French banks see opportunity in the US

By:
Peter Lee
Published on:

Société Générale and BNP Paribas outline new plans to get their investment banking divisions growing again. The US market is central to the ambitions of both banks.

The French banks are fighting hard to get their commercial and investment banking divisions growing again after years of setbacks, including deleveraging forced by the sudden stop of US dollar funding in 2011, the growing regulatory onslaught ever since and persistent weak growth in their home markets. 

The US market remains central to these growth plans, despite tough new rules on foreign banks and the shock imposition in July on BNP Paribas of an $8.97 billion penalty, guilty plea and one-year suspension of US dollar clearing.

Didier Valet-large
  The balance-sheet transformation is
behind us. We are
now in growth mode

Didier Valet

Société Générale (SG), unusually among the large universal banks, includes asset and wealth management inside its corporate and investment banking (CIB) unit, known as global banking and investor solutions. 

The aggregate revenues of this division have at least been stable through the euro-area crisis years ­­– partly thanks to a strong contribution from equity derivatives – coming in at €8.6 billion in each of 2011, 2012 and 2013. 

Didier Valet, head of global banking and investor services, now outlines ambitions to increase this to €9.7 billion by 2016, with an 8% compound annual growth rate targeted for the large finance and advisory business to bring earnings up to €2.4 billion in 2016 and an even more ambitious 12% compound annual growth rate target for the smaller investor services business to bring earnings up to €1.3 billion.

"The balance-sheet transformation is behind us," says Valet. "We are now in growth mode."

Secret sauce

What’s the secret sauce he thinks will allow the bank to achieve this remarkable rate of growth and draw investors’ attention away from the risk of deflation in the eurozone and the bank’s potential exposures in Russia? 

"We will continue to grow where we are already strong, such as in equity derivatives, but also re-expand our footprint not just in Europe but also the US and Asia," says Valet. 

"In 2011, due to the crisis of access to US dollar funding, we had to sell certain assets. Now, being fully Basel III compliant, we can inject more capital and re-enter certain activities in structured finance and commercial banking. These activities just need more fuel."

He adds: "In acquisition finance, for example, we recently landed a large role for a German pharmaceutical company acquiring in the US which four years ago we may not have been able to do."

Valet also mentions aircraft finance, shipping finance, real estate, trade finance, natural resources and infrastructure finance as sectors where the bank will strive to originate more commitments to sell on while also retaining a portion of these. 

He says: "In the US we aim to up-tier ourselves within existing relationships, for example playing a larger role in the revolving credits which are so important to large corporates. 

"I can think of large companies such as IT services providers where we are now partners in leasing finance, but where we can re-position at a higher level from which to pitch for FX hedging and cash management."

Time will tell if the bank is pushing on an open door in the US, or whether that shop is closed. The bank is perhaps lucky it was not as big in long-dated fixed-income derivatives as some rivals and so had less to lose as FICC revenues retrenched

Disintermediation is a key theme we have to be ready for and we must find the best ways to continue to serve our clients
Yann Gérardin

The group stands at a 3.6% leverage ratio today and targets 4% in 2016, even with the increased underwriting and hold commitments it now declares itself eager to take on, as well as continuing constraints around the size of the repo book supporting its conventional markets business.

The most eye-catching growth targets attach to a surprise source. In May, SG’s deal with Crédit Agricole to take 100% control of their jointly developed futures broker, Newedge, didn’t attract much notice. But now, with the target annual growth rate for the bank’s global markets business set at a modest 1%, Newedge is central to the bank’s much bigger ambitions in investor services. 

"There is growing convergence from pre-market coverage and through to post-trade services for investor clients, and Newedge sits right at that junction, being both in execution and also clearing," says Valet. 

"We expect a revolution in the capital markets and in particular in post-trade services as regulators continue pushing for more OTC instruments to become listed and cleared through central counterparties." 

He adds: "This is a secular trend and Newedge is the platform for us to embrace this and also grow prime services while enhancing our custody and funds administration businesses through SGSS [securities services]."