As Natixis finetunes cuts to its equity derivatives business ahead of third-quarter results in early November, questions must be asked about why that unit had grown so large in the first place – and whether the group needs further structural change to stop it happening again.
Frustratingly, it was precisely because of Natixis’ outsized losses in the last financial crisis that it cut its wholesale exposures even more stringently than other French banks in the early part of the last decade. By the mid-2010s, however, then chief executive Laurent Mignon – now CEO of parent group BPCE – was already telling Euromoney how the corporate and investment bank was a “growth story” once again.
No prizes for guessing what happened next. It’s not just equity derivatives – in which BNP Paribas and Societe Generale have suffered similar losses as a result of this year’s dividend cancellations. Mignon and his recently ousted successor at Natixis, Francois Riahi, also oversaw expansion outside Europe in commodities and aviation finance. That might have caused problems even without Covid-19.
This time, Natixis looks particularly exposed, because markets losses have so far been so much lower at Crédit Agricole SA (CASA), its closest peer. CASA, like Natixis, is a partly investment banking-focused listed subsidiary of a French retail mutual group. But it’s done a better job at keeping its investment bankers and traders at bay recently.
Alas, there’s a similar story in asset management. Largely due to illiquid bond holdings at H2O, Natixis’ funds have suffered more turbulence than those of CASA subsidiary Amundi. And as in wholesale banking, the underlying problem is an overly loose group strategy. Other bank-owned asset managers have already moved away from the once-fashionable multi-boutique model.
Fundamentally, it surely makes more sense for Natixis to use retail distribution in France as the basis for an efficient and competitively priced offering, just as Amundi has done. Why would the fund arm of France’s second biggest retail bank (after Crédit Agricole) try to be like LVMH, with a range of luxury brands, as Natixis asset management head Jean Raby once described his strategy to Euromoney?
Repositioning
Now there’s a germ of greater appreciation of the parent group, as new Natixis CEO Nicolas Namias gets ready to reposition the equity derivatives offering for core wholesale clients and BPCE’s French retail banks. He and Mignon should find a way to apply that approach more widely, ahead of a new strategic plan due in June 2021.
BPCE denied reports this summer of a tender offer for the 29% of Natixis shares it does not own. Yet there are other, unanswered questions: for example, might the corporate and investment bank move to BPCE? Natixis could then be more like Amundi – with the addition of insurance manufacturing – and less like CASA, which unlike Natixis is also the central institution for the regional mutual banks.
Whatever BPCE does with Natixis, it needs to keep a better tab on far-flung offices and exotic products. Crédit Agricole has done that better, despite large exposures in aviation finance. Part of the reason is that CASA’s governance has become more aligned with that of its retail-banking owners.
Is change coming at Natixis? Niamas’s background might suggest so. He was BPCE’s chief financial officer immediately before his appointment as Natixis’ CEO. Riahi previously ran Natixis’ wholesale bank in Asia. However, Mignon’s 2018 move to BPCE CEO is more suggestive of a takeover of the parent by the subsidiary, the opposite of what seems to have happened at Crédit Agricole.
Note that Philippe Brassac, who has consolidated his power as CEO of CASA since 2015, worked his way up from a Crédit Agricole regional bank in Nîmes. Mignon, on the other hand, started out in investment banking and has never worked at a regional mutual bank. It would hardly be surprising if he overlooked the benefits of the retail cooperative network.
Expansion in investment banking… may have come more from a position of weakness, not strength
Beyond this, there’s a sense that both BPCE and Natixis still suffer from a post-2008 identity crisis, to a much greater extent than Crédit Agricole, where the mutual banks are now more clearly the dominant force.
Natixis’ losses in the subprime market spurred BPCE’s creation in 2009, from a merger of the Banque Populaire and Caisse d’Epargne mutual groups, which had jointly owned Natixis. But the situation was so serious that the government loomed large. Francois Pérol – a former Rothschild banker and ally of then-president Nicolas Sarkozy – became BPCE’s first CEO, making Mignon CEO of Natixis.
While Pérol and Mignon’s affinity with mutual banking is questionable, another problem is that the BPCE merger – like the merger that created Natixis before it – was insufficiently predicated on cost efficiency. Crédit Agricole’s network has since proven more efficient, and CASA’s product factories have found a better reason for their existence, by looking to the regional retail banks first.
Given Natixis’ lesser focus on scale advantages and on working together as a group, it is perhaps no wonder its business units ended up taking riskier bets to make money. Expansion in investment banking, in other words, may have come more from a position of weakness, not strength. This is not an unfamiliar pattern in European banking, but it’s been particularly acute at Natixis.
