BNP PARIBAS 
(MT Newswires) -- BNP Paribas CFO Lars Machenil discusses the bank's financial forecasts for the year. On the commercial property front, although demand has fallen, Machenil said this would not significantly affect BNP Paribas' results, thanks to ongoing optimisation efforts.
Regarding loan loss provisions, he mentions that BNP Paribas expects to keep the cost of risk below 40 basis points, despite a 39% increase in loan loss provisions, mainly related to the real estate sector, an increase that Machenil attributes to non-recurring events. In 2022, BNP Paribas reassessed its risk models, having identified that they were too conservative. This revision led to a reduction in provisions, resulting in an abnormally low cost of risk for the year.
However, in 2023, the bank had to adjust its accounts to reflect the sale of non-performing loans. When a bank sells non-performing loans, it has to sell them at a lower value than that recorded in its books, resulting in a loss. These losses had been provisioned upstream in the bank's equity, but at the time of sale they have to be reclassified in the cost of risk, which explains the recycling effect mentioned by Machenil.
The recycling effect means that losses already provisioned and reflected in equity are 'recycled' in the calculation of the cost of risk. This accounting adjustment increases the cost of risk reported for the year of sale, even though these losses had already been taken into account in the bank's reserves.
The cost of risk is a financial indicator used by banks to estimate the potential risk of loss associated with their loans. It is generally expressed in basis points, where one basis point is equivalent to 1/100th of a percentage point, or 0.01%. So when Lars Machenil, BNP Paribas' Chief Financial Officer, says that the bank expects to keep the cost of risk below 40 basis points, it means that the bank expects potential loan losses to be no more than 0.40% of total loans outstanding.
