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BNP Paribas is half-way through its latest business development plan, which runs from 2017 to 2020. In the bank’s own slightly clunky translation, its stated intention is to “build the European bank of reference”. So how is it getting on?
There are some quantifiable objectives: compound annual growth in revenues of at least 2.5% and in profits of above 6.5%, a return on equity in 2020 of 10%, a fully loaded common equity tier-1 (CET1) ratio of 12% in 2020 and a dividend payout ratio of 50%.
It has some cumulative cost savings targets too: €500 million in 2017, €1.1 billion in 2018, €1.8 billion in 2019 and €2.7 billion in 2020.
On most of those metrics, it is doing well – and it should, as a number of them are conservative both in the context of the bank’s own performance and the sector as a whole. After all, plenty of other banks in Euromoney’s group of 25 are already at or above the return on equity that BNPP, under CEO Jean-Laurent Bonnafé, is targeting for 2020. The bank itself is at 9.5% for the first nine months of 2018.
At the third quarter results BNP Paribas said it had already realized cumulative cost savings of €1 billion in 2018, so that also looks well on track. Its fully loaded Basel III CET1 ratio is already 11.7%, just 30 basis points away from its 2020 target.
Conservative targets are targets nonetheless and analysts tend to prefer conservative targets comfortably hit to ambitious ones slightly missed. Shareholders appear to be judging the bank a little differently, however. As of mid-December, BNPP stock was down 35% since the beginning of 2018 (Société Générale is down 32% and Crédit Agricole is down 26%).
That might have something to do with revenues and profits, which on a nine-month basis are the part that is not quite making the grade. Even adjusting for currency changes, revenues are effectively flat against the same period in 2017, while operating income is down 5%.
The bank’s corporate and institutional banking (CIB) division, which accounts for roughly a quarter of revenues, saw a disappointing year in terms of revenues and profits, down 7% and 21%, respectively. It blamed a poor fixed income, currencies and commodities environment, which also hurt rivals, as well as the fact that the period in the previous year had seen big write-backs.
But Yann Gérardin, head of CIB and deputy chief operating officer of the bank, remains resolutely upbeat, preferring to note the division’s 16% pre-tax return on net equity in 2018.
“Despite a challenging environment we have maintained a good business drive and confirmed our number one position for syndicated loans in the EMEA region, trade finance in Europe, high-yield corporate bonds in Europe and for all bonds in euros,” he adds.
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| Jean-Laurent Bonnafé |
There is no question that BNPP’s traditional pockets of strength remain as solid as ever, but the firm still has further to go before it can claim to have firmly consolidated a position as the European “CIB of reference”. Gérardin cites European economic and political uncertainty as headwinds for the bank, as well as regulatory pressures and tough market conditions. “The biggest challenge for the CIB industry is the decline of the revenue pool, especially in Europe and in euro terms,” he says. “Having said that, we continue to gain new clients and remain profitable.”
The core market weakness he describes means there is all the more riding on the bank’s various growth plans in CIB. Partly with a view to replicating the success it has seen in growing its franchise in Germany, BNPP has spent the last year turning its attention to areas such as the UK and the Nordics.
“We’ve accelerated our development plan in the UK, with the recent launch of a corporate broking platform to further enhance our services to UK corporates, and in Germany we continue to gain market share, specifically with clients from the Mittelstand,” says Gérardin. He adds that the hire from Citi of Eirik Winter as chief executive for the Nordic region is expected to boost the service the bank offers to local exporting corporates who are looking to develop on an international scale.
“These growth plans are a strategic priority in our ambition of becoming the bank of reference for corporates in Europe and one of the leading banks in Europe at the service of the European economy.”
Gérardin says he is certain that the bank has the right business model and long-term strategy to allow it to deliver for clients, in spite of an “uncertain and demanding environment”. But the test will be in whether it can truly mesh its growth ventures with its existing platform. In current market conditions, banks like BNP Paribas cannot afford to add new inefficiencies as they build more scale.
