Citadel, Jefferies, Barclays and JPMorgan were all rumoured over the course of the year to be interested parties. It was somewhat surprising, therefore, when the news broke that BNP Paribas had done a deal with BoA.
BNP announced in June that it would be buying the business at a cost believed to be $300 million. BoA had been looking for a buyer for six months, and analysts suggested that the lack of interest would drive down the price to half that value if markets continued to be shaky and balance sheets of potential bidders were tested.
It is an interesting move for BNP Paribas, which has no prime brokerage capabilities. But market participants say it makes good sense for the French bank. BNP’s global head of corporate and investment banking, Jacques d’Estais, says his firm, having weathered the financial crisis better than most, is now well positioned for such acquisitions.
The prime brokerage industry has become increasingly competitive over the past few years as investment banks have battled for a share of the highly profitable hedge fund business. "Hedge funds are high-frequency traders so bring in a lot in commissions, and are also willing to pay high money for good services. It is a very healthy business to be in," says David Easthope, senior analyst at Celent.
Traditionally, Morgan Stanley, Goldman Sachs and Bear Stearns have been the top-tier prime brokers but in recent years pressure has been put on market share as UBS, Citi, Lehman Brothers and Deutsche have increased their presence. When Bear Stearns was sold to JPMorgan, many hedge fund prime brokerage clients began looking for other partners, however. And with several of the second-tier prime brokers under pressure, a gap in the market has opened up.
Easthope says: "BNP’s timing is good, and it’s a very opportunistic move. With several banks under stress, it is a convenient time to enter the market."
The capabilities of BNP Paribas in secured financing, securities settlement, custody and securities finance complement the prime brokerage business. "The firm is well known for its securities services expertise, and prime brokerage is a good fit," says Easthope. "Bear Stearns, for example, had a great prime brokerage business and a clearing business, and BNP Paribas brings a similar offering. If BNP can integrate Bank of America’s business into the services platform, it will have an end-to-end offering whereby hedge funds can trade, clear and settle with the firm. That’s an appealing proposition." BNP Paribas will need to ensure at the same time, however, that it is active in producing innovative trading ideas for hedge funds.
"The question is, will BNP Paribas make it to the top tier of prime brokers? Being a great custodian is not enough without being best in trading ideas," Easthope adds.
Todd Steinberg, head of equities and derivatives for the Americas at BNP Paribas, is confident that it is possible. "[The firm] has all the capabilities to become a leader in the prime brokerage industry including an AA+ credit rating, strong balance sheet, global platform and market-leading derivatives business," he says. The deal will create "a powerful new player in the industry". Other European banks that have made strides in US prime brokerage will certainly face stiffer competition when the deal closes in the second half of the year.