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BNP: Chunky Q3 miss on big de-risking; underlying in-line

BNP reported a Q3 a chunky headline miss on consensus on one-offs, but credit should be given for derisking, while underlying remains robust and in line. Bottom line of EUR541m net profit vs BBG cons of EUR1.24bn. Driven by one-offs of negative EUR-2.1bn most of which not accounted for in estimates. These are, finally a conservative charge on GGBs of EUR2.26bn which now represents 60% of its entire exposure. Also sold sovereign bonds and booked a EUR362m charge in its CIB unit. Other one-offs were an EUR299m impairment on its AXA equity investment and finally an own debt gain of EUR786m. Beyond this underlying earnings capacity is still strong at BNP. Gross revs were EUR10bn in Q3 down 9% qoq. Expenses well managed 8% lower qoq. Retail is strong with underlying PBT down just 2% qoq, offsetting weaker CIB revenues down 39% qoq. Cost of risk (excl GGB impairment) across all businesses is stable or lower qoq with NPLs stable and coverage of NPLs slightly higher. Leverage 22.3x (vs 22.7x in Q2)- some work definitely to do there still. Liquidity solid enough, with EUR170bn unencumbered liquid assets. USD funding in CIB reduced by EUR20bn out of the EUR60bn target it has set itself for end 2012, ahead of its original timeline but extraordinary circumstances makes this necessary I think. Another USD20bn targeted for Q4.

Solvency under Basel 2 at end Q3 is 9.6% which is flat on Q2, but BNP kindly models its expected proforma end June 2012 Basel 2.5 CET1 to meet the EBA shortfall of EUR2bn. This comes to 9.1% taking into account 60bps hit on Basel 2.5 transition, a further 40bps on the mtm of its sovereign bonds (which are end Sept values) and a positive 50bps from its announced deleveraging activities. All this before organic capital generation.

Residual net exposures of GIIPS as at end Oct 2010 (note, not end Q3) show a huge cut in Italy: Greece EUR1.6bn, Spain EUR0.5bn, Italy EUR12.2bn (this was EUR21bn at end Q2), Portugal EUR1.4bn and Ireland EUR0.3bn. As well as the EUR362m Q3 hit on sale of sov debt, it has further reduced in October to take a further charge of EUR450m (to be booked in Q4).

Overall, a horrible headline, but still maintain underlying is robust and the very rapid and aggressive derisking approach taken is a genuine positive, notably sovereign bond exposures, notably GGBs and BTPs (almost halved) is very encouraging. BNP is my pick of the French still. The bigger picture in Europe will continue to drive performance and theoretically it is the best positioned of the French banks to handle a Greece disorderly outcome but you wouldn’t take that bet today. (Christy Hajiloizou)

Source: RBS