BNP has Goldman in its sights after beefing up hedge fund business

BNP Paribas is seeking to displace Goldman Sachs as one of the top three global prime brokers to hedge funds, and surpass Barclays as the dominant European player after acquiring Deutsche Bank’s business last year.

France’s largest investment bank swooped on the German lender’s global prime finance unit and electronic equities business last summer as Deutsche scaled back its ambitions.

BNP is one of the few European banks still committing resources to prime finance, the lucrative but tech-heavy and risky business of lending money as well as handling trades for hedge funds and asset managers.

“Our combination could be the largest prime broker in Europe and be considered in the top four in the world,” said Olivier Osty, head of global markets at BNP. “This has to be seen, but that is the objective and we will make it . . . We would be trying to compete with Goldman for the third or fourth spot.”

“There is a good opportunity for us to take leadership in Europe on investment banking and global markets,” Mr Osty told the Financial Times. “US banks are retrenching a lot and BNP is stepping up.”

However, the bank faces significant hurdles in disrupting the established hierarchy. Along with JPMorgan and Morgan Stanley, Goldman has dominated the prime brokerage business for years, followed by Bank of America and Barclays.

By contrast, BNP ranked 11th last year and Deutsche has historically been placed seventh to ninth in league tables, according to data provider Coalition. To oust Goldman from the top three, the newly combined entity would have to increase its market share to more than 12 per cent, Coalition estimates.

“We have been taking market share for the last year and a half and this increased in the first quarter,” said Mr Osty. “Are we there yet? No, but the trend is definitely positive and the [coronavirus] crisis will probably strengthen us” as smaller players withdraw.

JPMorgan’s prime business handled more than $500bn in client assets at the end of September and the heads of the unit wrote “Next stop, $1 trillion!” in an internal memo at the time.

When all client transfers from Deutsche are completed in early 2021, BNP’s prime brokerage business is expected to have more than $300bn of assets — as much as $200bn of that coming from Deutsche — and revenue in the hundreds of millions a year. Mr Osty declined to be more specific on financial targets.

Around 125 staff out of a potential 800 have already moved across from Deutsche, including senior figures such as Brian Fagen, head of Americas execution services, and Andy West, global head of prime technology, according to Ashley Wilson, co-head of the German bank’s prime finance unit, who is himself transferring next year.

While there had been concerns that several large clients were snubbing BNP for bigger rivals, Mr Osty claims that many have been persuaded to stay. This is partly to counterbalance Wall Street’s increasing dominance of global investment banking but also because Deutsche’s system, branded “autobahn”, is seen as one of the better platforms in the industry.

“The combination of Deutsche’s technology and BNP Paribas’s balance sheet and long-term commitment to this business is compelling,” said Supurna VedBrat, global head of trading at BlackRock, which has remained a client.

“The asset management industry needs European-based global prime brokers, those with a strong balance sheet and support from the senior management of the bank,” she added.

New clients for the unified business include Melqart, a UK event-driven hedge fund that manages $1.5bn and Mint Tower, a $500m Dutch hedge fund.

“The feedback we are getting is that counterparties definitely want a strong European bank to provide competition to the Americans,” said Mr Wilson. We have been able to send “a very robust message” since the deal with BNP, he added, admitting that management’s commitment to the business was always in doubt at Deutsche.

“There are around 200 clients to move,” he added. Only 10 had transferred so far, because Deutsche’s has a “quant-heavy client base” and the technological integration needed to service them at BNP will not be ready until next year.

Although the market turmoil unleashed by the coronavirus crisis had led clients to cut back the leverage on trades in March, their appetite had rebounded as markets recovered, the two executives said. 

At the peak of the historic market turmoil in March, execution volumes tripled and the two banks’ systems held up, dispelling lingering fears over the platform’s stability.

“We are on track, which to be honest is surprising, because we could have been expected to slow down during three months of Covid,” Mr Otsy said. “Working from home did not have any impact on the integration. We have been able to continue to transfer the technology and people from Deutsche to BNP even more than we were expecting.”

Additional reporting by Laura Noonan in New York