BNP Paribas Warns on Profit After $1.2 Billion Virus Hit

(Bloomberg) --

BNP Paribas SA warned full-year earnings will take a pounding from the coronavirus outbreak after the bank followed Societe Generale SA in setting aside more cash to cover problem loans and posted a $200 million hit at its trading unit.

The French lender said net income this year could be 15% to 20% lower than in 2019 because of the impact of the lockdown measures, according to a statement on Tuesday. While first-quarter profit and revenue met analyst estimates, the bank took more than $1 billion in charges and writedowns, including 502 million euros ($547 million) for future bad credit.

Equities income was wiped out after complex products backfired as markets went into a tailspin. Both BNP and SocGen were blindsided when companies moved to cancel dividends, impacting structured products. The equities slump offset a near 35% increase in revenue from fixed income, currency and commodity trading, above the Wall Street average.

The results are a setback to Chief Executive Officer Jean-Laurent Bonnafe's effort to bolster the equities and prime services unit after the firm last year agreed to take over Deutsche Bank prime brokerage clients to take market share from rivals cutting back their investment banks. At the same time, the increase in provisions was in line with many of the bank's larger rivals in a dismal quarter and revenue excluding one-time items posted a slight increase.

Analysts pointed to positive signs including more optimistic earnings guidance than had been expected and only small misses on adjusted pretax profit and capital. However, the lack of detail in BNP's full-year outlook is “slightly disappointing,” wrote Martina Matouskova, a Jefferies International analyst with a buy rating on the stock.

The stock rose as much as 6.8% in early Paris trading before paring gains to trade 3.5% higher as of 12:03 p.m. That reduces this year's decline to 47%.

BNP Paribas Stock Trades Lost About $200 Million in Virus Rout

Spain's Banco Santander is leading the way among continental European lenders posting large provisions after setting aside 1.6 billion euros specifically for losses linked to the virus. Italy's UniCredit SpA is taking an additional 900 million euros in provisions, Deutsche Bank about 500 million euros and UBS Group AG approximately half that. BNP's total $1.2 billion hit in the first quarter is similar to that at Credit Suisse, which saw a $1 billion impact divided between loan losses and writedowns.

BNP said net income fell by about a third from a year earlier because of the virus and revenue declined by about 2.3%. Rival SocGen slumped to a surprise first-quarter loss after coronavirus-related volatility wiped out stock-trading revenue and bad-loan provisions surged. While it said provisions could hit 5 billion euros this year, BNP didn't give a forecast.

“A lot will depend on how this deconfinement will work,” BNP Paribas Chief Financial Officer Lars Machenil said in a Bloomberg TV interview. “In our view, a pickup of the economy back to normalization will happen at best by the end of the year and therefore a return of GDP to normal will not happen before 2022.”

SocGen Equities Trading Wiped Out in Perfect Storm for CEO Oudea

BNP's equities-trading revenue was down about 80% even when excluding the dividend impact because of the “dislocation” of hedging strategies during March volatility, the bank said; overall global markets revenue declined about 14%. The results compare with gains of 28% in equities trading at the biggest U.S. firms and an average jump of 31% in fixed-income trading. In Europe, trading results were uneven, with Barclays Plc and UBS Group AG leading gains.

The hit from equities derivatives comes a little more than a year after BNP lost tens of millions of dollars from derivatives linked to the U.S. stock market. The episodes underscore the volatile nature of such products, which derive their value from an underlying stock. French investment banks in particular have prided themselves on their expertise in this area.

At BNP, Bonnafe had embarked on a series of cost-cutting measures over the past year and could point to improvement at the trading unit. But expectations that interest rates would stay low for longer forced him to cut a profitability target.

What Bloomberg Intelligence Says:

“The success of BNP's 2020 delivery will center on managing cost of risk, further cost cutting and mitigating the effect of low rates, notably on French retail. Sales and trading should normalize in 2Q, and we expect the bank to step up its cost-cutting initiatives.”
-- Jonathan Tyce, BI banking analyst
Click here to see the full report

BNP in February introduced a 10% return on tangible equity target for 2020, dropping a previous and slightly higher target. That figure stood at 8% in the first quarter. IFor 2020, the bank targets business growth in all its operating divisions and a decrease in the absolute value of its operating expenses.

The bank's common equity Tier 1 ratio, a measure of financial strength, fell slightly to 12% from 12.1% at the end of the year.

Other highlights of the bank's first-quarter earnings release:

Equities revenue was negative 87 million euros
Covid impact also included 384 million euro accounting impact on insurance revenue
Net income of 1.28 billion euros, revenue of 10.9 billion euros
Sees increase in net interest income partially offsetting fee pressure
Expects to further cut costs; could be offset by increase in cost of risk