Understanding the Impact of Scandals on Company Value: A Case Study of BNP Paribas
Recent history has shown us that the fallout from corporate scandals can have a wide range of impacts on the value of businesses. One such instance is the case of BNP Paribas, a French multinational bank. The bank’s supposed links to a regime in Sudan that was involved in genocide raised serious concerns among investors, and the subsequent court case threatened to have a devastating impact on BNP’s value. However, the situation has since turned out to be quite the contrary.
The genesis of the issue lies in the bank’s work banking the regime of the now-deposed Sudanese leader, Omar al-Bashir. A US court decided that the bank had to pay damages to refugees who were affected by the activities of this regime. The court’s decision initially saw the bank’s shares drop, but they have since bounced back to nearly the same level as before the case.
Scandals and Their Surprisingly Small Impacts
At first glance, the potentially devastating impact of the case on BNP’s value seemed inevitable. With an estimated 23,000 potential class action claimants and a total of $20.8mn awarded to the three initial claimants, the total cost of settlements could have exceeded the bank’s entire €82bn market value. However, this hasn’t been the case.
Class action settlements are typically a fraction of the overall damages. For instance, according to Cornerstone Research, the median settlement was 7.3 per cent of damages in 2024. This would imply that BNP could potentially be liable for about $12bn, or €10bn. Furthermore, larger claims tend to settle for even less – more like 3.4 per cent of total damages. As such, analysts at Citigroup have projected a bear-case estimate of only a €5bn charge.
Even after accounting for the time value of money, which implies that the bank’s market value would fall by less than $5bn due to the prolonged legal process before any actual payout, BNP remains confident of overturning the ruling.
Subtle Impacts of Scandals and Other Challenges
Scandals often have more subtle impacts on a company’s value. For BNP, its valuation is noticeably lower than its large rivals, such as Santander and UniCredit, despite some encouraging updates like a new buyback and a stronger capital target.
BNP faces the challenge of investors who prefer to invest in other banks’ shares to avoid the unusual “tail risk” associated with the Sudan issue and the seemingly endless political uncertainty in its home market of France.
The presence of rivals with similar businesses means that investors are not forced to tolerate the tail risk associated with BNP. This is another factor that may prevent BNP from fully bridging the valuation gap.
For more information, you can contact nicholas.megaw@ft.com.
Source: Here
