BNP Paribas Q2 Profit Falls 13% on Lower Trading

BNP Paribas SA (BNP), France’s largest bank, posted a 13 percent drop in second-quarter profit as Europe’s debt crisis curbed trading revenue.

Net income dropped to 1.85 billion euros ($2.26 billion) from 2.13 billion euros a year earlier, the Paris-based company said in a statement today. That beat the 1.65 billion-euro average estimate of seven analysts surveyed by Bloomberg.

Chief Executive Officer Jean-Laurent Bonnafe, who took over last year, has embarked on asset cuts to comply with stricter capital rules, mirroring similar moves by other large European banks. The French firm’s goal of a 9 percent core capital ratio under Basel III rules has been “virtually” achieved by the end of June, six months in advance, Bonnafe said in the statement.

“It has been quite rapid and it’s positive,” said Jean- Pierre Lambert, a London-based analyst at Keefe, Bruyette and Woods Ltd. who has a “market perform” rating on the shares.

BNP Paribas, hurt by last year’s liquidity crunch and losses on Greek sovereign debt, joined smaller French rivals Societe Generale SA (GLE) and Credit Agricole SA in shrinking balance sheets and slashing sovereign debt holdings. The lender boosted its capital level with retained earnings and asset disposals.

“While it’s not a party environment, BNP Paribas has taken all the measures to resist” the crisis, Francois Chaulet, who helps manage 250 million euros at Montsegur Finance in Paris, including BNP shares, said before the results were announced.

Capital Rules

BNP Paribas rose as much as 2.6 percent and traded 1.1 percent higher at 31.04 euros as of 9:09 a.m. in Paris. Before today, it had fallen 30 percent in the past 12 months, giving the bank a market value of 38.5 billion euros. Societe Generale, France’s second-largest bank, slid 46 percent over the period.

France’s biggest lenders are cutting at least 300 billion euros off their balance sheets to comply with stricter Basel III capital rules, mirroring similar moves by other European lenders such as Deutsche Bank AG (DBK), Germany’s biggest.

BNP Paribas began trimming its balance sheet last year as capital requirements and funding costs increased. The bank at the end of June achieved 90 percent of its planned 79 billion euros cuts in risk-weighted assets, mostly at the corporate- and investment-banking, or CIB, division. The French firm is also cutting 1,400 CIB jobs.

BNP Paribas joins competitors including Germany’s Deutsche Bank, Europe’s largest investment bank by revenue, in reporting earnings curbed by weaker markets. Deutsche Bank said on July 31 that second-quarter pretax profit at its securities unit slid 63 percent. Societe Generale yesterday said that net income at the CIB division fell 71 percent in the quarter.

‘Strong Volatility’

JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. (GS) and Morgan Stanley had combined first-half revenue of $161 billion, down 4.5 percent from 2011 and the lowest since $135 billion four years ago.

Investment banks are trimming workforces and reining in costs as the debt crisis curbs trading and leads to a slump in stock and bond offerings.

“Against a general backdrop of the crisis in the capital markets and strong volatility, there was less demand from clients and the businesses were managed cautiously,” BNP Paribas said in the statement.

Pretax profit at BNP Paribas’s CIB unit declined 40 percent to 821 million euros, beating analysts’ estimate of 748 million euros. Revenue from equity and advisory operations slid 46 percent, while fixed-income sales dropped 25 percent.

Sovereign Debt

Corporate-lending revenue, also part of the CIB division, fell 8.4 percent to 1.02 billion euros, while it had 75 million euros of gains from the disposal of portfolios, the bank said.

BNP Paribas also booked a 286 million-euro gain from revaluing its own debt and 90 million euros of one-time losses from sales of sovereign bonds in the second quarter, it said.

The bank, which took 3.2 billion euros in writedowns on Greek government debt last year, has rushed to cut its sovereign debt holdings in most European countries since mid-2011 to help protect capital levels.

Funding exposures to units outside of France have been among elements weighing on the shares of BNP Paribas, Credit Agricole (ACA), Societe Generale and Natixis (KN) SA. The four French banks provided about 150 billion euros from businesses at home to fund their operations in Italy, Spain, Portugal, Greece and Ireland, according to Morgan Stanley estimates.

Funding Gap

“We don’t have funding gaps,” Bonnafe said in an interview with Bloomberg Television. “Italy and Spain are two very different businesses for us. Italy is a domestic bank” while BNP’s Spanish business “is basically a branch in which we are financing global international Spanish customers.”

BNP Paribas’s group provides about 18 billion euros in funding to its Italian unit, BNL, Bonnafe said.

“It’s really not a worry,” he said.

BNP Paribas may narrow a 40 billion-euro funding gap in Italy and Spain by moving some loans in those countries to deposit-rich Belgium and Switzerland, three people familiar with the matter said July 2. BNP Paribas Fortis, the Belgian unit, said July 5 that it plans to reinforce the Brussels hub for corporate banking, including trade finance, extending coverage to countries like Spain and Germany. The plan won’t cover France or Italy, the company said.

French banks had $334 billion euros in public and private debt holdings in Italy and $115 billion in Spain as of the end of March, Bank for International Settlements figures show.

Retail Banking

BNP Paribas gets most of its revenue from France, Belgium, Luxembourg and Italy and the company also owns BancWest, a network of branches in the U.S. Through its purchase of Fortis in 2009, overseen by Bonnafe, the lender also added clients in faster-growing economies such as Turkey.

BNP’s total retail-banking pretax profit was 1.64 billion euros in the second quarter, 0.7 percent higher than last year, the bank said. Earnings at the French branch network gained 0.9 percent to 558 million euros and Belgian retail banking pretax profit climbed 35 percent to 174 million euros.

BNP Paribas’s Italian retail-banking network, Banca Nazionale del Lavoro, had second-quarter pretax earnings of 132 million euros, down 8.3 percent from a year earlier and beating analysts’ estimates for 110 million euros.

To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net