BNP Paribas: Attractive Despite French Political Risk

Despite the increased political risks, 4-star-rated BNP remains one of our top picks in the European banking sector, trading at a 26% discount to our fair value estimate. BNP trades at a 40% discount to the European banking sector's average price/tangible book ratio and it offers a juicy 7.5% dividend yield. While we expect BNP's midcycle profitability to lag the sector somewhat, we do not believe it justifies such a steep discount, especially if we consider BNP's remarkable historical earnings stability. France contributed only about 25% of BNP's revenue in 2023, compared with 40% for Societe Generale and 46% for Credit Agricole. BNP has deployed some excess capital into several small bolt-on acquisitions that should support incremental earnings growth. The increased volatility in European capital markets due to the French elections may be a positive for BNP's investment banking franchise as its clients will look to hedge risks on rates and currency, supporting volume, and wider spreads will support trading margins.