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Morningstar | BNP Paribas' 2Q Below Our Expectations; Cutting Our Earnings Outlook and FVE

No-moat BNP Paribas reported attributable net income of EUR 2.4 billion for the second quarter of 2018, in line with what it reported for the second quarter of 2017 and significantly ahead of the EUR 2.1 billion that consensus expected. The result takes BNP up to EUR 4 billion for the first half of 2018. Our previous net income  estimate for 2018 of EUR 8.4 billion looks full, and we are paring our estimate for revenue by 2% and increasing our expectation for expense growth by 1%, which leads to a 10% decline in our net income estimate to EUR 7.4 billion. We are reducing our fair value estimate to EUR 53 per share from EUR 60 and maintaining our no-moat rating.

Decent revenue growth of 3% was offset by a 4% increase in costs, leading to preprovision profits declining 1% year on year. Lower credit costs supported pretax profit growth of 2%. On the positive side, it stood out to us that BNP booked very decent growth in lending of 4%, driven by mainly by French and Belgian retail loans as well as consumer credit. This did not translate into higher net interest income, however, as margins remained under pressure in the continued low-interest-rate environment.

Investment banking continues to be a drag on overall performance as fixed-income trading remains under pressure, although equity trading enjoyed a good quarter.

Insurance continues to be the standout performer, increasing pretax profits by 17% for the quarter compared with the corresponding period in 2017.

In the United States, BancWest recorded a 22% increase in its net profits in U.S. dollar terms, but the weak dollar negated most of this upon translation.