The biggest bank in France has just issued a wake-up call that no one expected in the current quarter. The bank, BNP Paribas, has posted weaker-than-expected earnings in the third quarter due to rising prudence among big corporate clients and significantly higher provisions against bad loans than expected in many of the company’s divisions. The bank posted net earnings of 3.04 billion euros, an increase of 6.1% from last year but missing expectations of 3.09 billion euros.
Increased defaults on loans pose unpredictable challenges to profitability
The major challenges experienced by BNP Paribas during the third quarter of 2024 arose from the declining credit quality of various sectors. The bank’s credit provision rose significantly due to the rising number of loan defaulters attributed to economic uncertainty in Europe and across the globe. The loan offerings to corporations were greatly challenged owing to the postponement of major investments by businesses in light of geopolitical conflicts and rising inflation concerns affecting the operational costs of businesses.
The trading unit took further blows in the form of deteriorating debt positions, adding to the complexities of an already tough quarter to perform in terms of earnings growth. The credit risk provisions took steeper rises than management expected in their preceding guidance on challenges facing loan portfolios in terms of growing economic difficulties in various industries, thereby directly affecting the company’s earnings in terms of disappointment beyond optimistic expectations by analysts and institutional investors.
The corporate clients take a wait-and-see policy
There was caution in the banking relationships with major corporate clients, and there were fewer transactions, with key funding decisions being delayed. The major corporate clients’ attitude has been revealed to exhibit risk aversion in the surveys of client sentiment, which directly influenced fee income in the commercial divisions of the bank.
AXA Acquisition Costs compound challenges in performance
The latest acquisition of AXA Investment Managers has further added to the bank’s expense base in the quarter, where it has significantly impacting the bank’s profitability in the current quarter. The bank has incurred an impairment of around €150 million because of the one-off expenses incurred in connection with the acquisition process, which has further deteriorated the bank’s performance in an already challenging environment where it has incurred substantial credit provisions on a higher bad loan book.
Despite the challenges associated with the acquisition, management at BNP Paribas showed immense confidence in the long-term growth opportunities presented by the AXA acquisition deal. The deal is expected to be of immense help in improving the bank’s asset management services, an area where it was facing challenges before the acquisition deal was reached. Nonetheless, the integration of expenses related to the deal is expected to continue affecting the bank’s quarterly performance until the start of 2025.
Management maintains an optimistic outlook despite current headwinds
The management of BNP Paribas has reaffirmed the goals of an aggressive expansion plan until 2026, being confident in the resilience of their bank in the face of challenges to the core model of conducting business. The bank’s CEO, Jean-Laurent Bonnafé, has declared that the challenges they are facing qualify as only temporary market challenges rather than structural challenges.
Key performance metrics:
- Net profit: €3.04 billion (+6.1% YoY)
- Consensus estimate: €3.09 billion
- Credit provisions: Significantly higher than expected
- Average loan balances: €434 billion (stabilized)
Management emphasized the signs of improvement in average loan balances, which levelled out at €434bn after the trend of reduction in the preceding periods. This trend indicates that the demand for loans has possibly reached the trough, which might help in driving the growth in revenue and market share in the coming periods. The bank is heavily investing in technological transformation projects to improve efficiency and serve clients better while minimizing costs in the future.
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