Nov. 5 (Bloomberg) -- BNP Paribas SA, France's largest bank, said third-quarter profit fell 56 percent as provisions for risky loans quadrupled following the collapse of Lehman Brothers Holdings Inc. and the worsening of European economies.

The bank dropped as much as 6.7 percent in Paris trading after reporting a decline in net income to 901 million euros ($1.17 billion) from 2.03 billion euros a year earlier. Earnings fell short of the 1.38 billion-euro median estimate of 13 analysts surveyed by Bloomberg News.

BNP Paribas dodged the worst of the financial crisis, taking the opportunity to make acquisitions such as Fortis's operations in Belgium and Luxembourg. The French bank wasn't immune to the effects of Lehman's bankruptcy, which froze credit markets and forced governments in the U.S. and Europe to aid banks to avert a financial catastrophe.

``The financial crisis had a strong impact on our books,'' Chief Executive Officer Baudouin Prot said in an interview with Bloomberg Television. ``At the investment bank we had slightly negative revenues for the first time in October. We'll gradually get back to a more normal activity.''

The financial crisis cost BNP Paribas about 1.7 billion euros in provisions and asset writedowns in the third quarter, excluding 123 million euros of gains from its own debt, the bank said. Like Paris-based Societe Generale SA, Prot, 57, decided not to use new accounting rules that are less stringent on markdowns.

Investment Bank Profit

The French bank fell 3.5 euros, or 6 percent, to 55 euros by 11:19 a.m. in Paris. The stock declined 26 percent so far this year, compared with a 53 percent slump in the 69-company Bloomberg Europe Banks and Financial Services Index. Societe Generale, France's No. 2 bank by market value, fell 49 percent.

Profit before tax at BNP Paribas's investment bank fell to 38 million euros from 760 million euros a year before. The unit, which increased revenue by 4.6 percent, had 1.03 billion euros of loan provisions and 289 million euros of asset writedowns.

``Given the extreme volatility on equity market indices in October, the fourth quarter looks challenging'' for BNP's investment bank, Alain Tchibozo, an analyst at ING Wholesale Banking who rates the company ``hold,'' said in a note today.

BNP did better than investment-banking rivals in Europe. The securities units of Frankfurt-based Deutsche Bank AG, Credit Suisse Group AG and UBS AG of Zurich, and Societe Generale, all reported losses for the quarter.

Lehman, Iceland

Overall, provisions for risky loans soared to 1.99 billion euros from 462 million euros, the bank said, almost triple the 700 million-euro estimate of analysts. The asset-management and investment-banking units took 512 million euros of charges related to Lehman, which went bankrupt on Sept. 15.

The investment banking division also set aside 462 million euros tied to debt backed by U.S. bond insurers, and 83 million euros for risks linked to Iceland's banks.

Banks worldwide have reported about $690 billion of credit losses and writedowns since the start of last year as the worst U.S. housing slump since the Great Depression battered credit markets, data compiled by Bloomberg show.

Prot told reported in Paris today that actions by governments and central banks have stopped the systemic risk that threatened the financial system. Still, markets remain ``far from normal,'' and BNP Paribas won't be immune to deteriorating economic conditions, he said. He predicted a ``gradual, slow improvement from the financial crisis.

Retail Banking

Pretax profit at BNP Paribas's asset management unit dropped 71 percent to 134 million euros, missing the 411 million-euro estimate of analysts. The unit added a net 7.4 billion euros in the quarter from client investments.

BNP Paribas was one of the first banks publicly caught up in the credit market seizure in August 2007 when it temporarily froze three funds because it couldn't find prices for some of the securities they were holding.

The French bank last month agreed to take control of Fortis in Belgium and Luxembourg for 14.5 billion euros to gain 3.3 million retail clients and become the biggest lender by deposits in the 15 countries sharing the euro.

Pretax earnings at the French retail network rose 5.5 percent to 385 million euros, matching analysts' estimates. Prot said in May that revenue at the French branches would probably increase 3 percent this year, and on Aug. 6 he reiterated that sales growth will be ``as close as possible'' to that level in the second half.

Capital `Satisfactory'

Pretax earnings at Bancwest, the U.S. consumer-banking unit, fell to 50 million euros from 171 million euros a year earlier. That missed the 128 million-euro estimate of analysts. Pretax earnings at the Italian retail network BNL, acquired in 2006, rose 12 percent to 164 million euros, missing analysts' 180 million-euro median estimate.

BNP Paribas's Tier 1 ratio, a key indicator of financial health, stood at 7.6 percent at the end of September. Including the effects of the Fortis purchase, that measure would be close to 8 percent. ``Our current capital level is completely satisfactory,'' Prot said.

BNP Paribas's shareholders equity rose 9.6 percent since the beginning of the year to 40 billion euros at the end of September, excluding effects from the Fortis acquisition. Capital will be bolstered by selling 2.55 billion euros of subordinated debt to the French government.

To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net.

Last Updated: November 5, 2008 05:42 EST