Baseline Credit Assessment also affirmed at baa1
Paris, July 05, 2022 -- Moody's Investors Service (Moody's) today affirmed the Aa3 long-term senior unsecured debt ratings, deposit ratings and issuer rating of BNP Paribas (BNPP) as well as the long-term Aa3 Counterparty Risk Ratings, the long-term Aa3(cr) Counterparty Risk Assessment and baa1 Baseline Credit Assessment (BCA). Moody's has also affirmed the bank's short-term ratings and assessments. The outlook on the long-term deposit, senior unsecured debt and issuer ratings remains stable.
For a full list of all affected ratings, please refer to the end of this press release.
RATINGS RATIONALE
Affirmation of ratings and assessments
The affirmation of BNPP's BCA reflects the bank's very strong and diversified retail, commercial and investment banking franchises, with leadership in Europe across various products and services, including sizeable and growing capital markets activities. The bank's global universal model has been providing strong stability in earnings and a high level of shock absorbers in the past decade, including the pandemic crisis in 2020, and Moody's expects it will continue providing a stabilizing effect in coming quarters against macroeconomic challenges stemming from inflationary pressures and secondary effects from the Ukraine crisis. The BCA of the bank is also supported by a stable risk profile, reflecting a very diversified credit risk exposure, mostly stemming from retail and corporate lending in Europe and the US. Although the bank remains exposed to risks from its sizeable corporate and investment banking (CIB) activities, the more volatile exposure to capital market activities represents a smaller proportion of the group's operations compared with other global investment banks (capital market revenues represented around 15% of BNPP's revenues in 2021 compared with around 34% average for the global investment banks – GIBs - peer group). Although lower than peers, BNPP's Common Equity Tier 1 (CET1) ratio (12.4% as of March 2022 compared with a 13.2% median at GIBs) has steadily improved in recent years. In Moody's view, the bank's diversified risks and revenue sources reduce the sensitivity of its capital to stress scenarios and support the stability of the BCA.
In addition, BNPP's BCA is constrained by an elevated stock of confidence-sensitive wholesale funding on its balance-sheet (around €298 billion as of end-2021 of which €108 billion of short-term funding). Moody's views this risk mitigated by the lengthening average weighted maturity of BNPP's market funding and reduced reliance on short-term funding (36% of wholesale funding in 2021 versus 44% in 2019). The bank automatically places at the central bank a large portion of its very short-term funding in line with its funding policy which restricts reliance on short-term funding deemed subject to a higher likelihood of outflow. In addition, BNPP increased its issuances of long-term bail-in-able debt to comply with Total Loss Absorbing Capacity (TLAC) requirements of 20.03% of risk-weighted assets since 1 January 2022. The diversified retail franchise also provides the bank with a strong capacity to collect deposits, reflected in a loan-to-customer deposit ratio (86% as of December 2021) which improved in recent years, in the context of accommodative monetary policies, and is better than all other French banks.
Finally, BNPP's increasing liquidity reserve (€468 billion as of March 2022 from €452 billion at year-end 2021 and €309 billion at year-end 2019) is an important factor offsetting partly the market funding risk of the bank, mainly comprising high-quality liquid assets representing more than one year of wholesale funding and a low level of asset encumbrance. Similar to most European banks, both market funding and liquidity ratios have been inflated since 2020 by the extensive drawdown of ECB funding through the Targeted-Long-Term Refinancing Operations (TLTROs drawn reached €120 billion for BNPP at year-end 2021) to take advantage of favourable terms offered on funding rate. We expect the TLTRO repayment in 2023 and beyond will have a neutral effect on the funding and liquidity risks.
In line with other global investment banks, with a complex legal structure and global footprint, Moody's has maintained a negative qualitative adjustment for Opacity and Complexity, reflecting increased risk management challenges inherent to such complex and global legal structures. In the case of BNPP, this is offset by a positive qualitative adjustment for business diversification, which reflects a superior resilience to shocks stemming from any geographies, mostly in Western Europe, or business lines, compared with less diversified banks.
Aside from considerations in relation to BNPP's financial profile, Moody's assessment of the volume of loss absorbing debt under its Advanced Loss Given Failure (LGF) analysis has not changed, as the bank will continue to issue more bail-in-able debt, mainly in the form of non-preferred senior debt (€74 billion stock as of March 2022 representing 39% of medium and long-term funding compared with 23% at year-end 2019), in order to meet its TLAC and upcoming Minimum Requirement for Own Funds and Eligible Liabilities (MREL) requirements. This results in a three-notch uplift in the deposit and senior unsecured debt ratings from the firm's BCA of baa1.
Moody's also continues to assess a moderate probability of French government support for BNPP's long-term senior unsecured creditors and junior depositors, resulting in a one notch uplift incorporated in the relevant Aa3 ratings. This reflects the systemic role of BNPP in the French financial system.
Stable outlook
Similar to other European banks, BNPP's profits will remain constrained in coming quarters by the low interest rate environment, as ongoing rates hikes will only gradually fuel revenue increases, and by the knock-on effects of the Ukraine military conflict and inflationary pressures on European economies and on banks' operating and risk costs. However, the stable outlook on the long-term deposit, issuer and senior unsecured debt ratings reflects Moody's expectation that the bank's diversified business profile, combined with the solid momentum in gross operating income (+10% as of Q1 2022 year-on-year) and levers identified to generate €2 billion of recurring cost savings across all divisions between 2022 and 2025, which will result in a lower cost ot income between 2021 and 2025, should support profitability despite mounting economic challenges.
In particular, solid momentum in CIB activity, with revenue growth superior to peers in all businesses in the past five years, has been supported by the completed transformation of its integrated model in the 2017-2020 plan, allowing an efficient development of the bank's equity franchise through the integration of Deutsche Bank AG's prime brokerage and the full acquisition of Exane S.A., which Moody's expects will continue generating revenue growth and more diversified capital market activities.
Diversification in BNPP's European and international Commercial, Personal Banking & Services will continue to moderate its interest income pressures in Europe, through increased fees and commissions and fast-growing products such as leasing, vehicle financing, or private banking. The group plans further optimization of its retail networks in its 2025 strategic plan. The full acquisition of BPost Bank in Belgium and the strategic distribution agreement with BPost in 2022 is also a good example of how the bank is creating revenue growth opportunities at more flexible costs.
Although Moody's expects the slowing effects of the Ukraine crisis on the European economies will result in rising problem loans, cost of risk (20 basis points in Q1 2022) should remain moderate in line with the bank's guidance of 40 basis points of gross loans for the period 2022-2025. The rating agency estimates that new provisions will likely increase gradually to pre-pandemic levels (39 basis points in 2019), but BNPP has so far released a modest proportion of the Covid-related provisions accumulated in 2020 on performing loans.
In Moody's view, CET1 capital will continue to improve in the next 18 months, as earnings generation and the planned €11 billion capital release from the sale of Bank of the West to Bank of Montreal, will more than offset asset growth, increased earnings distribution (60% payout from 2022 to 2025 from 50% under the previous plan) and various regulatory impacts. This will allow the bank to accelerate business growth in certain areas, to make some tactical acquisitions and to absorb the full impact of Basel 3.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
BNPP's ratings could be upgraded if the group (1) achieves a sustainable improvement in its profitability metrics; (2) reaches materially and sustainably higher capitalisation; (3) reduces its recourse to wholesale funding; and (4) demonstrates strong and sustained stewardship through disciplined risk management, in particular of the fast-growing CIB, yielding strong earnings stability through the cycle. An upgrade would also be contingent on the stability of the economic and banking environments where the bank operates and its ability to maintain strong risk management and risk culture, as evidenced by solid asset quality and a low cost of risk.
BNPP's ratings could be downgraded in the case of (1) a material deterioration in operating conditions in the bank's main markets, beyond our current expectations; (2) a weakening in funding and liquidity; (3) lower regulatory capitalisation or higher leverage; (4) a material risk management failure or an increase in the bank's risk appetite; and (5) failure to improve efficiency and profitability levels as planned. Although unexpected, the ratings could further be downgraded should there be a significant decrease in the bank's existing stock of bail-in-able liabilities. Although highly unlikely at present, this may lead to fewer notches of rating uplift as a result of Moody's Advanced LGF analysis.
LIST OF AFFECTED RATINGS
Issuer: BNP Paribas
..Affirmations:
....Long-term Counterparty Risk Ratings, affirmed Aa3
....Short-term Counterparty Risk Ratings, affirmed P-1
....Long-term Bank Deposits, affirmed Aa3, outlook remains Stable
....Short-term Bank Deposits, affirmed P-1
....Long-term Counterparty Risk Assessment, affirmed Aa3(cr)
....Short-term Counterparty Risk Assessment, affirmed P-1(cr)
....Long-term Issuer Rating, affirmed Aa3, outlook remains Stable
....Baseline Credit Assessment, affirmed baa1
....Adjusted Baseline Credit Assessment, affirmed baa1
....Senior Unsecured Regular Bond/Debenture, affirmed Aa3, outlook remains Stable
....Backed Senior Unsecured Regular Bond/Debenture, affirmed Aa3, outlook remains Stable
....Senior Unsecured Medium-Term Note Program, affirmed (P)Aa3
....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)Aa3
....Junior Senior Unsecured Regular Bond/Debenture, affirmed Baa1
....Junior Senior Unsecured Medium-Term Note Program, affirmed (P)Baa1
....Backed Junior Senior Unsecured Medium-Term Note Program, affirmed (P)Baa1
....Subordinate Regular Bond/Debenture, affirmed Baa2
....Backed Subordinate Regular Bond/Debenture, affirmed Baa2
....Subordinate Medium-Term Note Program, affirmed (P)Baa2
....Backed Subordinate Medium-Term Note Program, affirmed (P)Baa2
....Junior Subordinated Regular Bond/Debenture, affirmed Baa3
....Preferred Stock Non-cumulative, affirmed Ba1(hyb)
....Commercial Paper, affirmed P-1
....Other Short Term, affirmed (P)P-1
....Backed Other Short Term, affirmed (P)P-1
..Outlook Action:
....Outlook remains Stable
Issuer: BNP Paribas Canada
Affirmation:
....Backed Commercial Paper, affirmed P-1
..No Outlook assigned
Issuer: BNP Paribas Finance, Inc.
Affirmation:
....Backed Commercial Paper, affirmed P-1
..No Outlook assigned
Issuer: BNP Paribas Issuance B.V.
Affirmation:
....Backed Senior Unsecured Regular Bond/Debenture, affirmed Aa3, outlook remains Stable
..Outlook Action:
....Outlook changed to Stable from No Outlook
Issuer: BNP Paribas Securities Services
..Affirmations:
....Backed Long-term Bank Deposits, affirmed Aa3, outlook remains Stable
....Backed Short-term Bank Deposits, affirmed P-1
..Outlook Action:
....Outlook remains Stable
Issuer: BNP Paribas, Australian Branch
..Affirmations:
....Long-term Counterparty Risk Ratings, affirmed Aa3
....Short-term Counterparty Risk Ratings, affirmed P-1
....Long-term Counterparty Risk Assessment, affirmed Aa3(cr)
....Short-term Counterparty Risk Assessment, affirmed P-1(cr)
....Senior Unsecured Medium-Term Note Program, affirmed (P)Aa3
....Other Short Term, affirmed (P)P-1
..Outlook Action:
....Outlook remains Stable
Issuer: BNP PARIBAS, DUBLIN BRANCH
..Affirmations:
....Long-term Counterparty Risk Ratings, affirmed Aa3
....Short-term Counterparty Risk Ratings, affirmed P-1
....Long-term Counterparty Risk Assessment, affirmed Aa3(cr)
....Short-term Counterparty Risk Assessment, affirmed P-1(cr)
..No Outlook assigned
Issuer: BNP Paribas, New York Branch
..Affirmations:
....Long-term Counterparty Risk Ratings, affirmed Aa3
....Short-term Counterparty Risk Ratings, affirmed P-1
....Long-term Bank Deposits, affirmed Aa3, outlook remains Stable
....Short-term Bank Deposits, affirmed P-1
....Long-term Counterparty Risk Assessment, affirmed Aa3(cr)
....Short-term Counterparty Risk Assessment, affirmed P-1(cr)
....Commercial Paper, affirmed P-1
..Outlook Action:
....Outlook remains Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
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Olivier Panis
Senior Vice President
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Laurie Mayers
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
