EUR 850.00 For Business Accounts Only

Morningstar | BNP Paribas Even Lowered Guidance Might Be a Stretch. See Updated Analyst Note from 07 Feb 2019

No-moat BNP Paribas reported attributable net income of EUR 7.5 billion for the 2018 fiscal year, 3% lower than what it reported for 2017 and in line with consensus and our bottom-line expectations for the quarter. The reported pretax profits of EUR 10.2 billion was, however, below both our estimated pretax profits of EUR 10.9 billion for 2018; consensus expected EUR 10.6 billion. Very weak trading revenue in the final quarter of 2018 was primarily to blame, the sharp sell-off in global markets also had an impact on the results from BNP's insurance and wealth management businesses. BNP reduced its guidance till 2020, from BNP's guidance we back out a net income number of around EUR 9.4 billion in 2020--7% below the previous target. BNP's new guidance remains above the EUR 8.7 billion net income that consensus and we anticipate BNP will generate in 2020. We pare our fair value estimate for BNP to EUR 50, from EUR 53 previously. We maintain our no-moat rating for BNP.

BNP also lowered its profitability guidance with a new 2020 return on equity target of 9.5%. This makes us even more confident in our belief that BNP does not enjoy the benefit of an economic moat. Given BNP's significant investment banking business and its exposure to higher-risk countries like Italy and Turkey we believe BNP requires a cost of equity of around 12%. We are also not convinced that the 2020 target is based on midcycle credit losses. We estimate BNP's midcycle return on equity to be closer to 8.5%.

The reduction in BNP's guidance did not come as a surprise, BNP's revenue over the past two years has barely increased compared with 2016, thus it was always going to be challenging to increase revenue by a cumulative 10% by 2020 compared with the 2016 base. Even the reduced guidance of 1.5% CAGR between 2016 and 2020 means that BNP needs to increase its revenue by 3.5% CAGR over the next two years. If there is no support from higher interest rates it may well prove to be challenging to increase revenue at a healthy rate when economic activity is contracting. BNP also guided that it will look to cut an additional EUR 600 million of costs, with 55% of these cost savings expected to come from BNP's beleaguered investment bank. We are becoming increasingly skeptical about the efficacy of a cost-cutting strategy in investment banking, Deutsche Bank being the prime example of an investment bank getting caught in a death spiral of lower costs that damage the bank's revenue-generating capability, which calls for further cost-cutting in a vain attempt to stop the profits seeping away.