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Volatile markets cause havoc at BNP Paribas investment bank

BNP Paribas SA

Volatile markets cause havoc at BNP Paribas investment bank

French bank warns on ‘extreme market conditions’ in fourth quarter

BNP Paribas has reported one of the worst performances in securities trading of any large investment bank © Reuters

BNP Paribas warned that “extreme market conditions” hit trading revenues at the French bank in the fourth quarter, undermining chief executive Jean-Laurent Bonnafé’s ambition to become a European investment banking champion.

The biggest French bank by market capitalisation slashed its financial targets and pledged to cut an extra €600m of costs after reporting one of the worst performances in securities trading of any large investment bank.

Its global markets division posted a €225m loss in the final period of 2018 after revenue fell 40 per cent. It suffered a 70 per cent plunge in equity trading, a traditional strength of the bank, and blamed “extreme market movements . . . [that hit] the valuation of inventories and a loss on index derivative hedging in the US”. 

The bank, which has been building up its trading operations to try and win market share, made an $80m loss on a derivative trade linked to the value of the S&P 500 index, which tumbled in December on global trade tensions and US growth concerns.

It also confirmed plans to shut its proprietary trading arm, Opera Trading Capital, after it struggled to make a profit during its brief existence.

BNP Paribas’ results are symptomatic of a general malaise across French and European investment banking. Three weeks ago Société Générale warned market volatility hit its revenues and capital levels in the fourth quarter, pushing revenue down by a fifth in the period and 10 per cent overall in 2018. Last week Deutsche Bank deepened cost cuts after a double-digit decline in trading income.

A big miss in markets across FICC and equities . . . the worst performance in both since 2013

Maxence Le Gouvello Du Timat, analyst at Jefferies

Scandinavian bank Nordea also posted a similarly disappointing set of results on Wednesday. Chief executive Casper von Koskull promised more cost cuts after Nordea’s quarterly profit fell 21 per cent and said “difficult market conditions” across Europe had added “pressure . . . on market making revenues” at the investment bank.

Still, BNP Paribas’ equities trading performance was worse than most rivals, such as Swiss peer UBS, which reported a 13 per cent decline last month. The five largest US banks all posted gains in the area, underlining the widening the gap between Wall Street groups and their struggling transatlantic rivals. 

The French bank’s fixed-income, currencies and commodities (FICC) trading unit fared little better. Revenue fell for a seventh consecutive quarter — dropping 15 per cent — “with a market context still lacklustre in particular on rates and credit”, the bank said. Overall, fixed income trading revenue fell 21 per cent in 2018.

“A big miss in markets across FICC and equities . . . the worst performance in both since 2013,” Jefferies analyst Maxence Le Gouvello Du Timat said. “The repositioning in investment banking is rational and further cost-cutting should be taken well, accounts for 2.5 per cent of the 2018 cost base.”

The unexpectedly bad fourth quarter performance caps two disappointing years for BNP Paribas’ investment bank, which was previously heralded as a growth engine by Mr Bonnafé as embattled rivals such as Deutsche Bank retreat.

Executives said the “unfavourable environment requires . . . [us] to intensify the transformation” of the investment bank and deepen cost-cutting to meet financial goals. 

It increased a cost-savings target by €600m to €3.3bn, with more than half the extra cuts due to come from the investment bank, signalling more job losses and a shrunken bonus pool.

BNP Paribas now “expects a return on equity of 9.5 per cent in 2020” compared with a previous forecast of 10 per cent. Its group revenue growth target was also lowered, from 2.5 per cent between 2016 and 2020 to 1.5 per cent.

Overall revenue fell 1.5 per cent in 2018 to €42.5bn and came in below analysts’ forecasts at €10.16bn in the fourth quarter. Annual net income was €7.5bn, down 3 per cent. The bank expects “growth in the earnings per share of over 20 per cent between 2016 and 2020 and a common equity Tier 1 ratio of at least 12 per cent”.

The stock fell 1 per cent in Paris, extending its decline over the past year to 36 per cent, among the worst of any French business.

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