(Bloomberg Opinion) -- Diversification has been a blessing for BNP Paribas SA. France’s biggest bank is emerging from the economic carnage unleashed by the first wave of the pandemic better than competitors, even after losing money on derivatives. But absent a repeat of the buoyant trading markets we’ve seen this year, not even BNP can escape the pressures of souring debt and declining margins as the health crisis endures.
Bolstered by a 32% jump in trading revenue — better than Wall Street peers — third-quarter net income fell just 2.3% to 1.9 billion euros ($2.2 billion), BNP said on Tuesday. A 21% rebound in equities trading revenue was especially encouraging. Earlier this year the bank had suffered a hit from derivatives wagers, mostly linked to dividend payments. In the most recent quarter BNP also saw an improvement in services to hedge funds, which it’s in the midst of ramping up after buying Deutsche Bank AG’s prime brokerage unit.
There was good news too on charges. Across the firm, provisions for bad loans in the period were lower than what analysts had expected and the bank is on track to cut expenses by 1 billion euros this year. That’s helped BNP protect profit, which is down about 13% so far this year. Impressively the lender signaled it’s “ahead” of a goal to keeping the decline for the full year to no more than 20%, a significant feat amid the Covid-19 pandemic. The Paris-based bank said it’s setting aside 50% of profit for dividends should European regulators allow banks to reward shareholders again.
The stock soared on the news, jumping as much as 7% and reducing this year’s decline to just under 40%. But with economic forecasts for the fourth quarter deteriorating sharply amid fresh lockdowns across some of BNP’s key markets — France, Italy and Belgium — and the ongoing squeeze on margins, BNP will face the same challenges as other European banks.
Asked by Bloomberg Television how sustainable the performance may be, Chief Financial Officer Lars Machenil said that 2020 so far is “a good sign.” What’s more, authorities have “learned their lesson,” he said, leaving the construction and manufacturing industries open in the fresh lockdowns, while the services industry has already adapted to working remotely.
Still, while capital and liquidity remain strong, there are reasons for caution going into 2021. Even though BNP has been gaining market share, trading and investment banking revenue for the industry is expected to be just marginally better than in 2019 and significantly lower than this year.
Meantime, negative interest rates in the euro zone continue to eat into the top line. While overall revenue at the firm was flat, BNP saw a 4.6% decline in sales at its French commercial lending business, its biggest domestic banking unit. BNP also posted a 7.2% drop in revenue from international financial services, its biggest division of all, as low rates cut into wealth management and consumer spending dropped. It’s hard to know when the conditions that are depressing income will change for the better.
And questions remain over whether BNP’s provisions have been sufficient. Barclays Plc analysts say the reserves still don’t reflect previous lockdowns, and absent details on the assumptions for gross domestic product — the bank hasn’t shared them with the latest earnings — its figures require the benefit of the doubt.
BNP has had a good crisis, for sure. A repeat in 2021 looks by no means certain.
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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