EuroBusiness Media (EBM): BNP Paribas, one of Europe’s largest banks, reports earnings for 2009. Baudouin Prot welcome. You are the CEO of BNP Paribas. What are your comments on the Group’s performance for the full-year 2009?
Baudouin Prot (BP): In 2009, BNP Paribas posted its highest ever level of revenues at 40 billion euros. Our very good operating performance was achieved thanks to a dynamic organic growth derived from the strong sales and marketing drive of teams across all divisions and the consolidation of BNP Paribas Fortis’ results. This strong revenue generation, combined with tight cost control across all divisions, pushed the gross operating income to 16.8 billion euros, 4.6 billion euros above the 2007 level. This very good operational performance enabled the Group to absorb two thirds of the sharp increase in the cost of risk over the period. All in all, the Group posted a profit of 5.8 billion euros in 2009, nearly twice the level of 2008 illustrating the rebound in the Group’s earnings capacity. Including the capital increase linked to the acquisition of Fortis and the 4.2 billion euros rights issue, return on equity reached 10.8% against 6.6% in 2008 and EPS increased by 74% to 5.2 euros per share against. 3.0 euros per share in 2008.
EBM: Your CIB franchise is historically one of the leanest in the industry and posted a record cost-income ratio of 44,7% for 2009. Traditionally you have considered 60% as being your benchmark ratio over the cycle. Will that still be the case going forward?
BP: Corporate and Investment Banking posted its highest ever level of revenues due to exceptional market conditions in the 1st half combined with very buoyant client activity and market share gains throughout the year. At 44.7% for 2009, the cost/income ratio stands at a historically low level due to the exceptionally favourable market conditions I just mentioned. Should we not repeat such a performance, partially due to an exceptional market environment, our aim is still to remain among the best in terms of cost/income ratio going forward.
EBM: At a time when US investment banks are talking about capping bonuses, i.e. salaries + bonuses would not exceed 40% of revenues, what sort of guidance can you provide about the levels at which you would consider capping total compensation in your CIB franchise as a proportion of revenue?
BP: As for bonuses, let me first remind you that BNP Paribas’ policy is fully compliant with G20 rules with more than half of the bonuses being deferred, paid in shares or equivalent and subject to claw backs. Our CIB compensation to revenue ratio, at 27.7% in 2009, clearly ranks at the lower end of the sector and reflects our responsible approach in terms of compensation policy.
EBM: When do you think you will reach the peak for bad debt charges in Retail Banking and Consumer Credit across geographies from France to Ukraine?
BP: In a nutshell, the cost of risk in some businesses turned the corner in 2009 and others are nearing that point. Retail banking in France, which boasts a remarkably low cost of risk, and retail banking in Italy are both going to see the rise in their cost of risk slow down in 2010. BancWest, which was the first to be hit by the crisis, reached its peak cost of risk in 2009. The same goes for Ukraine where doubtful loans have now stabilised. At constant scope, cost of risk in Personal Finance has now reached its peak and should somewhat stabilise at that level in 2010. For the group as a whole, therefore including CIB, the cost of risk should be lower in 2010 than in 2009.
EBM: In Retail Banking in Europe, should we expect you to post weak top line growth in 2010, given the current economic environment? When do you expect volumes to pick up in Retail Banking in Europe?
BP: Despite the past economic environment, 2009 exhibited a rise in outstanding loans in the main businesses compared with 2008: +4,3% in French Retail Banking, +5,0% at BNL banca commerciale and +5,2% within Personal Finance at constant scope and exchange rates. Going forward, and looking beyond the top line, BNP Paribas has committed to continue to improve its operational efficiency. As a result, French Retail Banking aims for a positive jaws effect of 1 percentage point in 2010, Personal Finance for 2 points and BNL banca commerciale for 3 points. So year after year, and despite the current environment, the operating efficiency of BNP Paribas’ main retail banking franchises in Europe is improving.
EBM: You disclosed the full Fortis Industrial plan on December 1st. Is it progressing well to date? Have you encountered any bad surprises?
BP: The integration of Fortis is proceeding well. Positive net asset inflows from Belgian retail banking customers show that customer assets are flowing back as the first marketing campaigns prove effective and confidence has returned. The 4 new Belgian Competence Centres were launched a few days ago. They will cover Corporate and Transaction Banking across 16 European countries, Trade Services, Global cash management and Global factoring. 1100 new integration projects have been identified of which 3/4 of them are already in effective implementation phase. Out of the 900 millions euros of synergies targeted by 2012, 120 million euros of cost synergies have been implemented in 2009, above the initial 110 million euro target.
EBM: BancWest in the US has been facing a challenging environment these past few quarters. When do you anticipate that BancWest will start once again to contribute positively to Group earnings?
BP: BancWest weathered the crisis well in 2007 and 2008 but 2009 was a particularly difficult year. In early 2009, a significant cost cutting program of 100 million US dollars was initiated to cope with the worsening of the economic environment. Although the program progressed ahead of schedule the rising cost of risk and an increased FDIC assessment charge led to a loss for the full year 2009. For 2010: the overall cost cutting target has been increased by a further 30 million US dollars; the cost of risk should be down compared to 2009 levels; and finally branch revamping as well as sales and marketing initiatives will underpin revenues. Hence BancWest should return to profit this year.
EBM: To what do we owe the resilience of profitability in your Investment Solutions business? How sustainable is it?
BP: Investment Solutions, BNP Paribas’ asset gathering arm, posted a pre-tax income of 1.29 billion euros in 2009, very close to the 1.31 billion euros in 2008. The strong resilience comes from: Investment Solutions’ diversified business mix, which includes Asset Management, Private banking, Insurance and Securities Services; good cost control; large retail-oriented customer asset base; and strong BNP Paribas brand attractiveness. As a result, net asset inflows totalled 25 billion euros in 2009, 2.4x the 2008 level, and assets under management at 588 billion euros are higher than their pre-crisis levels at the end of 2007. This illustrates, if anything, the remarkable strength of the franchise.
EBM: Regulation governing capital adequacy ratios is undoubtedly going to be tightened, even if no one knows yet by how much. Some analysts are speculating on additional Core Tier One ratio requirements in the range of 200-250 basis points. Does this order of magnitude appear realistic to you? If so, within what time frame?
BP: Let me first emphasise that, going into the crisis, the level of BNP Paribas’ Equity Tier 1 ratio was adequate in the first place, as proven by the resilience and profitability of BNP Paribas’ business model through the crisis. Since mid 2007, the Group has been profitable and has therefore generated capital every year; it has materially reduced its risks and it was capable of making a major acquisition without deteriorating its capital ratios. Furthermore, we have already raised the Group’s Equity Tier 1 ratio in 2009 by 260bp, that is almost by half, to 8% from 5.4% at end 2008. This was achieved through a combination of retained earnings, equity raising and reduction of risk-weighted assets. Meanwhile, the French State’s capital support to help finance the economy was fully repaid in October 2009. Consequently, the future capital generation can now be allocated to organic growth. An Equity Tier 1 ratio of 8% is appropriate given BNP Paribas’ business model. The Group deserves a lower Tier 1 ratio than its peers, as acknowledged by regulators through Pillar 2 and as evidenced by our track record throughout the crisis.
EBM: Investors are worried that banks will start to slash dividends to preserve capital. Is this something we ought to worry about for BNP Paribas?
BP: Based on 2009 results, the Board has decided to propose a dividend of 1.5 euro per share, that is a payout ratio of around 32%. Like last year, shareholders will have the option to receive their dividend in shares or in cash. We have always applied a solid dividend policy over the cycle, based on a reasonable payout. It is because this policy has always been reasonable that it has remained consistent over the years, between 30% and 40%. This year, like last year, the payout proposed is around 1/3, a level that the management of the Group and its Board of Directors consider appropriate in the current environment.
EBM: Baudouin Prot, CEO of BNP Paribas, thank you very much.
BP: You’re welcome.
