BNP Paribas Meeting Its Targets, but Trading Revenue Could Be a Headwind

No-moat BNP Paribas reported a 10% year-on-year increase in attributable net income to EUR 2.8 billion for the third quarter of 2022, while year-to-date attributable net income grew by 12%. The robust growth is a good start for BNP Paribas to meet its target of a 7% attributable income annualized growth rate between 2021 and 2025. The 11.4% return on tangible equity that BNP Paribas has generated year to date is also ahead of its 11% 2025 target. BNP Paribas generates a more significant portion of its earnings from investment banking activities than the average European bank. While securities trading revenue declined sequentially in the third quarter, we calculate that BNP Paribas' year-to-date securities trading revenue is still 47% higher than its annualized quarterly average since 2017. In our opinion, the ongoing normalization of securities trading revenue is the significant potential headwind facing BNP Paribas. Net interest margin expansion on the back of higher interest rates should offset most of the reduction in investment banking income, even though BNP Paribas is not as rate-sensitive as most European banks. With credit fundamentals deteriorating, BNP Paribas management's high degree of confidence during the earnings call that it will not exceed its guidance of loan-loss provisions remaining below 40 basis points of loans, stood out to us.