What Does BNP Paribas Know That the Markets Don't?

(Bloomberg Opinion) -- Investors are particularly wary of European banks. Since February, shares in the region's lenders have lost more than 40% of their value to hit lows not seen even in the depths of the global financial crisis. The concern is that a fragmented industry still grappling with meager profitability will be crippled by the pandemic-inflicted economic slump, notwithstanding all the government assistance.

How banks are preparing for the inevitable buildup of bad loans isn't helping confidence, either. Some took their bitter medicine in the first quarter, making large provisions that ate into profit. Others, perhaps encouraged by regulators, took a more benign view of the impact of the worst economic contraction in living memory.

The result? While banks' loan books differ from each other — with varying exposures to different geographies and industries, and to secured and unsecured borrowers — it will take time to convince investors that things are OK. The mountain of bad loans that plagued lenders after the previous crises took years to reduce. Whether lenders have become truly more prudent remains to be seen.

Take France's BNP Paribas SA. Its outlook is much brighter than that of the markets. The last of Europe's big banks to report first-quarter earnings said on Tuesday that it only expects a drop of net income for the year of between 15% and 20%. Analysts have been forecasting a 30% drop or more for 2020.

Profit fell by a third to 1.3 billion euros ($1.4 billion) in the first three months of 2020, after the bank set aside an additional 502 million euros for the hit from the pandemic, chiefly for its corporate bank and consumer finance businesses. For the rest of 2020, the lender sees net-interest income offsetting a decline in fees. At the same time, BNP said more cost savings would help soften the blow of what it has to set aside for deteriorating credit.

The bank expects to lend more, filling a vacuum left by some banks that are less keen to extend credit into Europe. And it plans to capitalize on its shift into automation by not replacing employees who leave.

Still, when asked what bad loans will look like over the coming quarters, Chief Financial Officer Lars Machenil told Bloomberg Television it's “a tad too early to say.” On a call with analysts, executives also declined to share details on the assumptions for gross domestic product that the bank has used. For shareholders, this lack of clarity will remain a cause for concern. Government backing of companies with loan guarantees and grants will help, but the speed with which economic activity will resume is still largely unknown.

And there are always the one-offs. BNP missed out on the Wall Street trading bonanza where its peers posted their best quarter in eight years. Instead, its equities revenue was wiped out. The firm lost $200 million on equity derivatives, and unspecified amounts on misfiring hedges and building reserves. Blaming European authorities for restricting dividends, which caused BNP's bets on payouts to backfire, was a feeble attempt to deflect attention from the real issue. The bank was caught on the wrong side of the market.

BNP said there were nine instances in which its trading profits or losses exceeded what its internal “value-at-risk” models had predicted, a sign of the strain the trading business came under in the quarter. Luckily, regulators have lent a hand, easing the capital requirements for banks that get caught out like this.

Investors will also take comfort that the bank has a more diverse business than its domestic rival Societe Generale SA, which lost money on similar derivatives bets and plunged into the red for the quarter. BNP trades at 40% of its tangible book value, or twice SocGen's multiple. The gap has widened, but it's a stretch to say BNP is a safe bet.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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