(News Bulletin 247) – This legal setback last week cut around 8 billion euros in market capitalization from the leading French bank. For Jefferies this impact is exaggerated and the action is too cheap to ignore.

It is a legal setback which wiped out several billion euros of market capitalization at the bank: Sudan. Or more precisely the “Kashef and al versus BNP Paribas” file.

In 2016, several Sudanese refugees in the United States (including Entesar Osman Kashef) filed a complaint against the French bank, accusing it of being complicit in the violence committed by the regime of Omar Al-Bashir, former Sudanese president overthrown by a coup in April 2019, and by affiliated militias.

Friday October 17, a popular jury in New York recognized BNP Paribas as complicit in abuse, by having organized commercial transactions whose proceeds would have financed the Al-Bashir regime.

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.

>> Access our exclusive graphic analyses, and gain insight into the Trading Portfolio

BNP Paribas multiplies initiatives

The bank argued that its responsibility had not been demonstrated and that the regime of Omar Al-Bashir would have committed the same abuses without it, according to AFP.

The following Monday (October 20), BNP Paribas shares lost nearly 8%. More than the verdict of the popular jury, it was the estimates of the costs of a potential “class action” (group action), formulated by Bloomberg, which frightened investors.

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 mentioned an amount of up to $10 billion.

As is often the case, in this type of situation, investors have “adopted a very cautious approach”, underlined Oddo BHF.

BNP Paribas, for its part, has stepped up initiatives to reassure investors. The group announced it would appeal and claimed the popular jury’s verdict was “manifestly erroneous.”

The establishment maintains in particular that this file is a matter for Swiss justice and affirmed that the Swiss government had confirmed that the complainants’ allegations “were devoid of legal basis”. The Swiss government “even took the extraordinary step of submitting to the court, before the trial, a letter confirming the absence of any action for complicity liability against BNP Paribas”, explained the establishment.

The French bank also warned that extrapolating the judgment of the verdict of the New York popular jury was “erroneous” as was speculating on a possible “settlement” (a transactional agreement, Editor’s note). BNP Paribas assured that it had “no pressure” to establish this type of agreement.

An overhang

Its financial director, Lars Marchenil, then assured analysts, during a conference call, that the group had not made any provisions linked to this dispute in its accounts.

While all these communications and initiatives are notable, it is difficult for the market to abandon its caution on this issue.

“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,” Royal Bank of Canada explained last week.

Barclays, for its part, downgraded its advice on the stock to “online weighting”, compared to “underweight” previously. The British bank judges that this Sudanese issue will prevent BNP Paribas shares from rising again, due to the many uncertainties surrounding it.

For Jefferies, on the contrary, the stock is too cheap to ignore. The bank reiterated its “buy” advice on the stock this Monday, October 27, while adjusting its price target to 95 euros compared to 94 euros previously.

According to Jefferies, the fall in BNP Paribas shares was too violent. “We consider the Kashef file (the Sudanese dispute, editor’s note) as an ‘overhang’ (a sword of Damocles, editor’s note) for the BNP stock, but not as an insurmountable obstacle,” explains the research office. “And a risk which does not justify a loss of market capitalization of 8 billion euros. We therefore believe that the fall in the price is exaggerated,” she says.

“Many market players have tried to interpret the trial of three people as if it were a class action of more than 20,000 people,” Jefferies further develops.

However, “the verdict rendered in the Kashef case is not relevant to the class action: what happened with the three plaintiffs tells us nothing about the approximately 20,000 other people affected by the class action.”

The 2014 fine

“We also believe that BNP has ample grounds to appeal this case and, potentially, challenge (again) the class action certification itself,” Jefferies further explains.

The financial intermediary notes, however, that one point complicates the situation: the fine of nearly 9 billion dollars that BNP Paribas received in 2014 from the American authorities for having circumvented embargoes linked to Sudan, Iran and Cuba. BNP Paribas then agreed to plead guilty but retained its banking license in the United States.

“Although these illegal acts were committed against the United States and not the Kashef Plaintiffs, the guilty plea provides the Kashef Plaintiffs with a factual basis,” Jefferies wrote.

The research office also notes that the volatility in the BNP Paribas stock (and therefore the violence of the fall caused by this legal case) is also linked to the fact that the CET 1 solvency ratio (which relates the equity to the risk-weighted outstandings) of the bank on rue d’Antin does not always exceed 13%. This observation was also made by UBS. The Swiss bank, last week, wrote that many investors would like BNP to have a higher ratio.

With a 30% discount in its stock market valuation compared to the value of its book assets (“tangible book value”), “the share must be bought and not sold”, says Jefferies.

BNP Paribas will publish its third quarter results on Tuesday October 28. According to the Visible Alpha consensus cited by Jefferies, analysts expect revenues of 12.84 billion euros and net profit of 3.07 billion euros.