THIRD QUARTER 2007
A ROBUST BUSINESS MODEL: GROWTH IN THE REVENUES OF ALL THE CORE BUSINESSES
• Revenues €7,690mn (+12.6%/3Q06)
• Gross Operating Income €3,047mn (+18.7%/3Q06)
THE EFFECTS OF A STRINGENT RISK POLICY: LIMITED IMPACT OF THE CRISIS ON THE QUARTER’S RESULTS
• Impact on Revenues -€186mn
• Impact on Cost of Risk -€115mn
CONTINUED PROFITABLE GROWTH STRATEGY: SHARP RISE IN RESULTS
• Operating Income €2,585mn (+12.2%/3Q06)
• Net Income Group Share €2,027mn (+21.0%/3Q06)
FIRST NINE MONTHS OF 2007
• Net Income Group Share €6,816mn (+22.0%)
• Cost/Income Ratio 58.4% (improved by 1 pt)
• Annualised after-tax ROE 22.6% (improved by 1.4 pts)
• Earnings per Share (9 months) €7.4 (+19%)
On 6 November 2007, BNP Paribas’ Board of Directors, in a meeting chaired by Michel Pébereau, examined the Group’s results for the third quarter and the first nine months of 2007.
RESULTS UP SUBSTANTIALLY IN THE CONTEXT OF A CRISIS THAT HAS HAD ONLY A LIMITED IMPACT ON THE GROUP
BNP Paribas’ performance in the third quarter 2007 is explained by the Group’s limited exposure to the businesses affected by the crisis, and by the success of its growth and internationalisation strategy.
The Impact of the Crisis on BNP Paribas has Been Limited
For the third quarter, the net impact of the crisis on revenues was -186 million euros for the entire BNP Paribas Group, a limited amount thanks to its low exposure to the assets in question. With regard to LBO underwriting commitments, which totalled 3.7 billion euros as at 30 September, fair value adjustments totalling -194 million euros were posted to factor in the new market conditions. The amount of fair value adjustments on the securitisation portfolio was very limited, only -36 million euros. Conversely, 44 million euros in net one-off gains on own debt and equities were allocated to “Other Businesses.”
In an environment marked by extraordinary daily volatility, capital markets businesses performed very well, generating revenues up 23.9% compared to the third quarter 2006. This performance was achieved in particular thanks to highly sustained client business. The sharp rise in the historical volatility has led to a significant increase in the capital markets businesses’ Value at Risk (average VaR of 67 million euros in the third quarter compared to an average 39 million euros in the second quarter 2007). Still, the market risk models and management processes have proven to be highly robust during this period since none of the losses reported certain days by the capital markets businesses exceeded the corresponding daily VaR.
As far as the cost of risk is concerned, the impact of the crisis was -115 million euros. The bulk of this amount, or -97 million euros, corresponds to a net increase in the IFRS general provision on a portfolio basis related to the home builders sector in the U.S. The amount of the provision was calculated using stress tests applied to CIB and BancWest’s exposures. Moreover, CIB’s specific provisions this quarter include a net increase of only -18 million euros to cover certain defaulted mortgage originators, since the exposure was largely collateralised. Thanks to a strict collateralisation policy, the Group did not record any credit losses on hedge funds. CIB did not report any deterioration of the rest of its portfolio and continued to write back provisions. Its net direct exposure to the U.S. subprime risk is negligible. BNP Paribas as a whole has thus reaped the benefits of a stringent risk policy applied across all its core businesses.
However, the sustained crisis has resulted in a significant increase of counterparty risks in capital markets businesses.
Lastly, the crisis had only a limited impact on BNP Paribas’ refinancing costs. Benefiting from a AA+ rating by Standard and Poor’s, the Group had access to liquidity on competitive terms during the entire period. Furthermore, its refinancing needs did not increase significantly. As a matter of fact, BNP Paribas depends very little on securitisation to finance the growth of its assets and, what is more, its conduit business is small in magnitude: the six multi-seller conduits sponsored by BNP Paribas amounted to 9.6 billion euros in outstandings as at 30 September 2007, one of the lowest amounts amongst the leading banking groups.
The Growth and Internationalisation Strategy is Producing Results
In the third quarter of this year, BNP Paribas made 7,690 million euros in revenues, up 12.6% compared to the third quarter 2006. This growth is due primarily to organic growth in all the core businesses: at constant scope and exchange rates, the core businesses revenues rose 10.6%. Despite the crisis, revenues of each of core businesses were up.
For the first nine months of 2007, BNP Paribas generated 77% of its revenues in Europe, of which 47% in France. North America, the market hardest hit by the current crisis, makes up only 11% of revenues, whilst Asia and the emerging countries contribute 12% of the Group’s revenues for the first nine months of the year as these regions continue to represent a major growth potential for all its business lines.
The increase in operating expenses reflects continued investments in organic growth, as well as satisfactory costs flexibility in the capital markets businesses. The core businesses operating expenses, at constant scope and exchange rates, rose 10.5% compared to the third quarter 2006. CIB’s cost/income ratio was 59.1% in the third quarter, up 3.5 points, due to the value adjustments related to the crisis. The cost/income ratio of all the other core businesses improved, in particular BNL that posted a 4.9 points drop. For all the core businesses, at constant scope and exchange rates, the cost/income ratio for the third quarter 2007 was 61.0%, 0.1 point better than in the third quarter 2006, as the Group managed to maintain the level of its operational efficiency.
Gross operating income rose 18.7% to 3,047 million euros (2,881 million euros, or +10.8% at constant scope and exchange rates for the core businesses only).
The net addition to provisions was 462 million euros, up 75% compared to the third quarter 2006. This 198 million euros increase includes 115 million euros arising from the market crisis, as indicated above. The annualised cost of risk this quarter was 37 basis points of the risk-weighted assets compared to 24 in the third quarter 2006.
The Group’s pre-tax income totalled 2,727 million euros, up 12.4% compared to the third quarter 2006. It includes 211 million euros in pre-tax income from “Other Businesses,” which in particular posted this quarter capital gains from the disposal of BNP Paribas Capital’s stake in Bouygues Telecom, as well as one-off savings of 74 million euros due to a change in the accounting of severance costs in Italy (TFR), booked as a deduction of BNL’s restructuring costs. At constant scope and exchange rates, the core businesses’ pre-tax income was up 5.8%.
Net income group share, at 2,027 million euros, was up 21.0% compared to the third quarter 2006.
For the first nine months of 2007, the net income group share totalled 6,816 million euros (+22.0%). The 58.4% cost/income ratio marked a 1 point improvement compared to the first nine months of 2006. Annualised return on equity came to 22.6%, up 1.4 point compared to the first nine months of 2006.
Earnings per share in the first nine months of the year rose from 6.2 euros to 7.4 euros (+19%).
Against a backdrop of rapid growth of risk-weighted assets year-on-year (+15.1% compared to 30 September 2006), the international capital adequacy ratio was estimated at 10.5% as at 30 September 2006 and the Tier 1 ratio was estimated to be 7.3%.