Can BNP Paribas beat the investment banking jinx?

BNP Paribas wants to become the dominant force in European investment banking, displacing Deutsche Bank and Barclays and taking on Wall Street heavyweights such as JPMorgan Chase.

It is the same strain of ambition that — more often that not — has led to abject failure over the last 30 years at banks including Deutsche, Royal Bank of Scotland and Nomura, as bouts of expansion and hiring have been followed by humiliating retreat, job cuts and writedowns.

Today rivals suggest BNP, under chief executive Jean-Laurent Bonnafé, is engaged on just the latest doomed attempt to compete with US powerhouses on a global scale. They suggest that the Paris-based bank could be overextending itself in an attempt to win short-term market share.

The intent is clear. Last year brought BNP’s takeover of Deutsche’s $200bn prime brokerage business, part of a plan to become a top-three player in the potentially lucrative but risky business of servicing hedge funds.

In the first quarter of this year, with smaller rivals hobbled by the coronavirus pandemic and US banks focusing on their home market, the French lender added half a trillion euros of additional loans to its balance sheet.

“Some have suggested this is just a sign of BNP Paribas acting recklessly, using the balance sheet and a big, open cheque book,” said Yannick Jung, head of global banking at BNP. “I can assure you that all of these loans that we’ve underwritten have been successfully distributed . . . there is nothing random about what we have done.”

BNP underwrote more than €83bn of syndicated loans in Europe between mid-March and the end of May, leading the region with a 16.8 per cent market share, up from 7.9 per cent for 2019. In the six weeks to the end of May, it worked on more than half of the investment-grade corporate bond issuances across Europe.

“Our clients told us that the first bank that was in touch when hell broke loose was BNP Paribas,” Mr Jung added. “We are the bank that reopened the syndicated loan market with a $10bn facility for [UK oil major] BP, which we underwrote in full.”

He pointed to the “extraordinary” decision of German conglomerate Siemens to pick BNP, rather than a local bank, to underwrite an emergency €3bn credit line to help it survive the pandemic. BP and Siemens did not immediately respond to a request for comment.

“The ambition of BNP is something to watch and I am in no way dismissive,” said Magdalena Stoklosa, analyst at Morgan Stanley. “Sometimes behaviour in moments like this goes a very long way [with clients] . . . They were one of the few happy to use their balance sheet over the past few months supporting corporates and then ensuring the European bond market could reopen.”

BNP Paribas expands its balance sheet to win market share

At the height of the panic in March and April, several US banks balked at providing credit to European businesses in distress. JPMorgan stepped back from lending to BASF, the German chemicals group, while Goldman declined to take part in a €12bn syndicated loan for German carmaker Daimler.

“US banks [are] pulling out, or being much more cautious, less dependable,” said Mr Jung. “There are plenty of situations where our clients were hoping that US banks would step in by our side and share the underwriting, but then they were not comfortable doing so.”

However, Omar Fall, an analyst at Barclays, doubted BNP would be able to maintain its position as lead regional underwriter. “The US banks may be pulling out of European syndicated lending now, but I remember they did that during the last crisis and they came back again,” he said. “I’m sure that once the current crisis dies down, there is every likelihood the US banks will be back in Europe and most likely little will have changed [in the power dynamic].”

The history of European banks taking on Wall Street rivals is littered with failure. And there are precedents for opportunism during a crisis backfiring — notably at Deutsche and RBS during the last financial crisis more than a decade ago.

Yann Gérardin helped reposition BNP in 2014, moving it away from proprietary trading and towards serving clients © Leo Novel

BNP had a starring role in the early days of that crisis, with its decision to close three investment funds exposed to the subprime market in August 2007, but the group emerged stronger than most. Deals for Belgium’s Fortis Bank and Rabobank’s Polish unit helped the business spread across Europe.

However, its transatlantic ambitions were halted in 2014. It pleaded guilty to breaking US sanctions and reached an $8.9bn settlement with several state and federal authorities, which led to the French bank pulling back from its US dollar clearing activities.

That same year Yann Gérardin, head of the corporate and institutional banking division, outlined plans for the investment bank. He repositioned BNP to adapt to tougher capital and risk regulations, moving away from proprietary trading and towards serving clients.

Today Mr Gérardin sees an opportunity as other lenders retreat behind their borders, unwilling to risk their balance sheets abroad amid political pressure to prioritise their home economies ravaged by the fallout from Covid-19.

“We have a huge advantage given we are a very solid, well capitalised bank,” he said. “It’s easier to serve your clients when you are in good shape then when you are suffering.”

BNP sustains its European dominance in syndicated loans

Despite BNP’s increased activity in underwriting loans, rival bankers are sceptical about the long-term benefits. “In syndicated loans, they have been aggressive, but I would call it fake underwriting,” said the chief executive of a major rival. Much of the business is low risk with little fee revenue, he added.

In BNP’s home market of France, the government has introduced a €300bn guaranteed loan scheme designed to help troubled businesses in badly hit sectors. Under the initiative, BNP has already lent €17bn to companies including Renault and Air France-KLM.

Although the loans are guaranteed by the state up to 90 per cent, banks must keep some of the risk on their own balance sheets. As another rival banker said of BNP, “that means getting into some complicated situations and they are going to hope there is a pay-off down the road”.

Often banks lend at slim margins in the hope of winning more lucrative business later on, such as advising on a merger or winning a cash management or hedging mandate.

But different corporate habits around raising capital and M&A in Europe mean the profitability of becoming number one on the continent is questionable.

“I’m sceptical of anyone becoming a European champion for the simple reason that it’s meaningless,” said Jerry del Missier, former chief operating officer at Barclays and now head of Copper Street Capital, an alternative investment manager. “You do not have a European investment banking market. The profit pools are non-existent.”

BNP has not been immune to the effects of the pandemic. It warned in May that coronavirus could knock a fifth off its 2020 profits. It suffered a €184m blow to its equities trading division after complex derivatives products suffered in volatile markets, and earmarked an additional half a billion euros to cover potential loan losses.

In the first quarter, BNP’s balance sheet increased by €500bn to €2.7tn, which reduced its leverage ratio — a measure of its capital against total assets — to 3.9 per cent from 4.6 per cent since the start of the year. Banks are required by regulators to stay above 3 per cent.

Mr Jung painted this as a virtue. He said the bank was taking on calculated risk and using its balance sheet, in the hope that the clients it lent to today would pay dividends in the future.

“BNP did the job,” said Mr Jung. “We were the one European bank that went out of its way during the crisis to support its client base . . . We believe we are on our way to achieving our goal of becoming the leading European [corporate and investment bank]. That is where we belong, that is where we want to be and that is where we will stay.”