BNPP should tip its strategy hand
BNP Paribas has impressive targets for cutting costs and increasing capital, after outshining some of its major competitors by posting a full year profit. But it needs to tell a compelling story about how it plans to hit them.
The French bank said last Friday that it had a three part plan to “transition” its commercial and institutional bank: 'Focus,' 'Improve', 'Grow'.
Which is just to say “be a good business” — an underwhelming statement compared to banks such as Credit Suisse, which is going through an extended soul search and a rethink of what businesses it needs to be in. It has a restructuring plan with detail to match.
BNPP doesn't obviously need to make such extensive changes, or rethink its organisational essence. But then, neither did Credit Suisse or Deutsche Bank, until the market grew nervous.
Both of those firms were winners in the crisis, and seemed to have emerged from it stronger than unhappy wards of the state like UBS and Citigroup. But even the strongest firms can lose investors' confidence in this market.
BNPP did say it will “fine tune and extend” its plan of transformation in its upcoming 2017-2020 plan. But as peers make drastic changes to cope with the new and changing banking environment, BNPP risks being left behind. Rivals have undergone extensive reconstructive surgery to adapt to the new world order; BNPP has just had a little nip and tuck.
To be fair, the bank had already done some restructuring work. Cash management and transaction services have been folded into corporate and institutional banking; fixed income and equities were merged (with some job cuts), while high yield and leveraged loans were also merged.
More prosaically, it keeps doing what banks are supposed to do. It is building capital and delivers profits. The shares were spanked (along with every other bank) on Tuesday and Thursday, but had jumped 6% when it reported results last Friday.
The bank's restructuring plan seems to be the result of work it has been doing with consultancy firms Oliver Wyman and Boston Consulting Group since last year, in a project reportedly called ‘CIB of tomorrow’, that some speculated could result in the biggest cost and job cuts at the bank since the financial crisis. Perhaps those unattributed reports raised expectations too high.
The transformation the bank published last Friday is high on aspiration but light on detail. It smells more like an investor relations exercise than a commitment to change. That's not necessarily a bad thing — while the bank is turning profits and its rivals are retreating, a drip feed of investor reassurance is just what the doctor ordered.
But there is a growing constituency that does not think European banks, any European banks, have sustainable investment banking businesses without radical reworking. Banks have offered their shareholders a steady diet of lower risk-weighted assets (RWAs), sharper focus on better clients and setting the hounds on the scent of financial returns. Yet many of them have still lost the confidence of their investors over the past week.
Among BNP Paribas' goals are reducing "unproductive" RWAs by a gross amount of €20bn, reinvesting another €10bn into presumably more productive ones, which the bank estimates will increase pre-tax income by about €200m.
It also includes a plan to make the CIB more operationally efficient so it delivers “enough savings to support growth, while structurally reducing [the] C/I portfolio”, and “industrialis[ing] the set up”, which apparently means simplifying the business. It will also be “smart sourcing”, which presumably means something to someone in the bank even if it reads like arch-management waffle to anyone else.
But the revealing line in the plan is BNPP's commitment to grow market share as other banks retreat. It's refreshing to see some optimism in investment banking strategy, something which has been mostly absent in Europe since Jain-era Deutsche Bank. But it's not exactly a revolution.
BNP Paribas is fortunate not to need the kind of cuts and restructurings that Credit Suisse and Deutsche are making, but it is operating in the same environment. If the same forces crushing bank equity across Europe this week don't apply to BNPP because it has a better plan or a more resilient business, it should explain — and give plenty of colour.
Credit Suisse's full year loss is nothing to emulate, but the bank can show BNPP a thing or two about detail.
Each business in the Swiss firm's investment bank had a detailed appraisal of its economic and regulatory challenges, and of its place in the company's new set-up. More capital is to be deployed in Asia, more relationship managers hired for Asian wealth management, co-heads canned, management simplified, certain client categories covered more and others less.
It went on, and on, for seven hours worth of presentations and questions, with a further detailed update in its full year results last week. It's a lot to get through, but investment banks are complicated. Their restructurings are complicated, and investors deserve disclosure.
As for BNPP, and the alleged 'CIB of tomorrow', let's hope for a fuller account when the 2017-2020 plan is published. Given the punishment the markets are dishing out, detail can't come soon enough.