BNP Paribas cuts profitability outlook due to low interest rates
“BNP Paribas’ earnings are a mixed bag as they benefited from renewed activity from the fixed income, commodities, currencies and corporate and investment banking, thanks to the rebound in markets in 2019 but its costs are still too high and negative interest rates across its main European businesses are cutting into margins,” said Clairinvest co-founder and chief investment officer Ion-Marc Valahu.
PARIS (Reuters) – BNP Paribas SA (BNPP.PA) on Wednesday cut its target for profitability this year and warned revenue from its retail networks in Europe could decline due to low interest rates, although fourth-quarter earnings came in ahead of estimates.
Its target for return on tangible equity (ROTE) – a measure of profitability – was lowered to 10% from 10.5%, with the bank saying changes in monetary policies in the summer of 2019 had led to a more unfavorable interest rate environment than previously anticipated.
The lowering of that target contributed to BNP Paribas’ shares slipping 0.5% in early session trading.
European retail banks, which depend on making a margin by taking deposits and passing them on as loans, have been hit by rock-bottom interest rates for several years.
The profits of banks suffer from a squeeze in margins.
The difference between the interest charged on home loans and the interest paid for deposits was reduced to 1% in France, its lowest since late-2018, according to the European Central Bank (ECB) data at end-November.
BNP Paribas said it would pursue efforts to reduce operating expenses in retail networks to help offset this.
“BNP Paribas’ earnings are a mixed bag as they benefited from renewed activity from the fixed income, commodities, currencies and corporate and investment banking, thanks to the rebound in markets in 2019 but its costs are still too high and negative interest rates across its main European businesses are cutting into margins,” said Clairinvest co-founder and chief investment officer Ion-Marc Valahu.
Net income for the fourth quarter rose by 28.2% to 1.85 billion euros ($2 billion). It topped an average forecast of 1.71 billion euros in a Reuters survey of four analysts.
Revenue rose 11.5% to 11.33 billion euros, driven by robust growth in fixed income and equities trading.
At BNP Paribas’ domestic markets business encompassing retail activities in France, Italy and Belgium as well as leasing solutions, revenue rose by 3.4 percent in the quarter and was up by 0.8 percent for the whole of 2019.
“Domestic markets’ revenues in 2020 are nonetheless expected to decrease moderately due to the impact of a persistently low interest rate environment in the networks,” the bank said.
The business accounts for more than a third of the group’s total revenues.
BNP Paribas added, however, that it expected strong growth in specialized businesses.
The bank’s trading business, like those of its U.S. rivals, showed sharp growth, rebounding from a low base a year earlier.
Revenue from fixed income trading jumped 62.5% to 820 million euros, while returns from equity trading and prime services rose more than three times to 520 million euros.
In the fourth quarter of 2018, financial markets were hit by a sell-off due to concerns over trade tensions and global economic growth, while BNP Paribas’ results were additionally marred by a loss on index derivative hedging in the United States.