By Elena Vardon and Adam Whittaker

BNP Paribas expects a higher capital impact and lower return on investment than initially projected for its acquisition of AXA Investment Managers, after the European Central Bank clarified its regulatory stance on such deals.

The French bank last year agreed to buy the asset management arm of French insurer AXA for 5.1 billion euros ($5.79 billion) through its insurance arm BNP Paribas Cardif in a move that would create a European asset-management giant and bulk up its investment-management operations.

BNP had been discussing with supervisory authorities whether it could apply the so-called Danish Compromise rule to the deal for more lenient capital treatment. The regulation allows banks to risk-weigh their insurance investments instead of deducting them in full from their capital, making acquisitions cheaper in terms of capital consumption.

However, ECB Chair of the Supervisory Board Claudia Buch said Friday, in an interview published on its website, that the Danish Compromise is "intended to be applied to the insurance sector and not to, for example, asset management undertakings."

The ECB recently issued a negative view on a similar deal in Italy: Banco BPM's takeover of asset manager Anima Holding through its insurance unit BPM Vita. The deal has since closed without application of the Danish Compromise.

"A negative definitive decision on the usage of the Danish Compromise could act as a break for further M&A on the financial sector in our view," ING said in a research comment last month following the news.

On Monday, BNP Paribas noted the ECB's view and said it now estimates an around 35 basis-point hit to its common equity tier 1 ratio--which measures capital strength--from the AXA IM deal. It also expects its return on invested capital to be above 14% three years after completion and more than 20% in the fourth year.

This compares with the bank's initial estimates of a 25 basis-point capital hit and an 18% third-year return.

Despite this downgrade to projections, the potential capital hit isn't as bad as analysts had feared.

"Not applying the Danish Compromise for this transaction would not change the trajectory of earnings," Jefferies analysts wrote to clients on Friday, estimating a 43 basis-point hit to the group's CET1 ratio without it.

Still, the analysts noted that the move could limit the capacity of BNP to grow inorganically.

On Monday, Deutsche Bank analysts said they viewed the revised projections positively, expecting the bank to "easily absorb the additional capital impact of [around 10 basis points] without impacting its growth or payout targets."

RBC Capital Markets echoed this view in a research note, pointing out that the hit from a higher capital consumption is likely to be offset in the longer term from the value created from the deal.

The final conditions on capital treatment of the deal will be disclosed upon completion, which is still expected in early July, BNP Paribas added.

The company also confirmed that it is maintaining the share buyback program it launched in February, as well as its existing distribution policy and profitability targets.

Write to Elena Vardon at elena.vardon@wsj.com and to Adam Whittaker at adam.whittaker@wsj.com

(END) Dow Jones Newswires

April 14, 2025 07:59 ET (11:59 GMT)

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