BNP Paribas warned coronavirus could knock a fifth off its 2020 profits as it revealed a €184m blow to its equities trading division after complex derivatives products suffered in volatile markets.
The French bank said on Tuesday its net income could fall 15 per cent to 20 per cent this year, with Covid-19 prompting a “drastic revisit of the 2020 macroeconomic scenario”. The lender also earmarked an additional half a billion euros to cover potential loan losses.
“The health crisis has had major repercussions on macroeconomic outlook and produced extreme shocks on the financial markets,” BNP said in a statement along with its quarterly earnings report. Last week local rival Société Générale reported an unexpected first-quarter loss after similar weakness in its equities business.
BNP’s shares jumped 3.6 per cent in early Paris trading. Analysts had estimated a steeper 34 per cent plunge in annual profit. Still, along with most other European lenders, the stock has lost almost half its value this year.
“We think investors should welcome solid earnings, capital and outlook in the current environment,” said Jon Peace, an analyst at Credit Suisse. BNP executives assume “a very gradual recovery from a 2020 recession after the end of lockdown measures, with 2019 GDP not being reached before 2022”.
BNP said the decision by European regulators to lean on companies to restrict dividends contributed to “extreme and exceptional volatility [which] led to a dislocation” in complex equities products linked to future shareholder payouts.
The tumult caused a €184m hit to the revenues of the equities trading and hedge-fund servicing division, pushing it to an €87m loss. The unit generated €488m in revenues in the same quarter the previous year.
Strength in BNP’s fixed-income, commodities and currencies trading arm helped offset the pain, with revenues increasing to €1.4bn from €1bn in 2019. However, the overall global markets unit still posted a €17m loss compared with an expected profit of €102m, Mr Peace said.
SocGen last week pledged to cut risk and simplify the trading arm of its investment bank after the dividend curbs caused its equities derivatives unit similarly to backfire.
In a sign of the disruption, BNP took €502m in provisions for potential loan defaults as a result of the coronavirus lockdown and the economic repercussions. However, while the bank’s cost of risk is set to increase this year, BNP executives said they expect cost cuts, including from reductions worth tens of millions of euros in travel and entertainment due to the coronavirus, to compensate.
The move is in line with the rest of the banking sector, with US and European banks set to book more than $50bn of charges to protect against soured loans, the most since the 2008-09 financial crisis, and an indication of the severe economic damage wrought by the virus.
BNP’s group first-quarter net income fell 33 per cent to €1.28bn year-on-year, 18 per cent ahead of analysts’ expectations. Total revenue dropped 2.3 per cent to €10.9bn. SocGen reported a loss of €326m last week.