BNP Paribas breaks cover as Europe’s best bet

By:
Mark Baker
Published on:

BNPP’s latest strategic update for its corporate and institutional bank might have fallen short of the expectations of a market now used to the wild lurches of rival European firms, but to dismiss this as mere tinkering would be a mistake. It builds on an already bold and long-held plan. And, crucially, it is one the bank’s leaders say they can afford.

BNP illustration-400

Illustration: Stephen Lee

Barely five minutes after sitting down with Euromoney, Yann Gérardin, head of corporate and institutional banking at BNP Paribas, has to take a call on the retro Samsung mobile phone his children like to make fun of. Jean-Laurent Bonnafé, chief executive of the bank, wants to discuss the approval of a big credit commitment to an important client. 

The interruption is instructive. This is a bank willing to extend sizeable credit, but only if doing so fits in with its vision for the entire firm. At BNPP, the idea of a standalone corporate and investment bank strategy is anathema.

When Euromoney speaks to him, Gérardin has just come through the full-year 2015 reporting cycle that has seen him present the latest strategy for the CIB division, the 2016-2019 Transformation Plan, alongside the bank’s annual results. Those results provided a strong backdrop: CIB revenues rose 13.2% to €11.6 billion, with pre-tax profit up 17.9% to €3.3 billion. 

Gérardin told analysts on a February 5 conference call that CIB now had "a solid and profitable platform ready to act out of strength". It had improved its global position thanks to gains in market share and had seen progress in the US and Asia Pacific as well as reinforcing its European franchises. 

At group level, the bank has already surpassed its €3 billion revenue target for Asia Pacific one year ahead of the schedule dictated by the current 2014-2016 plan.

The new plan builds on the previous one and on the new governance structure that Gérardin put in place for CIB in late 2014, when the division was renamed from corporate and investment banking to corporate and institutional banking. 

It has its origins in an even earlier "adaptation plan" that BNPP put in place in 2011 in the wake of the eurozone sovereign debt crisis. That effort saw the bank slash risk-weighted assets as it sought to achieve Basel III compliance quicker than peers. 

The flexibility now afforded the bank by those early moves is a theme that Gérardin returns to frequently, both in his comments to analysts and in his discussion with Euromoney. For him, it has paved the way for all that has followed.

'Focus'

The first lever of the latest plan is dubbed 'focus', and is intended to see capital and balance sheet shifted from unproductive to productive areas, resulting in a trimming of some businesses, geographical scope and clients in favour of new opportunities principally created by the retreat of struggling competitors. 

Within this leg of the plan, risk-weighted assets are being cut by €20 billion, with some €12 billion of that coming from the wind-down of short-maturity legacy asset securitization positions within global markets. A further €8 billion is coming from the corporate loan book. This will all be accompanied by a €10 billion reinvestment to support the bank’s pursuit of market-share gains.

The second lever, 'Improve’, targets some €1 billion of cost savings by 2019, mostly through improvements in operational efficiency. Finally, 'Grow’ will look to develop those businesses that are less capital intensive than others and are strong fee generators. These include the securities services, transaction banking and cash management businesses that were brought into the scope of CIB in 2014, as well as advisory.

Gérardin told analysts that success by 2019 would see the CIB having grown revenues by at least 4% each year, while reducing the cost-to-income ratio by eight points, generating an additional €1.6 billion in pre-tax profit, compared with 2015. 

Not everyone shares his optimism that the targets can be hit. But BNP Paribas has made a habit of meeting targets in recent years in ways that many of its competitors might view with jealousy. 

At group level, the four targets it set as part of its 2014 to 2016 development plan have largely been hit already: revenue growth up 10%; cost savings of €2.8 billion; return on equity of at least 10%; and a fully loaded Basel III capital ratio of 10%.

That’s perhaps why Bonnafé exudes a quiet confidence when the doubts over the deliverability of the CIB plan are put to him. And he is not one of the European bank leaders, such as his close counterpart Frédéric Oudéa at Société Générale, Barclays chairman John McFarlane or Credit Suisse CEO Tidjane Thiam, that have publicly bemoaned the increasing dominance of US investment banks. 

He shrugs when asked why that is, as if the question is slightly redundant. After all, if US banks have increased European market share in some areas, so has BNPP. According to corporate banking and cash management studies by Greenwich Associates in 2015, some 60% of European companies with at least €2 billion in turnover use the bank for corporate banking and 38% for cash management, results that the analysts said put the bank "comfortably ahead" of competitors in both businesses.

"We used to be a top-10 player in European cash management. Now we are the top cash manager," says Bonnafé. "It’s the same story in trade finance, factoring and leasing. We’re confident we can continue to gain market share through organic growth as set out in our medium-term plan."

Trouble brewing

For Gérardin, the vision of how an investment bank should be run stems from his experiences at the toughest time in his career. He joined BNP in 1987 and, tucked away in a corner of the dealing room, set about creating an equity derivatives desk. By 1999, after the bank’s merger with Paribas, he was global head of a growing business. By 2005 he was running all of the equities division too.