BNP Paribas Misses Fixed Income Rally as Provisions Decline

BNP Paribas SA relied on lower provisions for bad loans and a resurgence of its equities business to boost earnings as its fixed-income traders missed out on a global rally.

Revenue from buying and selling fixed-income securities, currencies and commodities slumped 17% in the first quarter, compared with a gain of the same size at the biggest Wall Street banks. But in a reversal from a year earlier, equities trading more than offset those declines as it rebounded from steep losses on complex derivatives. The business of advising on stock and bond issuance also benefited from a surge in demand.

While profit beat analysts’ estimates as the bank set aside less than expected for souring loans, the uneven trading results highlight the challenge for Chief Executive Office Jean-Laurent Bonnafe ask he seeks to boost revenue at the markets unit. The bank in February promoted investment banking head Yann Gerardin and top retail banker Thierry Laborde to co-chief operating officers, making them potential successors to eventually take over from Bonnafe, one of the longest-standing bank CEOs in Europe.

BNP fell as much as 2.8% and was trading 1.7% lower as of 1:21 p.m. in Paris trading, paring gains this year to 22%.

The bank reiterated its outlook that vaccinations in Europe should allow economies to bounce back starting in the third quarter.

“It should be a sizable pick-up, and it should be a sustainable pick-up”, Chief Financial Officer Lars Machenil said in an interview with Bloomberg TV on Friday.

BNP’s investment bank was hit hard last year when equities trading revenue was wiped out in the first quarter after complex derivatives linked to companies’ dividends backfired. While BNP rebounded more quickly than its French peers, which also suffered losses on such products, trading results have remained mixed since then, with fixed-income missing expectations already last quarter.

Highlights from BNP’s first-quarter earnings:

  • Net income EU1.77b, up 38%; estimate EU1.4b
  • Revenue EU11.8b, up 8.6%; estimate EU11.3b
  • Corporate & investment bank revenue EU3.67b, up 24%
  • Global markets revenue EU1.85b, up 41%
    • Fixed income trading revenue EU1.15b vs EU1.27b estimate
    • Equity & prime services EU697m vs EU565m estimate
  • Provision for loan losses EU896m vs EU1.27b estimate

To strengthen the smaller equities unit, BNP in 2019 agreed to buy Deutsche Bank AG’s business with hedge funds as the German lender exited equities trading. It’s also seeking to buy the 50% in Exane that it doesn’t already own. The two companies, which have been partners since 2004, collaborate on prime services, electronic trading, equity derivatives, and equity capital markets.

But the collapse of Archegos Capital Management last month has raised questions about the so-called prime brokerage business and how much risk it carries for lenders. While Deutsche Bank, which is still in the process of shifting its relationships with hedge funds to BNP, avoided losses from Archegos, other lenders have reported combined hits exceeding $10 billion.

“We are very pleased to have this activity come up to strengthen our overall equities services”, Machenil said.

The Archegos risk was well managed by Deutsche Bank and BNP Paribas remains committed to taking over the bank’s prime brokerage assets, he said. The transfer of assets is expected to be completed by year-end, and the bank will make sure that onboarded clients meet its know-your-customer policies, Machenil said.

The bank’s corporate banking unit saw revenue rise by 16% as it benefited from a surge in capital raisings by clients. The volume of equity capital markets transactions led by BNP was three times higher than a year ago, while corporate bond issuance grew 13%.

In the retail business, BNP saw revenue at its domestic markets unit, which is mainly made up of its European retail operations, rise more than 1%, while the international financial services unit, which houses among others the retail operations outside Europe, saw revenue fall 0.6%.

As part of the February shakeup, the bank combined all retail banking operations, domestic and foreign, under Laborde, a move aimed at creating cost savings, streamlining technological investments and increasing cross-selling.

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