EuroBusinessMedia (EBM): BNP Paribas, one of Europe's largest banks, just reported earnings for the first half. Baudouin Prot welcome, you are the CEO of BNP Paribas. What are your comments on the group's performance in the first-half?
Baudouin Prot (BP): Well I think the first point really is that for BNP Paribas all traffic lights are on green, except for BancWest. The second thing is that revenue growth was really strong - it's 13%, all organic - and certainly this is the mark or the result of the strategy we have conducted in the last few years, with internationalisation and innovation. Internationalisation -- we see it because as of today, 56% of group revenues are originated outside of France. As for innovation, we now see most of our business lines either having pan-European or even worldwide leadership. As for European [positions], in consumer finance we are the number 1 in continental Europe; for securities services, for private banking, for leasing and real estate services we have a really leading European position. As for derivatives or creditor insurance, these are even worldwide leadership positions. I think that the other important thing is that in times when there is certainly a lot of concern in the market, because of the consequence of the US sub-prime problems, at BNP Paribas, because of our very prudent risk policy, the present difficulties will have no direct impact on our cost of risk.
EBM: Looking at your French retail business, as short term rates continue to rise, as margins on mortgages continue to decline, and as SME's are still flush with liquidity and therefore have a feeble appetite for credit, should we begin to expect that your full year guidance of 4% revenue growth in French retail banking will be revised downward before the end of the year?
BP: Let me be clear. First of all, I want to remind you that our guidance for the 4% is excluding PEL-CEL and at constant scope and perimeter. Now, in the first quarter we grew revenues at 4.1%. For the second quarter, in a challenging environment, we came out at 3.5%. Well, regarding the second half of this year, on the one hand we will have a less challenging comparison basis than we had for the second quarter, on the other hand we'll have a 25 basis points rate increase of the Livret A implemented as of today, as of the 1st of August. So, concerning all of this, we'll still keep our objective of 4% of growth in revenues and 3% increase in the costs, bearing in mind that to do that we target a strong increase in fees --fees making up or representing 46% of the revenues of our domestic banking division. Reaching this 4% target clearly implies for BNP Paribas to continue to outperform the French market, especially as regards the rate of growth in fee income revenues.
EBM: As France and the European Commission wrestle with each other over the distribution of regulated savings products -- called Livret A and Livret Bleu -- what are the consequences for BNP Paribas if you should start to distribute these products, or what advantage do you intend to reap if this regulation changes in France?
BP: I think the first point is: it's not going to happen this year. The second point is that in terms of revenues it would only have a moderate impact. Now the third point is that liberalising the distribution of Livret A would certainly level the playing field, and stop our competitors from having reason to have customers push their door and not our door, and therefore help us to get the Livret A -- the savings of our customers -- back to BNP Paribas and give us even more reason to gain more customers. Also you have seen in the second quarter of this year, we do very well at the moment in acquiring new customers. That's where we stand.
EBM: What is your progress report on the BNL integration today, in particular your ability to cross-sell successfully between BNL and BNP Paribas?
BP: We are ahead of plan. As of the end of June, 52% of our committed synergies to 2009 are already implemented. Revenue wise, the second quarter is up 7.4%, cost wise it's only 1.4% and therefore pre-tax profit has increased by 56.7%. So I think it's a very impressive and very positive value creation story, and we should get more of it in the next quarters.
EBM: US banks have reported lower earnings in their domestic retail market; margins in the US are decreasing due to the inversion of the yield curve, and the sector as a whole is suffering from the current crisis in sub-prime mortgage lending. For BNP Paribas, the decline of the dollar further dilutes the US earnings converted back into euros. Therefore, investors would like to know how much longer you are ready to see your earnings negatively impacted by your commitment to your US strategy?
BP: First of all, let me remind you that I'm still convinced that the Western part of the United States is one of the best places in the world to do retail banking. This is due to strong demographics, very entrepreneurial spirit, good business climate and over the medium term this stays [true].The second thing is that even in these more difficult times, the pre-tax profitability of BancWest still stands at 35%, higher than our profitability for French retail banking.
That being said, we certainly want to continue to work harder to enhance our US platform as we do for all of our businesses. Cost wise and risk wise we are still somehow best of the class. The point is that, in terms of product innovation and how we originate revenues at BancWest, we need to do better. We are working hard on that and we are going to continue to make progress.
The last thing is that, regarding the problems of the sub-prime on the US market today, because of our prudent risk policy at BancWest, where only 2% of our mortgage portfolio is sub-prime, we are not directly impacted, so this is what I would say on BancWest.
EBM: Your 20% stake in Nanjing Bank in China was recently diluted following that company's IPO. Can you provide us with an update today about your strategy in China, your ambitions and your time table?
BP: Well, we were diluted for regulatory reasons from 19.2% to 12%, but the extremely big success of the IPO has just demonstrated that we chose, with Bank of Nanjing, one of the best small regional banks in China. And we are continuing to develop partnerships, certainly Cetelem
just started to make consumer lending operations with Bank of Nanjing. This is for retail banking. As for corporate investment banking, we already have 1800 professionals between Hong Kong and mainland China, with 200 professionals of corporate investment banking into mainland China.
We are very significant there, not only in energy, commodities, but also in fixed income derivatives, and we are going to grow that platform. As we said at the recent investor day for CIB in London, we want to triple our revenues for CIB in China by 2010.
EBM: Looking at the broader picture, what do you see BNP Paribas doing in emerging markets in the coming years? Can you begin to provide the market with some quantifiable ambitions in emerging markets, and tell us by what yardstick we should measure these ambitions: will it be the number of customers, the number of countries, contribution to earnings or to revenues, or perhaps some other metric?
BP: In emerging markets, we need to distinguish two aspects of BNP Paribas' strategy. One is retail banking and the other is our platforms. As for retail banking, we have been really accelerating the developments of our branch network. We have tripled the number of branches in emerging markets and we now have over 1.700 branches, mostly around the Mediterranean. We have been very successful, after acquisitions in Ukraine and in Turkey, where we see strong developments. What we are really doing there is we are implementing and deploying the full integrated model of BNP Paribas, very much as we have done in France and in Italy. Around the Mediterranean we now have Italy and France as two key domestic markets. This was the reason why we acquired the Sahara Bank in Libya very recently, which will enable us to leverage all of our operations in the Mediterranean. So this is for branch retail banking in emerging markets, which now contribute 4% of group revenues.
As for platforms, a good example is Cetelem. Cetelem now derives 15% of its revenues from emerging markets -- both from Central, Eastern Europe and also from Latin America. We have recently acquired a new bank in Brazil, which will reinforce Cetelem's operations, which was already the fourth largest country for Cetelem after France, Italy and Spain. As for asset management, we have recently made new partnerships in India for asset management and for on-line brokerage. Last but not least, is corporate investment banking. Corporate investment banking derives 24% of its revenues from emerging markets. We are already big and growing in Asia. So the overall picture of BNP Paribas and emerging markets goes far beyond the presence in branch retail banking, and it should continue to grow, combining acquisitions and organic growth.
EBM: Concerning your asset management business, some dynamic money market funds that were invested in credit derivatives have seen their net asset value decline following the sub-prime crisis in the US. Do you see any risk of massive redemptions and pressure on margins?
BP: Well, out of the 356 billion euros of assets managed by BNP Paribas Asset Management, only three funds, for a total of 2 billion euros, have some sub-prime exposure or exposure to the US sub-prime market. And they represent on average 35% of these funds, therefore altogether 700 million euro. These investments are exclusively AAA and AA tranches, hence the intrinsic quality of the portfolio is not an issue. We therefore continue to offer normal subscriptions and buy-backs for clients presently.
EBM: How will your corporate and investment banking franchise be affected in Q3 by the current tensions in the debt markets? Do you see the current environment as merely market noise, or are we beginning to see a more fundamental shift in the market and what does this mean for CIB's contribution to earnings in Q3?
BP: For BNP Paribas, first of all, our CIB business is not impacted by the US sub-prime crisis, because our exposure on the sub-prime is negligible. As relates to hedge funds, our risks are limited, certainly compared to other CIB platforms -- we are not materially investing in hedge funds. Our counterparty risk with hedge funds is fully collateralised, and the shares of hedge funds that we hold in our trading book are hedging our structured derivatives positions.
As regards the LBO business, our final take portfolio is 6.3 billion euros, of which 69% relates to European exposure and we do not see, as of today, any deterioration in the quality of that portfolio. Let me also say very precisely that our underwriting risk is very limited - 1.6 billion euros for over 15 different operations. In terms of exposure as bridge to high yield, it is very limited -- 200 million euros -- and as for bridge to equity, it is zero.
More broadly, we see the current tensions in the credit markets as the logical consequence of a period of higher interest rates, the consequence on the most leveraged compartments of the financial services industry. This is why we have been, in the last 18 months really, extremely prudent and hands-on in how we have been managing our LBO portfolio, and certainly very much limiting our exposure on the sub-prime activity. At this stage, we see no significant change in the revenue potential of our CIB activities. Even in case of a more severe downturn -- which would hit by definition all the CIB banks in the world -- certainly, by increasing the loan loss provision and by implying a slowdown in revenues at BNP Paribas CIB, we would be more resilient than most of our peers, because our business model is geared toward our client business and is more diversified, but also because, let's face it, in terms of risk policy, we have been recognised as being strong and sophisticated, and as recently as three weeks ago Standard and Poor's was very clear on that, and that was I think one of the big reasons for upgrading BNP Paribas to AA+ rating.
EBM: Despite the doomsayers, your capital markets business has been beating new records quarter after quarter -- most notably in the derivatives business. Where do you see the potential for additional growth of your corporate and investment banking franchise, when the basis for comparison is already so high?
BP: There still is some potential, first of all with derivatives. The derivatives market is the fastest growing segment of corporate investment banking. For the last five years, it grew at an average rate at 20% per annum. We do not see a slowdown in the demand for derivatives, as more countries, more players and more segments are using those sophisticated tools, and to some extent the use of these hedging and management techniques has become a standard requirement for more players in the market. We also have our leadership in energy and commodities finance, which is benefiting from the huge increase in the trade flows, the huge need for new infrastructure, especially in emerging markets, and we see these trends are basically set to last. Lastly, I want to remind you that the geographic reach of BNP Paribas is extending, not by the day, but it's constantly expanding: we have new markets, like in Italy, we have new markets in Asia, and this is going to continue to grow, providing BNP Paribas with further diversification to our earnings streams. The last point I want to be very clear on is that you can expect BNP Paribas to continue to grow its CIB platform organically. We did that for the last seven years. We believe the execution risk for CIB with acquisitions is too big and we are going to continue to grow organically.
EBM: What do you intend to do with the excess capital on your balance sheet -- can you give us an update on your share buyback programme for the second half, and looking ahead can you begin to give the market some visibility about the progression of your dividend in the next 3 years?
BP: Well, first of all, the strong organic growth that we've enjoyed recently - if you take the risk weighted assets, the growth was 15.4% -- has been consuming most of our free cash flow, combined with the acceleration of the share buy-back, which amounted to 1.7 billion euro for the first half of this year. This explains why our tier one ratio stands now at 7.2%, close to the floor that we have set at 7% for that key ratio. So we intend to continue to manage rigorously our capital and to maintain a dynamic dividend policy. On that ground, may I remind you that, the compound annual growth rate from 2003 to 2006 has been 23.3% for earnings per share, and 28.8% for the dividend at BNP Paribas.
EBM: Baudouin Prot, CEO of BNP Paribas, thank you very much.
BP: You are very welcome.
