LONDON (Reuters Breakingviews) - Bankers in Europe have regularly complained that a steep sector selloff – the benchmark Euro STOXX Banks index is down by a third over the past 12 months – simply isn’t justified by the economic outlook. BNP Paribas, the biggest bank by assets in the euro zone, delivered a convincing rebuttal to that optimism on Wednesday with a one-tenth fall in pre-tax profit. The Parisian bank’s declining top line points to bleaker revenue outlook for the industry.
Given BNP is probably the closest thing in Europe to a bellwether bank, investors’ fretting appears fully justified. A 1.5 percent yearly drop in revenue was compounded by higher-than-targeted expenses and a miserable performance at the investment bank. In the latter, BNP’s traders delivered a 225 million pre-tax loss in the volatile fourth quarter, dragged down by a whopping 70 percent year-on-year fall in equities revenue, underperforming even those perennial also-rans at Deutsche Bank.
As a result, BNP lowered its return on tangible equity target for 2020 by 1 percentage point to 10.5 percent based on a reduced projected annual revenue increase of 1.5 percent.
That is merely acknowledging reality. To hit the original target would have required BNP to double its original revenue growth target to 5 percent per annum and keep expense inflation down to 1 percent, according to a Breakingviews calculation, something it has failed to achieve given expenses ate up 72 percent of income, a jump of nearly three percentage points.
Potentially more worrying is that BNP’s original 2020 plan was viewed as relatively unadventurous, especially in its projection that interest rates would hardly budge higher over the period. The fact that loan volumes rose by 4 percent over the year, but revenue fell, suggests that low rates have squeezed lending margins even more than BNP’s conservative assumptions.
The market appears to be baking in worse to come: BNP shares trade at a nearly 40 percent discount to tangible book. That looks harsh given the lender run by Chief Executive Jean-Laurent Bonnafé still managed to deliver a decent-enough 9.6 percent return on tangible equity, in line with its probable cost of capital and better than most EU peers.
In that light, BNP can justifiably complain of harsh treatment. A dimmed revenue outlook means European rivals may not have that excuse.
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