BNP Paribas unveiled a new three-year strategic plan on February 7, alongside annual results that showed revenues up 1.1% to €43.4 billion and profits up 2.6% to €14 billion. The new 2017-2020 plan, which succeeds the bank’s previous strategy for 2014 to 2016, puts technology firmly at its heart, according to chief operating officer Philippe Bordenave.
“What is very clear from the new plan is that this period will be characterized by digitization,” he tells Euromoney. “The previous plan was about cutting costs and increasing capital ratios. The new plan again involves cutting costs, but on the capital front we are there and now we can focus on transformation.”
COO, BNP Paribas
Costs were in fact the one miss for the bank in the 2014 to 2016 plan, despite the efforts of its Simple & Efficient programme that saw €3.3 billion of recurring savings since 2013, some €500 million above target. The year-end cost-to-income ratio came in at 67.7%, above the hoped-for 63%. Bordenave attributes that to extra costs around taxes and contributions, and not just in Italy, where the bank's contributions to the resolution process for Italian banks amounted to €52 million during the year. A new tax in Poland dented results in that country, while a tax hike in Belgium did the same there.
On top of those, there were the costs involved in implementation and reporting commitments associated with the bank’s intermediate holding company in the US, as well as the €500 million annual contribution to Europe’s Single Resolution Fund, the bank’s biggest single extra expense.
As would be expected, the bank builds buffers into its targets to allow for unpredictable events. Bordenave will not be drawn on how much flexibility the bank has planned for with its new aims, but maintains that the bank is always confident about hitting the objectives it sets. Keeping its cost-to-income ratio target unchanged for the new plan will help.
The return-on-equity target also looks the same, at 10%, but is in fact based on a higher level of underlying capital (core equity tier-1 ratio of 12%) and so represents an increase.
In the previous plan, the bank was shooting for the 10% target on a 10% CET1 ratio. Its capital requirements changed in the period, with a fully loaded Basel III CET1 ratio of 11.5%, meaning that while it did hit its 10%/10% target, its final RoE came out at 9.4%, based on its higher CET1. The bank is aiming for a 12% CET1 figure by the end of the new plan.
Organic revenue growth is targeted at an average of 2.5% a year for the new plan, an increase on the 2.2% achieved through the previous three years (although this rose to 4% after stripping out exceptional items), while net income is targeted to grow by at least 6.5% per year. The dividend pay-out ratio is intended to increase from 45% to 50%.
The digitization element of the new plan comes with its own big costs. The bank says it will spend some €3 billion between 2017 and 2019 in this area, but adds that it expects to generate €3.4 billion of savings as a result. It will then see €2.7 billion of recurring savings each year from 2020.
Transformation and digitization has been all the rage for years in retail banking – banks have fallen over themselves to roll out ever-cosier branches that aim to make customers feel they are chatting among friends in a members’ club, or mobile apps that give people the ability to check on their personal finances wherever they are.
One senior executive at another European bank told Euromoney recently that an app it produces whose sole function is to display a customer’s account balance is consulted by each user an average of eight times every day. BNP Paribas launched digital direct bank ‘Hello bank!’ in 2013 and has already notched up 2.5 million customers.
Applications of digitization beyond retail banking can be less obvious, but meaningful all the same. At BNP Paribas, the Centric platform already allows corporate treasurers to see all the cash management positions they have with the bank, to borrow money with a few clicks using pre-approved credit, and to use FX services. If they want something more complex, they can enter Cortex, the bank’s sci-fi sounding sub portal that opens up products such as currency options and interest rate swaps.
If such approaches to digitization sound rather corporate banking-heavy, this is perhaps unsurprising given the bank’s legacy as a commercial bank. The group has always been arguably overweight corporate exposure, even after the merger with Paribas in 2000, but part of the intention these days is to rebalance that.
The recasting last year of the group’s CIB division as corporate and institutional banking, rather than corporate and investment banking, was a nod to that objective. And part of the bank’s push in the new strategic plan period is to increase the penetration of such services to other client bases, particularly institutional investors.
“On the equity side, we will continue to push out our tools to private banks to help them to build structured products automatically, as well as adding more features and more complex products in order to have the same kind of result with institutions,” says Bordenave. “Ideally we would like to see all fund managers enjoy a similar kind of service that we already give to corporate treasurers, with our screen on their desks, particularly in areas like equity derivatives.”
The danger for any bank of increasing automation of its services is that the bank-client relationship becomes more distant — and less frequent. Bordenave acknowledges that risk and the pressure it imposes on a bank’s relationship managers, but adds that this presents an opportunity to enrich the dialogue.
“More and more basic services will be conducted automatically, but clients will always be interested in talking in person about higher value products,” he says. “More automation leads to basic services becoming less demanding, so we see room to improve and add value at the upper end of the service – and to keep developing. At the same time, there should be greater volume going through at the lower, more commoditised end, with lower operational costs.”
Automation through portals also in theory allows for opportunities to grab market share, on the basis that clients are unlikely to choose more than perhaps a couple of the best offerings to monitor, rather than attempting to use services through half a dozen platforms.
A continued expansion of the securities services offering, where the bank is already a European leader, forms another leg of the plan, says Bordenave.
“On the institutional side, we want to continue to leverage our knowledge and skills around derivatives. There are also many opportunities for us to continue to grow in securities services, which is perhaps the equivalent of cash management for institutions, and where we are already number one in Europe.”
Overall the bank is looking to grow annual CIB revenues by an average of 4.5% until 2020, cutting the division’s cost-to-income ratio by 8 percentage points and increasing its return on notional equity to more than 19%, up from 13% in 2016.
Geographical expansion — or rather, ensuring a deeper penetration in markets where BNP Paribas already has a presence — is another priority, particularly within the CIB division. Bankers at the firm readily admit that there is more to be done in improving its market share in countries away from France, and reckon that now is as good a time as any to embark on a serious push, given that some regional competitors are having to retrench.
Germany was a specific focus within the 2014 to 2016 plan, which saw the bank increase revenues there by 50%. Bordenave thinks there is plenty more to do.
“There are many opportunities for us to increase market share in Europe, particularly in northern Europe, such as the Nordics and Germany,” says Bordenave. “From the product perspective, what we are pushing most are cash management because it is a ‘hook’ product, and trade finance because of our international nature. Our presence in 80 countries is a natural advantage for exporters, especially when combined with our specific knowledge and skills around derivatives.”
Big US banks are frequently adopting the same approach, however, and have proved adept at moving into the ground being freed up by their capital-constrained European cousins.
They will be the most formidable obstacle to BNPP’s ambitions.