Jan. 30 (Bloomberg) -- BNP Paribas SA, France's largest bank, reported a 42 percent decline in fourth-quarter profit following 589 million euros ($871 million) of costs linked to the global credit market slump.

Net income fell to about 1 billion euros, the Paris-based bank said in a statement today. Earnings fell short of the 1.3 billion-euro mean estimate of five analysts surveyed by Bloomberg. Full-year profit rose 7 percent to 7.8 billion euros, a record for a French bank.

The collapse of the U.S. subprime mortgage market roiled credit markets and led to more than $133 billion of losses and writedowns at the world's biggest financial institutions. The costs to BNP Paribas were dwarfed by the $14 billion of writedowns announced today by UBS AG, Switzerland's largest bank, and less than those of French rivals Societe Generale SA and Credit Agricole SA.

``They told us before they didn't have any exposure to subprime, and now they have some that they have insured, which is a bit disappointing because we didn't know this before,'' said David Moss, a fund manager at F&C Asset Management Plc in London that oversees about 100 billion pounds ($199 billion) of assets, including BNP Paribas shares.

The French company was one of the first banks to be publicly caught up in the credit market seizure in August when it froze three funds, saying it could no longer find prices for some of the securities they held.

Merger Speculation

BNP Paribas fell 77 cents, or 1.1 percent, to 66.83 euros in Paris trading. It rose 2.9 percent yesterday and Societe Generale gained 10 percent on speculation the French government is trying to arrange a merger between the two.

Societe Generale reported 2.05 billion euros of subprime- related writedowns last week and said unauthorized trades cost it an additional 4.9 billion euros, the largest trading loss in banking history. Profit for 2007 fell to as little as 600 million euros from 5.2 billion euros in 2006.

``You cannot be one of the leading French banks and not look at another bank in France that's been wounded,'' said Mamoun Tazi, an analyst at MF Global Securities Ltd. in London.

Philippe Bordenave, BNP's chief financial officer, said today in a conference call with analysts that management has been working ``around the clock'' to prepare the results and ``we haven't had time to think about Societe Generale.'' In an interview with Le Monde newspaper, Chief Executive Officer Baudouin Prot declined to discuss its French competitor.

Credit Agricole announced in December writedowns and provisions that will cut 2007 earnings by 1.6 billion euros. That follows writedowns of 850 million euros in the first three quarters of 2007.

Weathered Crisis

``BNP Paribas seems to have weathered the crisis fairly well, with more limited writedowns compared to peers,'' Kian Abouhossein, an analyst at JPMorgan in London, wrote in a note to clients. He has a ``neutral'' rating on the shares because they trade at higher multiples than other French banks.

BNP Paribas took 456 million euros in provisions linked to a rise in counterparty risk for bond insurers. Bordenave wouldn't name the bond insurers, but said its risks were spread among ``three or four'' and that they are ``the names you would expect.''

Reserves, Write-Offs

Banks bought credit-default swaps from financial guarantors such as ACA Capital Holdings Inc. to guard against losses on mortgage-linked securities, and then later bought protection for the possibility those guarantees may be worthless as defaults surged.

The bank also wrote down the value of securities and loans committed to leveraged buyouts by a total of 96 million euros. It sold 1.5 billion euros of securities linked to leveraged buyouts in the quarter, without recouping or needing to add to provisions it took the previous quarter.

BNP Paribas said loan reserves and write-offs cut earnings by an additional 309 million euros, including 171 million euros at its U.S. unit BancWest. BancWest's risks related to subprime mortgages stands at 300 million euros, or 1 percent of its investments, while BNP said its investment bank has nothing further at risk related to subprime.

`Nervous Markets'

``This is one of the stocks that's less been affected by the issues in the U.S. and all these writedowns,'' said Christian Gattiker, head of equity markets at Bank Julius Baer & Co., in an interview today with Bloomberg Television. ``Given the adverse conditions in financial markets in the fourth quarter, these are OK numbers.''

The bank will report more detailed results on Feb. 20. Bordenave said the bank moved up an estimate of its earnings because of ``nervous markets.''

``Our very satisfying performance in 2007 can be explained by our stringent risk policy and our strong growth dynamic,'' Prot said in the statement.

The bank raised its dividend by 8 percent to 3.35 euros a share.

To contact the reporter on this story: Gregory Viscusi in Paris at gviscusi@Bloomberg.net.

Last Updated: January 30, 2008 11:51 EST