Press Release

DBRS Morningstar Confirms BNP Paribas’s LT Issuer Rating at AA (low), Stable Trend

Banking Organizations
June 21, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of BNP Paribas SA (BNPP or the Group) including the Long-Term Issuer Ratings of AA (low) and the Short-Term Issuer Ratings of R-1 (middle). The trend on all ratings remains Stable. DBRS Morningstar has also maintained the Intrinsic Assessment at AA (low) and the Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of BNPP’s Long-Term ratings at AA (low) continues to reflect the Group’s leading and diversified franchise, its ability to adapt to challenges in the operating environment and conservative risk management. Funding and liquidity remain strong, benefiting from stable customer deposits and very good access to wholesale markets. DBRS Morningstar also takes into account the Group’s build-up of loss-absorbing capacity in recent years and a consistent improvement in asset quality.

The rating action also incorporates the Group’s robust underlying earnings generation capacity, which continued to improve in 2022 and Q1 2023, mainly driven by strong revenue growth in all business lines. Whilst DBRS Morningstar expects inflation to continue pressuring the cost base in 2023, revenues should continue to grow, albeit at a slower pace, and benefit from higher interest rates and the cost of risk is expected to remain contained.

The rating action also reflects the Group’s conservative and well-diversified risk profile. DBRS notes that BNPP's asset quality profile has thus far been resilient despite a number of economic challenges such as COVID-19, the conflict in Ukraine, inflation and the energy crisis. DBRS Morningstar expects geopolitical tensions, rising interest rates and high inflation to lead to a rise in defaults across BNPP’s footprint. We view BNPP’s strong earnings generation capacity to be a key mitigating factor, providing the Group with some flexibility to absorb any potential deterioration in asset quality.

RATING DRIVERS

An upgrade would occur should BNPP demonstrate sustained and material improvement in cost efficiency and profitability whilst maintaining a resilient credit profile and capital position.

The ratings would be downgraded if BNPP experiences a prolonged material deterioration of its asset quality profile, profitability, or capital buffers. Ratings could also be downgraded in the case of a simultaneous deterioration of the Group’s performance in its main markets, as this would reduce the benefit of the Group’s diversification.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong
BNPP’s ratings are underpinned by its well-established and diversified franchise as one of the leading banking groups in Europe, with leading positions in France, Belgium, Luxembourg and Italy. The Group also benefits from extensive networks in emerging markets. However, the Bank exited the US retail market and sold BancWest, to BMO Financial Group in Q1 2023. The Group carries out a broad range of specialised finance services, some of which have global reach or are market leading. Corporate and Institutional Banking (CIB) has a leading position in European capital markets and comprises Corporate Banking, Global Markets and Securities Services.

Earnings Combined Building Block (BB) Assessment: Good
DBRS Morningstar considers that BNPP generates solid underlying earnings, supported by its diversified franchise. In our view, this has enabled the Group’s profitability to remain resilient throughout crises. BNPP reported EUR 10 billion net income in 2022. This was mainly driven by contained cost of risk and strong revenue growth in most business lines with notable performances in CIB and International Retail Banking, which started to benefit from higher rates. Despite higher operating expenses resulting from investments to support higher activity levels and pay increases due to inflation and higher variable compensation , we expect BNPP to continue managing its cost base efficiently. We expect inflationary pressure to continue on costs in 2023, although this should be more than offset by the low cost of risk and continued revenue growth. BNPP reported net attributable income of EUR 4.4 billion in Q1 2023, compared to EUR 1.8 billion in Q1 2022. Excluding exceptional items for each year, most notably the benefit stemming from the sale of Bank of the West in Q1 2023, net attributable income was up 14.9 % YoY to EUR 2.2 billion in Q1 2023. Q1 2023 results were driven by a contained cost of risk and strong revenue growth across all divisions despite growth in operating expenses, generating positive operating leverage.

Risk Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views the Group’s risk profile as generally conservative with some higher risk elements. Credit risk accounting for 77% of RWAs at end-March 2023. While the majority of the Group’s exposures have shown low risk metrics to date, the Group is exposed to higher risk segments such as Italy, Europe-Med and Personal Finance, as well as the approach of retaining impaired loans on the balance sheet for longer, even as this has changed in recent quarters. BNPP's asset quality profile has thus far been resilient against the uncertain economic backdrop, but DBRS Morningstar expects geopolitical tensions, rising interest rates and high inflation to lead to a rise in defaults across BNPP’s footprint. The Group’s reported doubtful loans ratio stood at 1.7% at end-Q1 2023 compared to 1.9% a year before, with a coverage ratio at 72.2%. Based on DBRS Morningstar’s calculations, the gross NPL ratio was 2.9% at end-2022 compared to 3.3% at end-2021.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
The Group has a solid funding position, supported by well-established deposit franchises in BNPP’s domestic markets and good access to capital markets. The Group has a large and stable customer base, which is the Bank’s main source of funding with consolidated customer deposits of EUR 1.0 trillion at end-March 2023. The loan-to-deposit (LTD) ratio was 85%, stable from end-2022. Typical of universal banks with extensive capital markets businesses, BNPP’s deposit base is accompanied by sizeable wholesale funding, which at end-2022 stood at EUR 315 billion (excluding sterilised short-term funding), including short term funding of EUR 108 billion. At end-March 2023, the Group had a substantial liquidity reserve of EUR 466 billion, amply covering outstanding short-term wholesale debt. The liquidity reserve consists predominantly of liquid assets meeting prudential regulation requirements. At end-Q1 2023, BNPP reported a solid LCR ratio of 139%.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views BNPP’s capital position as strong overall and its underlying earnings generation capacity as good. While the Group’s CET1 ratio is below those of some similarly rated peers, DBRS Morningstar’s view of capitalisation levels incorporates the Group’s very stable earnings, low risk profile, and solid cushion above the regulatory requirements. The Group had a phased-in CET1 ratio of 13,6% at end-Q1 2023, up 130 bps from end-2022 and phased-in total capital ratio of 17.9 % at end-March 2023, up from 16.2% at end-2022. The improvement was mainly linked to the closing of the sale of BankWest). This provides the Group with buffers of around 400 bps and 410 bps over the Group’s 2023 SREP requirements. The Basel 3 leverage ratio was 4.4% at end-March 2023. The Group continues to build-up its total loss absorption capacity through issuance of senior non-preferred debt and reported a strengthened TLAC ratio of 29.2% without including eligible Senior Preferred debt, positioning BNPP well against TLAC requirements of 22.21% of RWAs at end-? Q1 2023. Following the capital cushion generated by the sale of the Bank of the West, BNPP has decided to proceed with a EUR 5 billion share buyback programme of in 2023, of which EUR 4 billion is aimed at compensating for the dilution resulting from the sale.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/416223

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022)

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692 (23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents, BNPP 2022 and Q1 2023 Reports, BNPP 2022 and Q1 2023 Press Releases, BNPP 2022 and Q1 2023 Presentations, BNPP 2022 Pillar III Document, BNPP 2022 Universal Registration Document, BNPP Q1 2023 Universal Registration Document Update and BNPP 2022 Integrated Report. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/416222

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: William Schwartz - Senior Vice President - Credit Practices Group
Initial Rating Date: July 23, 2015
Last Rating Date: June 28, 2022

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