BNP Paribas: redeployment of capital promises to drive growth

Optimism is again in the ascendant in the EU. Hopes are running high that the bloc will dodge serious economic damage from rate tightening. The EU’s biggest lender, BNP Paribas, has already recovered the eighth of its market value that it lost in the gloom of 2022.

On Tuesday, boss Jean-Laurent Bonnafé upped BNP’s annual growth target for net income by 2 percentage points to more than 9 per cent by 2025. He also promised big payouts, totted up to €10bn by Jefferies. Both moves took the sting out of lacklustre fourth-quarter profits.

The bank plans to invest €7.6bn of the proceeds from its $16.3bn sale of Bank of the West in expanding existing businesses and on bolt-on takeovers. It aims to exploit retrenchment by rivals and broaden its reach in insurance. BNP expects this deployment of capital to generate an extra €3bn in revenues over the next two years.

Interest rate rises should generate another €2bn by 2025. French banks cannot fully benefit from higher rates because fixed-rate loans and inflation-linked savings accounts are common. BNP is in a better place than some rivals, however, with French net interest income accounting for just 7 per cent of revenues.

BNP’s core equity tier one capital ratio of 12.3 per cent is slightly above its 12 per cent 2025 target. Disposal proceeds will help fund a €4bn share buyback. That is on top of a buyback and dividend payout amounting to 60 per cent of 2022 distributable income.

The bank has raised its return on tangible equity to 12 per cent in 2025, from 11 per cent before. The price-to-tangible book value has risen two-fifths to 0.7 in the past 18 months, placing it 75 per cent higher than Société Générale’s.

Trading at a low price/tangible book value multiple compared with return on tangible equity has become the norm for European banks. BNP has proved itself to be a steady earner. The mood of investors is brightening, but that discount will be hard to shift.