BNP Rebound Wagers Surge as Cloud Lifts Over U.S. Fines

Options traders see $5 billion of fines as little more than a bump in the road for shares of Paris-based BNP Paribas SA.

The price of call contracts that pay should the stock rally in the next nine months is higher now relative to bearish bets than at almost any time since 2010, according to data compiled by Bloomberg. BNP Paribas stock has slumped 8.8 percent this year, the fourth-most in France’s CAC 40 Index and leaving it cheaper than 36 constituents in the gauge.

U.S. authorities are seeking what would be the largest penalty for sanctions violations after probing BNP Paribas’s dealings with countries including Sudan and Iran, a person with knowledge of the situation said this week. With the uncertainty over the size of the fines lifting, the stock valuation will rebound, Karim Bertoni of de Pury Pictet Turrettini & Co. said.

“When the news comes out, it’s kind of a relief because then at least you can put a line in the sand and you understand the situation,” Bertoni, who helps manage $3.3 billion at de Pury Pictet Turrettini in Geneva, said by telephone. “The fact that you erase the uncertainty is taken well by the market.”

The agreement to settle criminal charges may be announced as soon as next month, according to a person familiar with the matter. Discussions are continuing, and the final amount could change. France’s largest bank said in April that it may need to pay far more than the $1.1 billion it has set aside for the alleged U.S. sanctions breaches.

Stock Rebound

BNP Paribas rebounded 1.3 percent yesterday, its biggest gain in two weeks, after losing 1.3 percent on May 21. When Credit Suisse Group AG agreed to pay $2.6 billion in penalties for helping U.S. citizens evade taxes, ending a three-year probe, the stock jumped as much as 3 percent.

“These fines are a one-time event, and they aren’t financially onerous or threatening to the ongoing operations of the bank,” Timothy Ghriskey, chief investment officer at New York-based Solaris Asset Management LLC, which helps manage about $1.5 billion in assets, said by phone yesterday. “It’s a thing of the past, and it won’t be an overhang on the stock going forward.”

U.S. prosecutors are seeking a guilty plea from BNP Paribas and a settlement to federal and state investigations for transactions involving Sudan, Iran and Cuba, all countries that are under U.S. economic sanctions. The bank said in 2011 that following discussions with the nation’s authorities it was reviewing operations to see if it complied with rules of the Office of Foreign Assets Control.

Stock Jump

BNP Paribas surged 164 percent from a low in September 2011 to a more than five-year high on Feb. 12, beating the Stoxx Europe 600 Bank Index’s 70 percent rally in the same period and the CAC 40’s 55 percent advance. Shares of the French lender have slumped 15 percent since their high and now trade at 0.79 times book value, data compiled by Bloomberg show. That’s the lowest multiple in the CAC 40 after ArcelorMittal, Credit Agricole SA and Societe Generale SA.

Net income at BNP Paribas climbed 5.2 percent in the first quarter, the biggest quarterly increase since 2012 and following a 26 percent earnings slump last year. Analysts estimate profit will jump 23 percent this year, according to the average projection in a Bloomberg survey. That would be the biggest increase since 2010.

2016 Targets

In March, the bank set a series of targets for 2016 to capture a higher portion of the global demand from investors and corporations for fixed-income products in markets such as Asia and North America. It is also expanding its equity-derivatives business. BNP Paribas aims to boost its return on equity, a key measure of profitability, to at least 10 percent by 2016 from 7.7 percent last year.

Options traders are betting on a stock rebound. Contracts pricing in a 10 percent decline in BNP Paribas shares cost 2.2 points more than wagers betting on a 10 percent increase, according to nine-month implied-volatility data compiled by Bloomberg. The spread reached 1.7 on May 13, the lowest since data going back to 2010.

Bullish calls betting on a 24 percent increase from yesterday’s close were the most owned, data compiled by Bloomberg show. Those expire next month.

Julia Boyce, a spokeswoman for BNP Paribas, declined to comment on the options trading.

Transfer Ban

A potential ban on transferring money into and out of the U.S. could impair BNP Paribas’s growth plans in America, according to Jean-Pierre Lambert, an analyst at Keefe, Bruyette & Woods Ltd. in London. The ban would be temporary and was floated by New York’s Superintendent of Financial Services, according a person with knowledge of the talks. If the French lender isn’t allowed to pay another bank to provide the service, it could push some customers to competitors.

Lambert on May 1 lowered his rating on BNP Paribas to market perform, the equivalent of a hold, from outperform, citing lackluster earnings expectations driven mainly by weakness in its fixed-income business. Revenue at the unit sank 22 percent in the first quarter, BNP Paribas said last month.

“If there are operational constraints, what does it mean for the revenues originating from the U.S.?” Lambert said by phone, referring to the possible ban on money transfers. “That means there’s also a risk of the financial targets being eroded. The deterioration in the momentum of earnings plus the risk of impact on U.S. targets led me to downgrade.”

CAC Volatility

The CAC 40 Volatility Index, a measure of the French gauge’s option prices, gained 0.5 percent to 13.86 today. The VStoxx Index, which tracks the cost of Euro Stoxx 50 Index derivatives, climbed 2.2 percent to 15.6 after closing at its lowest level since November yesterday.

BNP Paribas could beat its 10-percent target for return on equity if it successfully reshapes its business, according to Barclays Plc’s Kiri Vijayarajah, who has an overweight rating on the bank, similar to a buy.

“BNP has made strong progress in de-risking, improving its funding structure,” London-based Vijayarajah wrote in a May 16 note. He named BNP Paribas as one of his top picks and predicts the shares will climb to 65 euros. It “is one of Europe’s most diversified banks by product and geography,” the analyst said.