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Including dividends, BNP Paribas (OTCQX:OTCQX: BNPQY)(OTCQX:OTCQX: BNPQF) stocks have lost about 12% of their euro value since I last hedged the bank in mid FebruaryADRs slightly underperformed due to the strong dollar.

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Unfortunately, this coin came just a week before the Russian invasion of Ukraine, and with the conflict being the catalyst for a sharp decline in Europe’s economic outlook, it’s no surprise that the biggest bank in the continent has experienced difficulties.

While the credit quality backdrop may well deteriorate, BNP has so far reported strong results for the year. Revenues are up, cost increases are lagging top line growth, and asset quality is holding up very well on balance – a good combination for net income growth. It also puts the bank off to a good start in terms of achieving management’s 2021-2025 strategic objectives.

In terms of total return, the fall in the stock price since the start of the year essentially brings us back to where we were when I first covered the bank in Q3 2021. Meanwhile, the tangible book value per share is on the rise, which means that the shares have suffered a significant depreciation during this period. Admittedly, uncertainty has also increased since then, but with management appearing rather bullish on credit quality, I’m inclined to think the stock is once again offering attractive value. To buy.

Solid results since the beginning of the year

Results for 2022 to date have been strong, with BNP posting strong numbers across its three operating divisions: Corporate & Institutional Banking (“CIB”), Commercial, Personal Banking & Services (“CPBS”) and Investment & Protection Services ( “IPS”). “).

IPC: Revenues of €12.6 billion were up 10% at constant currencies compared to the first nine months of 2021, as market volatility helped boost trading in fixed income, currencies and commodities as well as equities and its prime brokerage offering, particularly at the start of the year. Higher trading volumes, higher interest rates and new mandates also helped offset the impact of market declines on assets in custody and under administration in its Securities Services segment.

CPBS: Revenue of €21.3 billion increased by 7.6% at constant currencies compared to 9M21, helped by the impact of high single-digit loan growth on net interest income ( “NII”). The division’s operating profit before provision (“PPOP”) rose more than 16% to 7.8 billion euros, helped by positive jaws, while lower provisioning expenses further boosted the result before tax, which, at 6.5 billion euros, was up nearly 30% compared to 9M21.

IPS: Revenue of just over €5 billion was up 3.5% year-on-year, helped by strong NII growth at Wealth Management.

In total, 9M22 group revenue of €38.3 billion was 6.9% higher than the prior year period at constant exchange rates, with PPPO up 9.2 % at constant exchange rates to more than 13 billion euros. Net income increased 12% year-on-year to €8.05 billion, while tangible book value per share was €79.30 at the end of the third quarter, compared to €76.80 at the end of the third quarter of 2021.

Perspectives

BNP Paribas will not be the most interest rate sensitive bank in the region due to its revenue mix (higher fee income due to investment banking) and some specific factors (e.g. French regulations on the repricing of loans). Finally, the disclosure direction recorded a parallel shift of 50 basis points in the yield curve, only shifting revenue by 127 million euros in the first year. Investors looking for more pure plays on rising rates would do better with companies like NatWest (NWG) or, in the euro zone, the Irish banks in my opinion.

Nevertheless, BNP will still see a positive impact now that the ECB is on the rise, with management pointing to around €2 billion in additional revenue through 2025 due to higher interest rates. This should help offset an eventual normalization of investment banking revenue (CIB revenue fell again sequentially in Q3 to EUR 3.8 billion).

Performance of BNP Paribas Corporate & Institutional Banking Q3

Image source: BNP Paribas Q3 2022 results presentation

With this, the bank still seems to be in a good position with regard to its 2021-2025 strategic objectives. To recap, these goals include annualized revenue growth of 3.5%, annualized net income growth of 7%, and an annual return on tangible equity (“ROTE”) of at least 11% here the end of this period. The results so far put him on the right track to get there.

Objectives of the BNP Paribas 2025 strategic plan

Image source: BNP Paribas 2025 strategic plan infographic

Credit quality is perhaps the most interesting part of the equation right now. The European economic outlook has deteriorated since I last covered the bank, but asset quality measures are still holding up very well. The cost of risk was 39 basis points in the third quarter, and this included 8 basis points of mortgage relief legislation in Poland, with the underlying cost of risk still significantly below the 2017-2019 average . This helped the bank post an 11.4% ROTE in the third quarter.

BNP Paribas bad debts to gross debts 2017 - Q3 2022

Source of data: BNP Paribas annual reports and publication of third quarter results

Doubtful outstandings also remained relatively low, standing at 1.7% of total outstandings in Q3 versus 2% at the start of the year. They remain comfortably below the 2017-2019 average of around 2.6%.

Stocks look cheap

BNP Paribas shares are trading at €53.25 each as I type, putting them below 0.7x tangible book value per share. I’ve previously called for a fair value here in the region of 0.9 to 1.0x tangible book value per share, and despite the economic uncertainty, I see no reason to change that based on recent results . Indeed, management was very confident about credit quality in response to analysts’ questions during Call for third quarter results:

I was going to say read my lips, but this is a video, so listen to my lips. We’re basically forecasting 40 basis points every year through 2025.

Lars Machenil, Chief Financial Officer

This gives me confidence that BNP will at least get closer to its ROTE targets over the next few years, and with that implying a 34% rise in fair value at the bottom end, these stocks look cheap. To buy.

Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these actions.

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