Awards for Excellence 2016: Fine-tuned BNP Paribas excels at the business of banking

World's best bank: BNP Paribas is that rarity – a large bank actually delivering on its promises to stakeholders. It is producing better returns even than many of the US banks, despite being anchored in a low-growth home region, building capital and winning customers – all while proving the benefits of a diversified business model. Its cadre of loyal, long-serving senior executives look to have got the strategy right: staying the course in Asia and the US and running global customer franchises, but only in the select services it excels at.

AfE BNP-350

Illustration: Jeff Wack


Beset by weak profitability, negative interest rates and low growth in their home markets, European banks are losing out to US rivals that restructured and recapitalized quickly after the global financial crisis and whose home economy has enjoyed a much more robust recovery since.

In April, the European Banking Authority published its latest update on the vulnerabilities of the 154 biggest European banks and noted a prevailing average return on equity of just 4.7%, an average return on assets of just 0.29% and a non-performing loan ratio of 5.8%. 

At the same time, the Federal Reserve Bank of St Louis, which aggregates data for all US banks, recorded an average return on equity of 8.3% after the first quarter of 2016, a return on average assets of 0.94% and a non-performing loan ratio of just 1.57%.

But it’s in tough times that bank management teams prove their worth: when their chosen business models are most severely tested and the true strength and depth of customer relationships reveal themselves.

BNP Paribas, a leading European universal bank with strong international reach in the US and Asia, was by some distance the standout candidate as the world’s best bank in the Euromoney Awards for Excellence 2016.

Remember that the sluggish continent of Europe accounts for 70% of BNP Paribas group revenues. It remains the heartland of a bank that has large domestic retail operations in France, Italy, Belgium and Luxembourg and is also making inroads into Germany, especially with its digital bank. BNP Paribas also runs a large corporate and institutional bank encompassing transaction services, FICC and equities markets business alongside classic investment banking. Its third division, international financial services, includes banking in the US, Latin America and Asia, as well as specialist business such as consumer finance, asset and wealth management and insurance. 

I believe that some banks went too far in basing their approach only on product strength when what customers really want and need is service 
 - Jean-Laurent Bonnafé

At a time when peers are still shrinking, BNP Paribas is growing. While new and uncertain management teams struggle to get back to basics, the technicians at BNP Paribas embrace geographic and business diversity. Critics see a large bank running on six engines in the age of the monoplane. But BNP Paribas seems to have found the happy knack of always keeping four of five of its engines singing.

"Is it our goal to be a global bank?" asks Jean-Laurent Bonnafé, chief executive of BNP Paribas. "No. We are a European bank with global customer franchises and one that seeks to capture what clients want from a bank in the world of today and tomorrow." 

This is a large, complicated and diversified banking group which investors and analysts might expect to be struggling in the prevailing tough market conditions. But BNP Paribas is not struggling. It is delivering on its promises to shareholders. It is winning over customers and surpassing the competition even beyond its European peer group.

BNP Paribas has promised shareholders it will deliver a return on tangible common equity of around 10%, now the standard target for most large international universal banks but one that very few are even close to hitting.

BNP_solid-600

For 2015 BNP Paribas delivered 10.1% and for the first quarter of 2016, on an annualized basis and excluding one-offs, it returned 11.1% on tangible common equity. That’s far better than most other large eurozone banks and even better than some of the supposed winners from across the Atlantic. Citigroup, the world’s best bank in Euromoney’s awards for excellence in 2015, reported a respectable 9.1% return on tangible common equity for 2015 and 6.4% for the first quarter this year. Bank of America also made a return on average tangible common equity of 9.1% in 2015 and 5.4% for the first quarter of 2016.

Two of the biggest and strongest US banks both underperform the European champion. It makes you wonder what BNP Paribas might achieve if its home region ever does catch up with the US recovery.

BNP_delivering_300

For now, BNP Paribas is delivering its return targets – that were set in 2014 on the basis of a 10% Basel III common equity tier 1 ratio – even after boosting that ratio up to 11% from a mix of retained earnings and RWA reductions, while still being able to pay out to shareholders a full cash dividend for 2015 of 45% of net income. 

This is a strongly capital generative business. UBS analysts have had a buy on the stock since initiating coverage in March. One of them, Lorraine Quoirez, notes: "We see the bank returning around 30% of its market capitalization over the next four years." With BNP Paribas’ market cap at around $65 billion, only Santander ($71 billion) in the eurozone carries a bigger valuation.

Good returns are not a function of leverage. BNP Paribas’ fully-loaded Basel III leverage ratio is 4%, up from 3.4% after the first quarter of 2015. In fact the bank appears to be getting less risky, not more so. In the first quarter, its cost of risk was just 43bp, down from a quarterly average of 57bp across 2015. At the end of the first quarter it reported a liquidity coverage ratio of 116% with immediately available liquidity reserves of €298 billion (up from €266 billion at the end of 2015). Those may present an earnings headache but they are enough to cover a full year of exclusion from wholesale funding in the event of any systemic market seizure.

Survival

BNP Paribas is a very well managed bank. 

It has had to be. BNP Paribas has survived twin setbacks in the US – the sudden short-term funding stop in 2011 and the $8.9 billion settlement and temporary clearing restrictions imposed in 2014 for sanctions busting with Sudan, Iran and Cuba.

While other European banks have withdrawn from or severely cut back international operations, BNP Paribas has held on to its key US asset, Bank of the West, selectively expanded its CIB operations in the US and is now on track with plans for its intermediate holding company there. That’s a sign of commitment and resilience that US clients value and, looking out from their European heartland, executives believe that BNP Paribas has the capital, liquidity and talent to tap into growth in the US and Asia while selectively picking up market share at home as other European banks continue to struggle.