Acquisition Of AXA Investment Management Will Create Synergies And Cost Savings By 2024

Key Takeaways

• Revenue growth expected from corporate client financing in climate and technology transitions, leveraging CIB demand and Capital Markets Union opportunities.
  
• Operational efficiency and strategic acquisitions in Insurance and Asset Management aim to enhance earnings and achieve significant cost savings by 2024.
  
• Economic uncertainties and competitive pressures in key markets could strain profit margins and hinder revenue growth for BNP Paribas.

Catalysts

Provides various banking and financial products and services in Europe, the Middle East, Africa, the Americas, and the Asia Pacific.

• BNP Paribas is poised for revenue growth driven by its intention to capitalize on expanding corporate client financing needs, particularly in climate and technology transitions, as well as potential European market growth from the Capital Markets Union. This is particularly relevant for CIB where the demand for financing and deep client relationships are leveraged to support revenue growth.
  
• The ongoing transformation within Insurance and Asset Management through the acquisition of AXA Investment Management suggests potential synergies and efficiency improvements that could enhance revenue and earnings. It is a strategic move towards capital-light, fee-driven services, increasing potential for cross-business synergies that could boost revenue.
  
• Operational efficiency measures are expected to yield up to €1 billion in cost savings for the full year 2024, which should positively impact net margins and earnings by reducing overall costs and allowing better allocation of resources towards growth initiatives.
  
• Improvements in commercial banking in the Eurozone, driven by a favorable interest rate environment, stabilization of loans and deposits, and reduced impacts of previous headwinds, are projected. This environment should enhance revenue growth and contribute positively to earnings beyond 2024.
  
• The planned share buybacks returning 60 bps of capital to shareholders will likely enhance EPS, while strategic investments reinvesting 90 bps into high potential value-creating activities are expected to strengthen earnings capacity in capital-light, fee-driven businesses within BNP Paribas.

BNP Paribas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BNP Paribas's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.0% today to 24.0% in 3 years time.
• Analysts expect earnings to reach €13.0 billion (and earnings per share of €11.57) by about December 2027, up from €10.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €11.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.3x on those 2027 earnings, up from 6.5x today. This future PE is lower than the current PE for the GB Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.57%, as per the Simply Wall St company report.

BNP Paribas Future Earnings Per Share Growth

Risks

• The continued normalization of used car prices in Arval, with a decrease of 35% year-on-year, could negatively affect revenues and net margins until the fourth quarter of 2025.
  
• Intense competition on loans and deposits in the Belgian market, coupled with market disruptions, may compress margins and adversely impact net income.
  
• Ongoing geopolitical and macroeconomic uncertainties pose risks, particularly in the Europe-Mediterranean region, affecting revenue growth and increasing the cost of risk.
  
• The high capital allocation toward the Institutional and Private Client Solutions (IPS) division may not yield the anticipated synergies and return on investment, potentially dragging on earnings and net margins.
  
• BNP Paribas is exposed to execution risks related to the integration of AXA Investment Managers, which may delay expected synergies and thus impact future earnings.

Valuation

• The analysts have a consensus price target of €79.4 for BNP Paribas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €96.0, and the most bearish reporting a price target of just €65.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €54.4 billion, earnings will come to €13.0 billion, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 6.6%.
• Given the current share price of €59.59, the analyst's price target of €79.4 is 24.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.