THE EMERGENCE OF BNP Paribas as one of the clear winners from the credit crisis offers intriguing insights into how the global banking industry might reshape itself in the years ahead.
It is a universal bank that has determined ever since the merger of BNP and Paribas 10 years ago to keep the balance of its business mix tilted towards retail. Retail banking accounts for half its earnings. Whenever organic growth in its two other businesses – corporate and investment banking (CIB) and asset management (called investment solutions at BNP Paribas) – disturbs that balance, the bank hunts for retail bank acquisitions to restore it.
In 2006, on the eve of the crisis, it acquired Banca Nazionale del Lavoro in Italy and quickly rolled out the retail banking products and customer relationship management tools it had built in France to revitalize a tired Italian bank that had underinvested in both.
In 2009, it completed the acquisition of Fortis, adding Belgium and Luxembourg to Italy and France as eurozone countries in which it enjoys large shares of the domestic banking market, averaging 10% across all four.
Right now it is searching for smaller acquisitions in the US, exploring the possibility of picking up small local banks from the Federal Deposit Insurance Corporation in Los Angeles or elsewhere in California to bolster its currently troubled San Francisco-based Bank of the West, which ranks among the top 25 commercial banks in the US.
At a time when many risk-averse banks are retreating back within their national borders, often at the bidding of home governments that have spent huge amounts of taxpayer funds to prop them up and now require payback in lending to their own economies, BNP Paribas, thanks to its strong management and good record of overseeing its risk, is able to buck that trend.
Since 2006, it has transformed itself from a predominantly French bank into a predominantly European one. Only one-third of earnings now come from France, compared with more than two-thirds just three years ago. Following the Fortis deal – the largest cross-border takeover in Europe to result from the banking system seizure – BNP Paribas becomes the number-one bank in the eurozone by share of deposits. Fortis brings 4 million new customers, taking the enlarged bank to 14 million retail network customers in Europe. It has also become the number-one private bank in the eurozone, with €237 billion of assets under management and, for good measure, the region’s fifth-largest asset manager, with €511 billion of assets under management.
BNP Paribas’ corporate and investment bank, long established as a leader in the euro fixed income and debt capital markets, is growing market share of its established franchises and increasingly in equity markets and M&A as well.
The bank’s executives are proud of all this, as they are also of coming through the crisis with what they say is a very strong capital ratio – 7.8% equity tier 1 – given the moderate risks and resilient earnings of their underlying businesses, achieved with minimal dilution to shareholders.
A €4.3 billion rights issue, announced and swiftly completed last September to repay French government investment made at the height of the crisis, has been BNP Paribas’ only large capital raise. To maintain their ownership of the bank’s earnings at existing levels, investors had to buy just one new share for each 10 they already owned. Many other banks, by contrast, now have many more shares in circulation than they did up to the summer of 2007.
Looking further ahead, the broad outline of the next challenge for this bank already looms. Michel Pébereau, chairman of BNP Paribas, who joined the old BNP in 1993 when it was still owned by the French state and led it through first privatization and then the audacious merger with Paribas that quickly followed the launch of Europe’s single currency, sees it falling to the next generation of the bank’s leaders.
"Baudouin Prot [chief executive of BNP Paribas and a protégé of Pébereau] has succeeded in establishing this European bank that was always the target after we created BNP Paribas," Pébereau says. "The longer-term challenge will be to become one of the top five at the level of profitability and, in the short term, to rank consistently in the top 10. That longer-term step will be for the coming generation of leaders and international management. When Fortis has been fully integrated, in the next one or two years after that, then the time will come to think of the next stage."
He adds a quick qualifier that size itself is not the target. "The maximum size is that at which it is still possible to maintain the unique culture of this organization and to manage our risks."
Culture is the key
And what is the culture that has emerged over the past 10 years, rather against the odds, at this unlikely combination of a state-owned national retail and commercial bank and a private-sector international investment bank?
The bank’s leaders like to talk of their people’s tenacity in sticking to a business mix that now appears validated by the most severe stress test imaginable. They also highlight their responsiveness to both dangers and opportunities. "The way we reduced market risk inside CIB so quickly at the end of 2008 and the start of 2009 showed that responsiveness," says Prot, "and so did our speedy reaction to the opportunity to acquire Fortis. The opportunity was suddenly here, but we had to move quickly."
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"I tell my people to be ambitious but not to dream"
Alain Papiasse, BNP Paribas |
He might also have mentioned the bank’s prompt response at the very start of the crisis, in August 2007, to the impossibility of calculating fair values in discontinuous markets for structured triple-A-rated assets inside its money market funds. When senior management learnt of the problem it investigated for a couple of days and then disclosed it to the market. It was the start of the crisis. It has since been forgotten that the bank reopened redemptions from the fund within three weeks, allowing investors to withdraw at just a 1% discount.
