Arquivo para Março, 2012

The parable of BNP Paribas and SocGen

Segunda-feira, Março 5th, 2012



William Wright, Financial News, 05 Mar 2012


Nearly 10 years ago, in a provocative report entitled French banks: are they any good?, a French banks analyst at Merrill Lynch came to a scathing conclusion about his country’s two largest investment banks. The sad fact, he wrote, was that the investment banking businesses at BNP Paribas and Societe Generale were “too big to be ignored, but too small to count on the world stage”.


After a decade in which both banks have tried to expand beyond their chosen specialist fields (fixed income for BNP Paribas and equity derivatives for SocGen), and after a torrid 2011, the original question can be posed again.


On the plus side, both banks still exist. This was by no means a certainty just six months ago. When Greece plunged the eurozone into crisis last summer, the markets decided that the French banks (and in particular SocGen) were the weaklings in the playground and started picking on them. The US dollar funding market, on which both firms’ investment banking operations were heavily reliant, effectively closed its doors, the share prices of the parent companies collapsed, and spreads on their CREDITdefault swaps soared.


But, in their latest results, both banks demonstrated remarkable damage limitation. In the second half of last year, BNP Paribas’ and SocGen’s investment banking businesses slashed their dollar funding requirements by more than half and ahead of their own targets. Both also took big hits on Greek government debt and on culling their loan BOOKS. Despite this, in corporate and investment banking, revenues fell by 17% at SocGen and 20% at BNP Paribas (pre-tax profits were down by 47% and 33% respectively).


Strip out their corporate banking business, and underlying revenues fell at each bank by an estimated 15%. This means that they did better than their international rivals. Since the start of the year, shares in BNP Paribas have jumped by 21% and SocGen is up by 42% (although it is still trading at a miserable 0.4 times BOOKvalue compared with 0.65 times at BNP Paribas).


And yet the question about their future in the global investment banking panoply – and how they got here – remains. CAPITAL MARKETS and advisory revenues at BNP Paribas last year of $7.6bn and estimated revenues for SocGen of around $6.4bn highlight their position in the hierarchy: JP Morgan made $24.5bn last year in capital markets, Deutsche Bank $18.3bn and even UBS managed $8.4bn.


Although a lot smaller than their international peers, they are more profitable, with the corporate and investment banking business at each bank posting pre-tax returns on equity of more than 24% (although in SocGen’s case this excludes nearly €1bn in losses from its “legacy assets”).


Vous ne regrettez rien?


To understand why neither bank has managed to deliver on its potential to challenge the top ranks of the global capital markets, you have to travel back into history.


For much of the past decade, BNP Paribas and SocGen have been trying to recreate on their own what they failed to achieve in 1999. Then SocGen wanted to buy Paribas for its fixed-income business, and BNP wanted to buy SocGen for its equities business. The failure to create SG Paribas or a French champion in the form of BNP Paribas SocGen (that deal was blocked by a certain Jean-Claude Trichet) handicapped both banks from the start.


In pursuing their separate strategies, they have both tried to expand into each other’s specialist fields. For BNP Paribas, under the leadership of Philippe Blavier up to 2006, and Jacques d’Estais until 2009, this has meant building on its already strong fixed-income business while expanding its smaller equities and equity derivatives business. And for SocGen, under Xavier Debonneuil until his untimely death in 2002, and then under the mercurial Jean-Pierre Mustier, it meant trying to build a fixed-income business to match its equity derivatives CASH cow.


The problem with this is simple. BNP Paribas has become a “flowmonster” in European fixed income, and its equity derivatives business has become big enough to cope (it made the wise decision to outsource much of its CASH equities business to a joint venture with French BROKER Exane). But SocGen never managed to become big enough in fixed income to be able to thrive under the new economics of investment banking. Neither has built an investment banking business to threaten the upper tiers of even the European league tables.


Last year, the fixed-income business at BNP Paribas made about €3.2bn, nearly double the €1.8bn at SocGen, while its equities business was not far behind its domestic rival with €1.9bn in revenues, compared to €2.4bn at SocGen.


Throw in the Jérôme Kerviel trading scandal – which cost €6bn – and SocGen has come off worse from this bruising battle over the past decade. In 2000, its investment bank had revenues of €4.8bn compared with €3.7bn at BNP Paribas. In 2006, just before the crisis, SocGen was still just ahead of BNP Paribas with revenues of an estimated €5.7bn. But since then, revenues in CAPITAL MARKETShave fallen just 4% at BNP Paribas, whereas they have plunged by 21% at SocGen. They are now back where they were in 2000.


Et encore?


What next? For Alain Papiasse, head of corporate and investment banking at BNP Paribas, the task is easier: continue to build on the fixed-income business under Frédéric Janbon, particularly in expanding the bank’s distribution capability to include more asset managers (it had been heavily focused on corporates and banks), and squeeze out more synergies from the bank’s corporate banking business in Europe. Do this right and BNP Paribas can assert its position as one of the dominant corporate and investment banks in Europe.


For Didier Valet, the new head of CIB at SocGen, things look tougher. He must maintain the bank’s top-tier global position in equity derivatives, and find niches in fixed income in which the bank can compete.


Both banks have launched cost-cutting and restructuring drives, particularly outside France. They also both face a new common enemy in the form of French politicians who have picked on the banks as they squabble ahead of this spring’s presidential elections.


So, a decade on, we are closer to an answer to the question: “French banks: are they any good?” Yes, they are both very good in their backyard and at activities in which they have always been strong. But, no, they (and in particular SocGen) have not been quite good enough to expand sufficiently beyond their core competencies or traditional hunting grounds.


There is a parable in here somewhere for the wider industry. It is probably something along the lines of – “you’re best off sticking to your knitting”.


And 10 years after their dream deal was blocked by the Banque de France, there is more than a little nostalgia at what