After one year as chief executive of BNP Paribas, Jean-Laurent Bonnafé is easing France’s national banking champion onto the front foot. The cause of his new confidence isn’t immediately obvious from the fourth-quarter 2012 results the bank reported last month. It delivered underlying operating performance 6% below consensus estimates, partly thanks to higher costs and weaker revenues in the corporate and investment banking division.
Nor does the bank’s first response to this, a cost-cutting programme designed to shave €2 billion from annual expenses over the next three years at a one-off cost of €1.5 billion, inspire great excitement, although analysts at Citi are impressed. They say: "BNPP has a strong track record of delivering (and over-achieving) on its cost savings plans." And they have a buy rating on the bank to reflect the combination of potential restructuring benefits, progressive capital return, a valuation at a discount to tangible net book value and new growth potential in Asia.
It is this second part of the new business plan, to boost annual revenues in high-growth Asian markets by €1 billion by 2016, that shows the French bank’s senior management surveying the banking scene from a position of strength. Further investment plans will be unveiled over the rest of the year, presumably targeting growth in the more robust US economy.
The only reason why BNP Paribas can afford both the cost-reduction programme and the organic investment in revenue growth is that it has earned its way to a strong capital position, with Basle III common equity tier 1 now at 9.9%. That’s ahead even of the big-two Swiss banks, as well as its local rival, Société Générale, and Barclays. Its leverage ratio is down below 20, compared with 30 still at Deutsche Bank. At the same time, BNP Paribas has also strengthened its liquidity buffers to now cover 125% of short-term funding liabilities.
|Jean-Laurent Bonnafé, chief executive, BNP Paribas|
It’s obvious that growth will be hard to find in the flat-lining eurozone economy in the next three years. But in the past many European banks have announced ambitious programmes to chase investment banking revenue in fast-growing Asian markets only to find the costs of doing business higher than they estimated and the revenue pools smaller. Barclays is one of the most recent to announce cutbacks in Asia.
BNP Paribas does not intend to repeat these mistakes. "This programme is predominantly about corporate and investment banking, wealth management, insurance," says Bonnafé. "We are a strong regional cash management services provider and a leading trade finance house. We have 12 full banking licences in countries across Asia, which is unique in a region where the annual GDP growth is forecast at around 6%. Looking forward, our competitors are likely to be global players such as HSBC and Citi and, from Europe, Deutsche Bank which remains an important player." Bonnafé adds: "Asia is a market of increasing importance not only for large multinationals but also for many of our mid-sized and even smaller corporate clients in Europe."
BNP Paribas will chase loan growth outside Europe while its home market stagnates. A 9.9% Basle III capital ratio gives the bank a lot of room for growth. "It’s verging on too much capital," says Bonnafé. He adds: "So many banks are still worried about capital and deleveraging and liquidity. But we dealt with all that in 2012. We decided to do it quickly because you cannot try to run the company as a commercial business in a continuous state of adaptation. We now have an excess of cash, liquidity and capital. And we intend to use it to move this company forward."