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Morningstar | BNP Paribas Company Report

BNP Paribas is one of a select few European banks that have remained profitable over the past 15 years, through two major crises. Similar to its European peers, it had to take significant markdowns against the carrying values of its lending book, as well as other financial instruments. However, the diversity of its earnings, combined with a relatively benign outcome in its French home market, meant BNP Paribas had the ability to absorb these losses in its profit and loss statement and still generate a profit.Fundamentally, we believe BNP is the best French bank. The only problem is that we do not find French banking particularly attractive. Investors who are not close to the French banking sector often get excited by the high level of concentration in the industry, as the top five French banks have a combined market share north of 80%. Typically, there is a high correlation between industry concentration and profitability for banks. However, the French banking sector is dominated by mutually owned, regional banks grouped together in three groups, with various degrees of integration among the constituent banks. Because the owners and the clients of these banks are largely the same people, the profit motive for the mutually owned banks is not as pronounced as it is for BNP or a traditionally listed bank. France therefore does not differ materially from some of the less attractive, fragmented European banking markets, such as Germany or Italy.We are not convinced that BNP can outearn its cost of capital meaningfully and consistently. We believe BNP’s current level of profitability is not far off what a midcycle level of profitability would be. Some of the key drivers of profitability for BNP--notably interest margins and credit losses--are already more favourable than our midcycle estimates and BNP’s historical averages would suggest. Earnings in 2017 were at the same level as in 2010, yet loan-loss provisions were 40% lower.