BNP cost controls drive earnings beat as debt traders trail
BNP Paribas relied on tight cost controls and lower provisions for bad loans in the second quarter, to offset a slump in fixed-income trading that was worse than what most peers reported so far.
Operating expenses at the Paris-based bank rose just 1.6 per cent from a year earlier, much less than analysts had estimated, helping the company post a better-than-expected profit. Revenue weakened on the back of an 18 per cent slump in debt trading that exceeded the 13 per cent drop of the biggest Wall Street companies.
Chief executive officer Jean-Laurent Bonnafe has pledged to cut annual expenses by 2.3 billion euros (S$3.4 billion) through 2025, after building BNP Paribas into the biggest corporate and investment bank in Europe in more than a decade at the helm. He is now sitting on billions in excess cash from the sale of regional US lender Bank of the West, much of which he has vowed to return to shareholders, while using the rest for bolt-on acquisitions and targeted investments.
Equities trading has been one growth priority for the CEO, who beefed up the unit by taking over the business with hedge funds from Deutsche Bank and clients from Credit Suisse in recent years. The effort bore fruit this quarter, with revenue from the trading of equities and prime brokerage services dodging the slump that hit some Wall Street rivals.
Global banking, which includes advising companies on selling bonds and stocks, fared even better. The unit reported a 15 per cent increase in revenue, led by a surge in transaction banking and capital markets in Europe and the Americas.
But BNP’s historical strength – the trading of fixed-income products, currencies and commodities – fell short of analysts’ estimates in the quarter, which the bank attributed to softer demand, particularly for fixed-income and currency products and commodity derivatives.
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The results contrast with those of Deutsche Bank, which on Wednesday (Jul 26) reported stronger-than-expected fixed-income revenue, while missing on costs. The German lender also flagged worsening credit quality, which pushed up provisions for bad loans by 72 per cent from a year earlier, to the highest level in three years.
BNP Paribas’ commercial, personal banking and services unit, which houses the retail banking operations, saw revenue increase 3.3 per cent as rising interest rates lifted income outside France. Domestic retail banks have not reaped the full benefits of rising interest rates yet, because increases in rates on regulated savings have raised their cost of funding, while mortgage lending rules cap how much they can charge on new loans.
Income from BNP’s investment and protection services unit, home of its asset management and insurance operations, was almost flat, with gains in insurance offset by weaker wealth and asset management. The business is one of the areas where analysts see a benefit from acquisitions, for instance in asset management, a business that is dwarfed by rival Amundi.
Bonnafe has earmarked about 7.6 billion euros of his excess cash for bolt-on deals and investments in growth. But he has repeatedly pushed back against suggestions that he could embark on a major takeover with the money from the sale of Bank of the West, which he sold for US$16.3 billion just before the collapse of several regional lenders triggered a banking crisis in the US.
BNP Paribas, which is about to complete the first tranche of a five billion euro buyback programme, said it intends to start the second tranche in early August after receiving regulatory approval. BLOOMBERG
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