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Ne regrette rien

30 October 2015 By Dominic Elliott

BNP Paribas should stay true to its conservative traditions. As rivals like Deutsche Bank and Credit Suisse retrench in investment banking, decent third-quarter results mean France’s biggest lender by assets is now contemplating grabbing market share. It should hold its horses.

Sure, third-quarter trading revenue rose 7 percent from the same period a year ago – better than American and European peers. But Chief Executive Jean-Laurent Bonnafe needs to cut costs. BNP Paribas’ corporate and institutional bank employs 29,000 staff, more than Deutsche’s equivalent division, which made 23 percent more in third-quarter revenue. BNP is due to update investors on how it will rejig things at the start of next year.

The case for expansion is shaky. BNP reckons it has enough capital. But as of Sept. 30, its key Tier 1 common equity ratio was 10.7 percent. That’s above minimum requirements, but below the average European mark of 11 percent-plus. While trading may now be less likely to split off from the rest of the group than the bank once feared, regulators will still probably be able to force change. As the European Central Bank finds its feet as the region’s banking overseer, capital requirements could rise.

In any case, investment banking returns have also been flattered by a skimpy equity allocation. As Breakingviews has reported, if the French bank assigned equity equivalent to 3 percent of the business’ gross assets, as most peers do, it would have made only a 12 percent pre-tax return on equity in investment banking in 2014 rather than the reported 14 percent. That makes it less promising for investment than, say, retail banking in the United States and emerging markets. Those produced a combined pre-tax 2014 ROE of about 14 percent on a healthier equity-to-assets ratio of almost 7 percent.

BNP can and should lay out a path to a higher group capital ratio, closer to 12 percent. That should be achievable given it can easily retain earnings, which are close to 2 billion euros a quarter. Once that higher threshold is reached, going for investment banking growth will look more reasonable.


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