BNP’s payout pledge falls flat with investors as costs jump

Bloomberg

BNP Paribas SA’s joined European peers in pledging higher profitability and bigger shareholder returns, while struggling to contain a surge in costs that’s plaguing the industry.
The Paris-based bank on Tuesday set a target for a return on tangible equity — a key measure of profitability — of more than 11% in four years’ time and vowed to return 60% of profit to shareholders. The shares fell as investors, who had priced in some of the new ambitions already, instead focused on a jump in operating costs that outpaced revenue growth in the fourth quarter.
Led by Chief Executive Officer Jean-Laurent Bonnafe, BNP Paribas has promised some of the biggest payouts among peers in Europe, after regulators in the bloc last year lifted a de facto ban on dividends. Flush with cash from the sale of its US retail unit late last year, Bonnafe is also pursuing bolt-on acquisitions, after building up equities trading where the firm is eyeing the top spot in Europe.
But in a sign of the challenges that remain, revenue from that business fell short of analysts’ expectations in the fourth quarter, even as it outperformed Wall Street with a gain of 17%. The bank’s bigger fixed income trading unit suffered steeper declines than peers, dropping as much as 25%.
For the bank as a whole, revenue in the fourth quarter was in line with expectations, rising 3.7% from a year earlier. Operating costs jumped 4.9% from a year earlier, as inflation and wage pressures drive expenses across the industry. Net income was ahead of forecasts as BNP set aside less money than expected for troubled loans.
BNP falls 3.1% at 9:27 am in Paris trading, after dropping as much as 4.5% earlier in the day.
European lenders are raising their profitability targets as the prospect of higher interest rates promises to boost income from lending. After almost 15 years in which returns on shareholder capital have languished mostly in the single digits, several banks are now targeting at least 10%, with Nordea Bank Abp and Banco Santander SA aiming for more than 13%.
BNP is targeting an average annual growth rate of 7% for its net income through 2025, as well as 3.5% for its revenue over the period.
An increasing portion of those profits is being earmarked for dividends and share buybacks, to reward investors who stuck with Europe’s banks over the lean years and win new ones. BNP said it plans to return at least 50% of profit through dividends, with the rest deployed through buybacks.
Spain’s Banco Bilbao Vizcaya Argentaria SA’s in November increased its payout target to between 40% and 50% of profit. Italy’s Intesa Sanpaolo SpA said last week it plans to pay out 70% of annual earnings to shareholders through cash dividends.
BNP’s corporate & institutional banking unit posted revenue of 3.3 billion euros ($3.8 billion), short of the 3.4 billion euros that analysts polled by Bloomberg had anticipated. Still, its corporate banking activities revenue gained 3.3% to 1.3 billion euros, above analysts’ estimates.
The domestic markets unit, which houses its core retail operations, posted a revenue of 4.1 billion euros, up 3.9% from a year earlier. The International Financial Services unit’s revenue, at 3.95 billion euros, is just above analysts’ consensus.