BNP Paribas S.A. (BNPP; A+/Stable/F1) has set ambitious but achievable targets for revenue and business growth under its 2022-2025 plan, Fitch Ratings says. The plan reaffirms BNPP’s ambition to be a European leader across commercial and investment banking and consumer finance and leasing, where it faces strong competition.
The successful execution of the plan would allow BNPP to generate a return on tangible equity (ROTE) of 11% in 2024 and potentially up to 12% in 2025. The group achieved its 10% ROTE target in 2021 and reached an operating profit/risk-weighted assets (RWAs) ratio of about 1.8% in 2021, materially exceeding pre-pandemic levels.
BNPP’s diversified and resilient earnings and business profile will remain key strengths underpinning its ratings. BNPP’s plan to organically grow its leading franchises in key segments should continue driving better earnings resilience than at peers, and the group plans to establish various platforms and partnerships in Europe to achieve this objective. BNPP expects to see its total revenue increase by a strong 3.5% compound annual growth rate by 2025 at constant scope. Revenue from global markets, specialised businesses (consumer finance, leasing and digital services) and from wealth and asset management are expected to grow even faster.
To deliver on its intention to grow revenue in excess of costs and RWAs, the bank will need to maintain its strong execution record and strict approach to cost control. The bank has delivered on most of its key financial targets outlined in its 2017-2020 plan although with a one-year delay due to the crisis. It missed its cost/income ratio target of 63% as revenue growth was weaker than expected due to low interest rates. The bank expects that each business line will self-fund its transformation costs and investments over the next years.
We estimate that executing its announced targets could lower BNPP’s cost/income ratio by about 5pp by 2025 to around 62%, which would be slightly below the current average for large European banks. As a result, we expect BNPP to maintain its operating profit/RWAs between 1.8% and 2% over 2022-2025. This will, however, require delivering the planned positive jaws and keeping the loan impairment charges /gross loans ratio at around 40bp over the next few years.
We expect BNPP to continue managing its capital ratios at the low end of large European banks. But downside risks from running with comparatively low ratios are mitigated by BNPP’s strong capacity for generating capital organically and better resilience to adverse shocks than peers as seen in 2020. BNPP targets to maintain its common equity Tier 1 (CET1) ratio at 12% and its total capital ratio at 15.9% after the implementation of the final Basel III rules in 2025. This compares with CET1 and total capital requirements of 9.27% and 13.35% respectively for 2022. These requirements could increase moderately if BNPP’s G-SIB buffer increases or if countercyclical buffers are reactivated in BNPP’s core markets.
The increased distribution to shareholders compared to the previous plan is neutral to our assessment as it is in line with BNPP’s most recent guidance. While arguably low, the updated capital targets do not include the expected benefits of the sale of its US retail banking business which could temporarily add 110bp to the CET1 ratio, net of potential share buybacks. We expect BNPP to carefully deploy this additional capital over the long term in line with its conservative risk appetite and with its 12% CET1 target. We believe the group will prioritise organic growth. But it could also opt for bolt-on acquisitions to selectively strengthen its franchise in areas of growth such as car leasing, consumer finance, securities services (or CIB) and new digital services.
