Tue. Jul 5th, 2022

BNP Paribas has worked hard to convince shareholders their capital is in safe hands. Steady growth and healthy investor payouts paid off via a higher share valuation in years past. But with European inflation picking up and higher rates a possibility, France’s largest bank has fallen into the “friend zone”. Investors’ heads have been turned by weaker European banks. Their shares have left BNP behind in the past year.

It does not help that BNP overshot slightly on operating costs in its fourth-quarter results on Tuesday. Underlying expenses were 4 per cent higher, leading to a miss for pre-provision operating earnings. Revenues were also lighter than analysts expected. BNP defends the higher costs as merely variable ones that will shift with revenues. Its common equity tier one ratio at 12.9 per cent did not surprise either way.

BNP is suffering from a lack of near-term positive catalysts. It already planned to resume dividend payments. For 2021, consensus forecasts suggest a dividend yield pushing 6 per cent. Some bulls, such as Citi, expect more. Even the lower figure puts BNP in the upper quartile among European banks.

The announced sale of Bank of the West to Bank of Montreal in December should generate another € 7bn plus of excess capital to return to shareholders via buybacks.

Even with a 60 per cent payout from 2021 earnings, the market wants more. With target returns on tangible equity of more than 11 per cent by 2025, a share price currently trading below tangible book value looks a tad low when compared with European peers. GDP should trade at book value at least.

Perhaps lower-rated Société Générale looks more alluring because it has so much to do to match BNP’s returns on risk-weighted assets. Sunlit uplands may look more alluring as a destination than a permanent residence.

Markets do not always seek out the safe choice. Then again, higher interest rates would boost BNP’s return on equity, towards 12 per cent. In the medium term, GDP should continue to reward the patient investor.

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