We like BNP Paribas because the shares look ‘cheap’. There is no debating that trading on a P/E of 6.8x, P/B of 0.49x and an indicative gross dividend yield of 7.3%, the shares look attractive.
But it is also true that the interest rate environment in Europe is not contributing positively towards the bottom line and the group, and we do not expect it to improve anytime soon as Central banks continue to remain accommodative. Also, the Bank’s exposure to Italy and Turkey adds pressure to the stock, keeping in mind the instability in both countries at this point in time.
We reduced our stance from a Buy to a Hold and lowered our price target from €74 to €48 factoring in a drop in our forward P/E multiple from 12x to 9x. We are also not factoring in any improvement in net interest income till 2021 whereas before we were assuming a pick-up in net interest income in 2020.
Turkey
The French group controls 72 percent of the Economy Bank of Turkey (TEB), partly through a local joint venture. Turkey accounts for around 2.5 percent of BNP Paribas’ pretax profit.
Italy
In 2018, France’s largest bank, with €16 billion of Italian sovereign debt holdings.
We like the shares for the following reasons:
· They are trading on a forecasted earnings yield greater than 14% (2020E)
· They are trading on an indicative gross dividend yield of 7.28%
· They are trading on a historic P/E of 10x compared to Western European Banks which are trading on a historic P/E of 12x
· BNP do not have any litigation issues pending
· The argument a well-capitalised bank with an attractive dividend falls into place for BNP Paribas
Risks
· Margins continue to remain under pressure
· Risk of exposure to Turkey and Italy
· Deterioration in the French Banking environment
Q1 2019 Results
· Revenues of 11.1 billion euros, vs. 10.8 billion euros a year ago. The upturn at its corporate and investment banking arm, mainly thanks to more favourable market conditions in the last part of the quarter, allowed BNP Paribas to recover from the hit it took in late 2018 from a brutal and general market meltdown
· Common Equity Tier (CET) 1 Ratio of 11.7% — a 10 basis point drop from the previous quarter
· Net income of €1.92 billion for Q1 2019, a jump of 22% from the same period the year before.
Valuation
Our €48 price target is based on a forward Price-to-earnings ratio of 9x and a discount rate of 12.5%. We are discounting 3 years of future profits to come up with the price target.
Conclusion
We have a Hold recommendation on BNP Paribas. Despite the bank trading on attractive multiples, the low interest rate environment in Europe and the exposure to Italy and Turkey will continue to keep the share price under pressure in the short to medium term.
About the Company
BNP Paribas is a French international banking group with a presence in 75 countries. It was formed through the merger of Banque Nationale de Paris (BNP) and Paribas in 2000, but has a corporate identity stretching back to its first foundation in 1848 as a national bank.
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, https://cc.com.mt/ . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice