BNP Paribas Bucks Fixed-Income Slump for a Second Quarter

(Bloomberg) -- BNP Paribas SA posted a second straight gain at its fixed-income trading business, outshining Wall Street and European peers in what’s shaping up to be the worst first half for securities trading in a decade.

Debt trading revenue rose almost 9% to 793 million euros ($884 million) in the three months through June, beating competitors including JPMorgan Chase & Co. and Citigroup Inc. though falling short of a 29% rebound in the first quarter. Equities trading also did better than expected.

Chief Executive Officer Jean-Laurent Bonnafe has closed units and vowed to slash costs after tough trading conditions complicated his plans to create a European champion better able to compete with U.S. banks. BNP has shut a proprietary trading unit and commodity derivatives activities to curb risk while seeking to take advantage of Deutsche Bank AG’s retreat from equities and prime services.

BNP rose as much as 3.5% in early Paris trading and gained 3.2% as of 9:02 a.m. local time.

BNP’s global markets unit -- its key trading division --
saw revenue decline by almost 3%, dragged down by the 14% drop in equity and prime services. While that was worse than most Wall Street peers, some analysts had expected BNP to post a drop of about a quarter in equities. Still, both global markets and FICC results would have been higher excluding the effect of the creation of a new capital markets platform.

Bonnafe cut 2020 earnings targets in February and announced an additional 600 million euros in cost cuts to weather a trading slump. The bank is targeting about 3.3 billion euros of expense reductions by 2020. That followed a particularly difficult end to the year when it lost about $80 million on derivatives trades linked to the U.S. stock market.

Last year, BNP was caught on the wrong side of a sell off in developing-market assets and blindsided by the Turkish currency crisis. The second quarter was marked by growth in foreign exchange and credit, despite the more challenging context for rates, especially in Europe, the bank said.

Stayed Clear

The French bank has so far stayed clear of suggesting any big job-cutting plans like those at cross-town rival Societe Generale SA or the 18,000-headcount reduction that Deutsche Bank kicked off earlier this month. BNP is about half way through its 2020 cost plan, having achieved about 1.5 billion euros of cost savings, and has outsourced equity research in Asia to Morningstar.

BNP “started to see the benefits,” of restructuring in corporate and institutional banking, Chief Financial Officer Lars Machenil said in a Bloomberg Television interview. “In fixed income we saw already a strong pickup and contribution in the first quarter that was confirmed in the second quarter,” he said.

BNP Paribas is targeting its spending to win clients in countries such as the U.S., the U.K. and especially Deutsche Bank’s backyard. Germany’s mass of small and medium-sized companies have traditionally been the backbone of its export-oriented powerhouse economy, yet international trade disputes have taken their toll on the outlook for the country.

Bankers across the globe have warned in recent weeks that the prospect of lower interest rates to stimulate economies will hurt their revenue. Given its geographical focus, BNP is exposed to negative rates at the European Central Bank, which charges banks to deposit funds overnight rather than lend them out.

Here are some other key numbers from the second quarter results:
Net income of EU2.47b vs estimates of EU2.1b
Revenue of EU11.2b vs estimates of EU11b
CET1 ratio 20 basis points higher vs end of Q1 at 11.9%

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