(Updates with description of probe in seventh paragraph.)
Feb. 13 (Bloomberg) -- BNP Paribas SA, France’s largest bank, reported a surprise drop in fourth-quarter profit after setting aside $1.1 billion tied to a review of payments to parties subject to U.S. economic sanctions.
Net income fell 76 percent to 127 million euros ($173 million), the lowest result since the fourth quarter of 2008 and below the 1.02 billion-euro estimate of analysts surveyed by Bloomberg. BNP kept its dividend unchanged, missing forecasts, and the stock fell the most in almost eight months.
“Clearly that $1 billion could have been used somewhere else,” said Roger Francis, a credit analyst at Mizuho International Plc in London. “There is some pain for the shareholders to be passed on, but things are not derailing.”
The French bank said in October that following discussions with the Department of Justice and other U.S. regulators it had for several years been reviewing “certain U.S. dollar payments involving countries, persons and entities” that might be subject to American sanctions. BNP Paribas didn’t identify the parties involved. The decision to set aside funds comes after firms including HSBC Holdings Plc, ING Groep NV and Standard Chartered Plc paid to settle U.S. allegations they carried out improper transactions with countries such as Iran.
The BNP probe focuses on dealings tied to Iran, Sudan and Cuba, according to a person with knowledge of the matter. Authorities involved include Manhattan U.S. Attorney Preet Bharara, Manhattan District Attorney Cyrus Vance Jr. and Benjamin Lawsky, superintendent of the New York Department of Financial Services, the person said, asking not to be named because the inquiries are confidential. Spokesmen for Bharara, Vance and Lawsky declined to comment.
BNP Paribas fell as much as 4.8 percent, the biggest intraday drop since June 20, and was down 2.6 percent to 59.30 euros as Paris trading closed. The shares have climbed 29 percent in the past 12 months, trailing the 48 percent gain in Societe Generale SA, France’s second-largest bank by market value.
European and U.S. banks have faced mounting legal bills as regulators and governments tighten their oversight and crack down on misbehavior. Deutsche Bank AG, Germany’s biggest bank, had a surprise fourth-quarter loss as it settled a lawsuit alleging it deceived clients about products linked to U.S. mortgages and a probe into traders colluding to rig benchmark interest rates. JPMorgan Chase & Co., the biggest U.S. bank, agreed to more than $23 billion in legal settlements last year.
“The final amount that will be booked could be very different from the one we have provisioned,” BNP Chief Financial Officer Lars Machenil said in an interview with Bloomberg Television. The size of the charge wasn’t discussed with U.S. authorities beforehand, said Machenil, who declined to elaborate on the probe.
BNP Paribas proposed to pay a dividend of 1.50 euros a share for 2013, unchanged from the previous year and below the Bloomberg Dividend Forecast of 1.75 euros. BNP will target a dividend payout of about 45 percent of earnings for 2016, compared with about 41 percent for 2013, it said. Annual profit declined 26 percent to 4.83 billion euros last year.
BNP targets 2016 revenue at least 10 percent higher than last year, excluding acquisitions, it said in a presentation on its website. The bank’s full-year 2013 sales were 38.8 billion euros, a 0.6 percent decline from the previous year.
The bank pursued investments and acquisitions in the fourth quarter, agreeing in November to buy the rest of its Belgian consumer-banking unit and three weeks later to purchase Rabobank Groep’s Polish division. Chief Executive Officer Jean-Laurent Bonnafe last year announced plans to expand in Asia, Germany and in online banking and asset-management.
“We basically want to grow,” Machenil said in the interview. BNP Paribas may also seek “some bolt-on acquisitions, but it wouldn’t be large acquisitions,” he said.
The company intends to increase return on equity, a measure of profitability, to at least 10 percent by 2016, excluding one- time items, it said today. ROE stood at 7.7 percent in 2013, the bank said. BNP Paribas will present details of its 2016 targets to investors next month.
“What matters is the plan, not the results,” said Alain Tchibozo, a London-based analyst at Mediobanca SpA who has a neutral rating on the stock. “It gives visibility for the future.”
The bank’s common equity Tier 1 capital adequacy ratio under fully applied Basel III rules, a key measure of financial strength, stood at 10.3 percent at the end of December, down from 10.8 percent three months earlier following the Belgian purchase. Equity as a portion of total assets, known as the leverage ratio, amounted to 3.7 percent, above the 3 percent threshold regulators will require at the start or 2018.
Societe Generale said yesterday it plans a dividend of 1 euro a share for 2013, more than double the year-earlier payout, after annual profit almost tripled to 2.18 billion euros. It is targeting an ROE of 10 percent by the end of next year.
Pretax profit at BNP Paribas’s corporate and investment bank, which includes trading and corporate finance, rose 36 percent to 350 million euros. BNP Paribas was among European banks that reduced corporate and investment banking staff and risk-weighted assets between the middle of 2011 and 2012 as short-term dollar funding for the region’s lenders evaporated during the worst of Europe’s sovereign-debt crisis.
BNP’s advisory and capital-markets revenue rose 3 percent in the fourth quarter from a year earlier as its equity and advisory income climbed 44 percent to 465 million euros, helped by a “good level of transaction volumes and investor demand for structured products.” Fixed-income revenue declined 13 percent to 721 million euros, according to the bank’s presentation.
“BNP Paribas showed good operating resilience in a lackluster economic environment in Europe in 2013,” Bonnafe, 52, said in the statement.
The bank is now expanding its equity-derivatives franchise. In October, the Paris-based firm signed an agreement to take on a 12.5 billion-euro equity-derivatives book from Credit Agricole SA. BNP is also in talks with Royal Bank of Scotland Group Plc to buy the British lender’s equity derivatives and retail structured products unit.
BNP Paribas’s consumer banking pretax earnings fell 18 percent to 1.17 billion euros in the fourth quarter. Pretax profit at the French consumer bank fell 3.5 percent to 354 million euros, while in Belgium, where BNP Paribas’ consumer- banking unit is closing 150 branches by 2015, fourth-quarter pretax earnings rose 7.5 percent from a year earlier.
In Italy, where the economy is exiting its longest recession in more than two decades, pretax earnings at BNP’s Rome-based unit, Banca Nazionale del Lavoro, dropped 63 percent to 24 million euros, the bank said.
Pretax profit at BNP Paribas’s investment-solutions unit, which includes asset management, private banking and insurance, fell 15 percent to 493 million euros in the fourth quarter.
--With assistance from Greg Farrell and David Scheer in New York. Editors: Frank Connelly, Keith Campbell