioration, with the Group's cost-to-income ratio improving to 74.9% from 75.8% in Q1 2019. DBRS Morningstar expects this trend in operating expenses to continue for the remainder of the year, offsetting the expected increase in the cost of risk.

The Bank reported a fully loaded CET1 ratio of 12.0% at end-March 2020, down 10 bps quarter-on-quarter (QoQ). Market and transaction elements (-50 bps) and the increase in risk-weighted assets (-20 bps) both resulting from the COVID-19 crisis were mostly offset by the cancellation of the Group's 2019 dividend (+60 bps). This provides the Bank with a buffer of 220 bps for the Maximum Distributable Amount (MDA).