BNP Paribas SA will comfortably beat a key profitability target in 2020 if positive economic conditions, rising interest rates and lower tax rates persist, the bank's CFO said Feb. 6.
"The combination of stronger economic growth in Europe, higher implied interest rates and lower taxation in the U.S., France, and Belgium mean that, if confirmed, we are now expecting to beat the target on return of equity of 10% in 2020," BNP Paribas CFO Lars Machenil told an analyst call following publication of the lender's 2017 results. "Our ROE could reach 10.5% if all of those elements were to materialize, and this, of course, is accompanied by a lift in the bottom-line target."
ROE in 2017 was 8.9%.
The bank announced in March 2017 a long-term strategic plan under which it aims to invest €3 billion between 2017 and 2019 as it undertakes a digital transformation program and generate €3.4 billion in savings. It is also aiming for average annual net income growth of at least 6.5% through 2020.
BNP Paribas reported fourth-quarter 2017 net income of €1.43 billion, down 1.1% from €1.44 billion a year earlier, as revenues fell to €10.53 billion from €10.66 billion. For full year 2017, the bank's net income ticked up on a yearly basis to €7.76 billion from €7.70 billion.
Banks generally have been suffering from the low interest rate environment, which has been eating into revenues and margins, and Machenil said he expected the trend to continue to weigh on BNP Paribas' French retail division in 2018. For the whole of 2017, French retail revenues fell 0.8% to €6.35 billion, while net interest income fell 2.9%.
"On French top line, we expect 2018 to be a tad better than what we have seen in 2017, but we expect in the current interest rate environment it will still be roughly flattish," he said.
The bank has made investment banking one of the main planks of its strategy, with its know-how in derivatives trading, fixed income and structured finance taking it into the top five by i-bank revenue in Europe, the Middle East and Africa. Machenil said BNP Paribas had "picked up on market share quarter after quarter" in the corporate and institutional banking (CIB) division.
"This is something that we will continue to do and we will continue to serve our clients even if the markets are a bit lackluster as they have been," he said.
Investment banks in the U.S. and Europe have struggled to generate revenue in their fourth-quarter results, which reflect a period of extremely low market volatility. BNP Paribas' fourth-quarter CIB revenue fell 6.9% year over year, with fixed income, currencies and commodities trading down 27.4% while equity and prime brokerage services rose 12.1% on strong volumes in prime services.
Global markets have tumbled in recent days, and Machenil said that could be a sign that the days of low volatility are over.
"Volatility has been very low in the second half of 2017 so it was to be assumed that there would be a kind of evolution back to more normal territory and that transition may be a bit bumpy and that may be what we are seeing today," he said.
Machenil said the bank's average lending volumes were growing by about 5%, possibly higher in France owing to a low comparison in 2016. Bank of France Governor François Villeroy de Galhau recently warned of excessive lending in France, saying the central bank could activate a countercyclical buffer for banks if needed, but Machenil said he did not think the lending market was overheating.
"We have a growth on average which is around 5%, and 5% is in an environment where the economy is picking up and for banks is a natural kind of evolution so does this include overheating, I don't think so," Machenil said.
