(News Bulletin 247) – After its fall of almost 8% on Monday caused by concerns about a dispute linked to its activities in Sudan, BNP Paribas organized a conference call with analysts on Tuesday to try to explain the situation. For its part, Barclays preferred to lower its recommendation on Wednesday due to the uncertainty caused by this issue.

It is a legal setback which brought back bad memories to the market. Memories dating back eleven years to be exact, when BNP Paribas paid a fine of nearly 9 billion dollars in 2014, guilty according to American justice of having circumvented embargoes linked to Sudan, Iran and Cuba.

The BNP share had then significantly underperformed its sector on the stock market between the first provision linked to this dispute, at the beginning of 2014, and the agreement reached with the American authorities, in June of the same year, Royal Bank of Canada recalled on Monday.

The Canadian establishment then referred to this episode in a note devoted to the violent fall in BNP Paribas shares, which occurred at the beginning of the week.

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After opening almost stable, the stock suddenly lost up to 10% and closed down almost 8%. At the origin of this decline, market fears surrounding costly compensation to be paid in legal disputes linked to the group’s activities in Sudan.

On October 17, a popular jury recognized BNP Paribas as complicit in abuses in Sudan, by having organized commercial transactions whose proceeds would have financed the army and militias of the regime of Omar Al-Bashir, former Sudanese president overthrown by a coup d’état in April 2019.

The jury decided that BNP Paribas was responsible for the losses and suffering of each of the three plaintiffs, who were expropriated, tortured and imprisoned by Sudanese soldiers and militiamen, Agence France Presse (AFP) reported. The jury awarded damages of $20.75 million (in total), or approximately 18 million euros.

Estimates of billions of dollars in costs

More than this conviction strictly speaking, it was cost assessments cited by Bloomberg which caused the fall of BNP Paribas shares. Because beyond the three plaintiffs affected by last week’s verdict, defense lawyers cited by Reuters put the number of Sudanese refugees who could potentially be compensated at 23,000.

According to Royal Bank of Canada, Bloomberg estimated the cost of a settlement (a transactional agreement, more precisely) for BNP Paribas at up to $10 billion, or 1% of the bank’s CET 1 solvency ratio – which relates equity to risk-weighted assets -.

It is these amounts which therefore worried the market. For its part, BNP Paribas has not remained idle. According to AFP, the bank argued last week that its responsibility had not been demonstrated and that the regime of Omar Al-Bashir would have committed the same abuses without it.

On Monday, the establishment published a press release indicating that it would appeal and that it considered the verdict of the popular jury “manifestly erroneous” ignoring “evidence that the bank was not authorized to present”.

“Any attempt at extrapolation is necessarily erroneous, as is any speculation concerning a possible ‘settlement’ (a transactional agreement, editor’s note). The Bank considers that it has no pressure to reach a settlement in this matter”, also warned BNP Paribas, probably in reaction to the estimates which worried the Stock Exchange.

Another statement from BNP Paribas, also published on Monday, added that the complaint linked to the October 17 verdict was “governed by Swiss law”.

“The Swiss government itself has confirmed that these allegations, based on Swiss law, are devoid of legal basis and has even taken the extraordinary step of submitting to the court, before the trial, a letter confirming the absence of any action for liability of complicity against BNP Paribas”, affirmed the bank of rue d’Antin.

BNP Paribas also assured that the activities it carried out in Sudan were part of usual banking transactions unrelated to the complainants’ accusations, and authorized by Swiss and European laws.

No provisions passed

On Tuesday, the bank this time organized a conference call with analysts and investors. During this meeting, the financial director, Lars Marchenil, spoke to highlight the previous points, reports UBS. He also clarified that the company had not made a provision related to this dispute in the third quarter.

Royal Bank of Canada also reports that the manager explained that Friday’s judgment did not open the way to “class actions” (collective actions) but to judgments on a case-by-case basis, where each plaintiff must provide their evidence. Still according to the comments reported by the Canadian bank, BNP believes that an appeal judgment will take into account the letter sent by the Swiss justice system, which the popular jury did not do. Company management believes the appeal process will take several months. Furthermore, the situation is very different from that of 2014 in that it concerns a civil case and not a criminal or regulatory one.

“BNP’s initiative to organize a conference call was appreciated, but we believe it will take time to have visibility on the potential financial impact, with certain questions about the process, timing and amount of claims remaining open,” says Royal Bank of Canada.

For UBS, the risk linked to this file leads “the market to focus on the bank’s CET 1 ratio targets” once again. The Swiss bank writes that some investors it has spoken with would like BNP to have a higher ratio and commit more forcefully to share buybacks rather than acquisitions or organic growth. This while the bank, according to UBS, increased its CET 1 ratio by 10 basis points (0.1 percentage point) in the second quarter, which it describes as “low capital generation”.

Barclays, for its part, has decided to remain on the sidelines due to the dispute linked to Sudan. The British bank on Wednesday lowered its advice on BNP Paribas from “overweight” to “line weight”, which amounts to going from “buy” to “neutral” in its terminology. The British establishment also reduced its price target to 80 euros compared to 94 euros previously.

A sword of Damocles for the coming months

“BNP Paribas shares are trading with the lowest PER in the sector, at six times, and we expect earnings growth to accelerate from the third quarter onwards, but given the uncertainty surrounding the potential costs of litigation in Sudan, the risks have increased, which, in our opinion, will limit a ‘rerating’ (an appreciation of stock market multiples, editor’s note) for months,” writes the bank.

Barclays believes that this file creates a stock market “overhang”, that is to say a sword of Damocles which prevents the action from rising.

“”The outcome of the appeal is of particular importance, but the average time before appeal is eight months (according to BNP), which suggests prolonged uncertainty around this issue. It is also important to note that even in this case, we cannot predict the outcome of the appeal,” Barclays explains. “We are not legal experts and make no judgment on a likely outcome or on the merits of the case,” the bank emphasizes in passing.

“Assessing the financial risk associated with this legal matter is, in our view, virtually impossible given the lack of available information,” Barclays also writes.

Barclays also adds that while this is clearly not the French bank’s intention, there is a “theoretical possibility” that BNP opts for a transactional agreement.

The establishment also mentions, although this is not its preferred scenario, the “theoretical risk” that the European Central Bank, regulator of banks in the euro zone, limits the return to the shareholder (dividend, share buybacks) until the situation becomes clearer. “And of course there is potential reputational risk associated with the case,” he notes.

BNP Paribas will probably still be questioned about its Sudanese file when it publishes its quarterly results on October 28.