BNP Paribas: Deeply Undervalued And Poised For A Q3 Earnings Beat

| About: BNP Paribas (BNPQF)
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BNP Paribas is still one of the most undervalued stories in the European banking space.

The bank's diversified business mix makes its earnings more resilient in the current challenging market environment.

The bank should surprise the market with a solid Q3 earnings beat.

A deeply undervalued bank

BNP Paribas (OTCQX:BNPQF) (OTCQX:BNPQY) (OTCPK:BNPZY) trades at a 30% discount to the sector's regression line. We believe this valuation reflects concerns on the bank's capital build in the context of the ECB minimum requirements.

Source: Bloomberg, Renaissance Research

As a reminder, last December, BNP Paribas disclosed its regulatory requirements. The ECB (European Central Bank) requires the company to operate with a 9.5% SREP ratio plus the G-SIB (globally systemically important bank) buffer of 2% has to be reached by 2019 (0.5% on a transitional basis as of 2016), corresponding to a 11.5% fully-loaded CET1 requirement. BNPP's management mentioned that it would also like to have a management buffer of 50bps. The bank's CET1 ratio printed at 11.1% in 2Q16 and we do agree there is a concern around BNPP's capital position. Having said that, in our prior article we have illustrated that BNPP has plenty of restructuring options, which could meaningfully increase CET1. As such, we believe these restructuring activities will drive a multiple re-rating and the company's valuation discount will unwind as its capital ratio improves.

We expect a solid Q3 earnings beat

By contrast to Barclays (BCS), Credit Suisse (CS) and Deutsche Bank (DB), BNPP has chosen to maintain its existing positioning and remains a one-stop shop for European corporates and increase its market share. According to Dealogic, BNP Paribas has been gaining market share for its investment banking products and the bank's Q3 performance was exceptionally strong.

Source: Dealogic, Renaissance Research

Source: Dealogic, Renaissance Research

Source: Dealogic, Renaissance Research

While the sector's revenues were flat on a yearly basis, BNP Paribas delivered an impressive 43% y/y pick-up in Q3. We believe the data confirms that BNPP benefits from the ongoing issues at other European investment banks: Deutsche Bank, Credit Suisse, Barclays and Societe Generale (OTCPK:SCGLF) (OTCPK:SCGLY).

BNP Paribas is set to publish Q3 results on 28 October.

Source: Dealogic, Renaissance Research

Resilient earnings and defensive characteristics

With less than 15% of revenues coming from French Retail, BNPP has the most diversified business mix of the French banks and it also compares well at a European bank's level. Fees & commissions income growth should compensate for ongoing margin pressure. We expect future F&C income growth at BNPP to be supported by strong flows in life insurance, which are negatively correlated with the sector's deposit yields. We also believe asset management and brokerage businesses should support F&C income growth going forward as this rate environment is supportive of a shift from classic banking deposits to stock market products. Finally, standard service fees should play a more important role - as a reminder, BNP Paribas started charging fees for current accounts in January 2015.

Bottom line

BNP Paribas is one of the few investable names in the European banking space. A 30% valuation discount coupled with resilient earnings, defensive characteristics, and a strong banking franchise make the stock very attractive for a long-term fundamental investor.

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Disclosure: I am/we are long BNPQF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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