For France’s biggest bank, happiness is a long patience

BNP Paribas SA’s 2016 results should have been a celebration worthy of a guingette. France’s largest bank actually managed to increase revenue as well as earnings amid a backdrop of crushingly low rates and political instability.
Yet the stock slumped as much as 5 percent, with investors unimpressed by a slew of one-time costs and the prospect of a long round of expense cuts to offset predicted weak growth.
At least some of the disappointment can be attributed to shareholders’ sometimes frustrating tendency to prioritize short-term rewards, like dividends, over long-term investment.
BNP’s pledge to shrink costs as a proportion of income to 63 percent by 2020 is laudable, but, as analysts at Kepler note, the target dividend payout ratio of 50 percent looks underwhelming. The average payout ratio for top European banks is already estimated at 54 percent, according to Bloomberg Intelligence. With one-off surprises already eating into shareholder pay-outs, investors fear the rainbow is getting longer and the pot of gold smaller.
But there’s a deeper, gloomier signal being felt here. BNP’s economic predictions suggest the euro zone’s trek out of the cold will be long and arduous. The bank reckons interest rates will be negative until at least 2019.
While firms would normally be free to seek alternative growth through mergers, CEO Jean-Laurent Bonnafe says that regulators aren’t in favour of consolidation among banks right now. And the likelihood of rising regulatory fragmentation in the US, UK and euro area will surely hurt big global banks like BNP, present in all three markets.
There’s also the risk of an electoral upset in France, where voters could turn to anti-euro candidate Marine Le Pen. The gap in yield between France and Germany’s 10-year bonds — nick-named “Le Spread” — is worrying markets. HSBC research suggests there’s a direct impact between credit-market jitters and financial stocks’ performance: When France suffers, so does BNP. And markets are likely to stay jumpy.
BNP’s management says the bank is adaptable, prudent and can manage possible bumps in the road ahead. But it’s hard to detect much optimism or confidence in the bank’s outlook either. The stock already trades at a steeper-than-average 25 percent discount to book value.
Given the likelihood of surprises ahead, investors are understandably waiting and seeing before believing. As Albert Camus put it, happiness, too, is a long patience.
— Bloomberg
Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at
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