Thanks to its central bankers, the bond market has been one of the few sectors in Europe that has thrived under Covid-19. This has helped no continental European bank more than BNP Paribas.
Earnings in its corporate and institutional bank rose 14% in the first nine months of 2020. By contrast, its retail divisions suffered steep falls in earnings due to rising credit losses, leading the bank to pencil in a drop of pre-tax profit of between 15% and 20% in 2020.
The CIB has done particularly well on the markets side. Corporate banking has had a slightly harder time, as a spate of frauds in commodity trade finance precipitated the closure of that business in Switzerland.
However, cost cuts planned on the eve of the crisis have since mitigated the increase in expenses associated with growing business volumes across both divisions, leading to higher CIB profits.
FICC
Above all, rising fixed income, currencies and commodities revenues have given BNP Paribas the support it so sorely needed. Thankfully, it hadn’t been forced to make cuts to that franchise as deep as those at fellow French lender Societe Generale.
In a year of booming credit markets issuance, BNP Paribas gained share in Dealogic’s global bond league table. Almost all other European banks lost share, including Societe Generale.
Equity and prime services revenue during the first nine months of the year was only about half of its level in the same period of 2019. The unit recovered in the third quarter, after suffering similar losses to other French banks from the imposition of dividend restrictions in Europe earlier in the year and difficult equity derivatives markets in the region.
The question is what happens if the capital markets are less active in 2021?
Above all, many investors fear that BNP Paribas – like other European banks – has underestimated the volume of loans that will fall into default over the coming 12 months. Coupled with its exposure to negative eurozone interest rates, that’s a factor in its valuation of only about 0.4 times book value – slightly lower than the European average, according to Citi.
BNP Paribas’ loan write-offs roughly doubled to about €4 billion in the first three quarters of 2020. But, like most European banks, it posted lower-than-expected provisions in the third quarter, just as much of Europe went into a second lockdown. Analysts at Barclays are among those to express scepticism about the bank’s claim that its cost of risk will probably fall in 2021. Barclays forecasts a nine basis point increase to 74bp.
It’s more important than ever for UK corporates to have at least one continental bank among their core banks
Philippe Bordenave, BNP Paribas
According to chief operating officer and deputy chief executive Philippe Bordenave, some optimism is justified as almost all borrowers subject to expiring loan moratoriums have restarted payments, although some moratoriums are longer lasting or have been extended, including those in Belgium and Italy.
In fact the cost of risk fell in its Italian bank in the first nine months. Bordenave says that’s because of the bank’s conservative risk model, including a refocus on higher-quality borrowers in Italy in recent years and a pivot to car loans from credit cards on the consumer finance side.
Overall, BNP Paribas’ performance in 2020 highlights why product and geographic diversification is so beneficial; in Bordenave’s view, banks with smaller corporate and institutional businesses won’t do so well.
“Community banks, those working with SMEs – such as restaurants and hotels – were less affected in 2008, as the crisis came from the big counterparties,” he says. “Today, it will be the other way around.”
The growth of CIB earnings is sustainable, Bordenave adds, as it’s largely driven by investments in electronic trading and technology – such as its 2019 acquisition of Deutsche Bank’s prime finance and electronic equities unit – and by its focus on expansion in northwest Europe outside France, including the UK, over the last three years.
Bordenave is particularly proud of winning a mandate as joint global coordinator role on the £2.1 billion rights issue for Rolls Royce this autumn. He says the bank remains committed to its UK strategy, despite Brexit.
“It’s more important than ever for UK corporates to have at least one continental bank among their core banks.”
Acquisitions
Well beyond France, BNP Paribas has continued to exploit its relative size and balance-sheet solidity.
In the syndicated loan market globally, no other top-tier bank has seen a bigger increase in its market share post-Covid. Could BNP Paribas now seek to ram home this advantage through acquisitions, as smaller and weaker banks come under pressure?
With bank M&A revving up in Europe and more positive signals on eurozone financial integration, the bank’s top management continues to downplay any suggestion it will acquire a big bank. They see less value these days in buying branch-based commercial banks.
On the other hand, the crisis could bring more opportunities for bolt-on deals, like the Deutsche Bank one in 2019.
In Italy, the market is especially fragmented and mergers are starting to happen; BNP Paribas subsidiary Banca Nazionale di Lavoro (BNL) is Italy’s sixth biggest bank. However, Bordenave says BNL has found “the right formula”. Its corporate bank is closely integrated with the group and the physical network is right-sized, with one big branch in each Italian province and a few smaller branches.
This thinking in Italy is applicable elsewhere too.
“A small number of branches is more of an advantage than a handicap,” says Bordenave. “We can provide physical meetings not too far away for big investments or borrowing decisions. The day-to-day business doesn’t require a branch on every corner.”
