BNP Paribas Fixed-Income Trading Jumps

(Bloomberg) --

BNP Paribas SA surprised investors with a rebound in its fixed-income trading business, beating all its European and U.S. peers. Its shares surged to a six-month high.

Debt trading revenue unexpectedly rose 29 percent from the previous year, helped by growth in rates and foreign-exchange transactions, the French bank said on Thursday. That helped BNP’s global markets unit -- its key trading division -- post pretax profit of 252 million euros ($283 million), above the average estimate of analysts surveyed by Bloomberg.

Chief Executive Officer Jean-Laurent Bonnafe, who wants to create a European champion able to compete with stronger U.S. banks, has been cutting costs and exiting businesses after being forced to cut 2020 targets and announcing 600 million euros in additional cost cuts because of a trading slump. BNP has shut down its proprietary trading unit and U.S. commodity derivatives activities as part of the measures.

BNP Paribas Fixed-Income Trading Jumps

“Operating expenses were well contained and benefited from cost-saving measures, generating a positive jaws effect,” Bonnafe said, referring to banking jargon for income growth outpacing costs. “An upturn in client business” at the corporate and investment bank was particularly helpful, he said.

Revenue at the bank’s equities business fell more than analysts estimated, highlighting the challenge of reviving its derivatives business amid tough trading conditions and a downturn in volatility. BNP Paribas is revamping parts of the markets unit after last year was capped by a surprise loss in equity derivatives.

BNP Paribas’ fixed-income business reached 1.04 billion euros in revenue, snapping a streak of seven consecutive quarterly declines. It also showed a rebound in trading of emerging-market debt. That’s a reversal from last year, when the French bank was caught on the wrong side of a selloff in developing-market assets and blindsided by the Turkish currency crisis.

BNP Paribas Fixed-Income Trading Jumps

BNP Paribas is strengthening its lead in euro bond issues this year, gaining market share from 2018 and managing more deals than any other player. Meanwhile, Deutsche Bank AG slipped off the the podium and ranks a mere 7th behind rivals such as JPMorgan Chase & Co., Credit Agricole SA and Barclays Plc. New debt sales are an important performance gauge for secondary markets too because they provide fixed-income traders with more opportunities for further transactions.

BNP rose as much as 3.9 percent in Paris and was trading 2.8 percent higher as of 1:46 p.m. The stock is up about 23 percent this year, beating the 13 percent gain of Europe’s Stoxx 600 banking index.

Bucking the Trend

BNP Paribas bucked the debt-trading trend seen at other major U.S. and European investment banks. That helped France’s biggest bank post a 1.7 percent increase in global-markets revenue, while most other big competitors had declines.

“Fixed income is bearing the fruit of the changes that we have applied,” Chief Financial Officer Lars Machenil said in a Bloomberg TV interview. In equities, “customers took some time to come back into the market and there was a gradual pickup in the first quarter.”

Machenil stayed clear of suggesting any potentially big job-cutting plans like those recently announced by crosstown rival Societe Generale SA. At BNP, “natural attrition” of staffing should help the bank achieve its cost savings goals.

Trading at the major Wall Street firms fell 14 percent on average in the quarter, driven by a 21 percent slump in equities, as clients remained cautious after a tumultuous end to 2018. The U.S. government shutdown at the beginning of the year also damped sentiment.

Deutsche Bank, Germany’s largest bank, posted a 19 percent decline in fixed-income trading, while its equity-trading sales slid 18 percent. At London-based Barclays, first-quarter equities sales slipped 20 percent, but fixed-income revenue rose about 4 percent.

BNP’s revenue from equities trading and prime services for hedge funds in the first three months fell about 29 percent from a year earlier, adding to the travails seen the end of 2018. In the fourth quarter, the bank lost about $80 million over several days on U.S derivatives trades linked to the S&P 500.

BNP Paribas is targeting its spending to win clients in countries such as the U.S., the U.K. and especially Germany, where rival Deutsche Bank posted its weakest investment-banking results since the financial crisis.

Asset Sales

BNP is selling assets as it seeks to bolster its financial strength to help meet regulatory demands. It booked 838 million euros of gains in the quarter from selling shares in India’s SBI Life Insurance Co. Ltd. Still, the French bank’s common equity Tier 1 capital ratio -- a key measure of financial strength -- was little changed at 11.7 percent at the end of March.

Retail banking in BNP’s key markets had a mixed performance. Income at its Italian unit, BNL, dropped about 5 percent, while in France, retail banking revenues were flat from the previous year. Revenue growth of 14 percent in a grouping of other markets, including Poland and Turkey, was among the bright spots.

Here are some other key numbers from the first-quarter results:
  • Net income rose 22% to 1.92 billion euros, falling short of analyst estimates
  • Total revenue rose 3.2% to 11.1 billion euros, beating estimates
  • Insurance business revenue grew 32%, helped by revaluations
  • Wealth and asset management revenue fell 3.7%; bank cites “lingering impact” of end-2018 markets decline and reduced client appetite, but says there was gradual upturn toward the end of first quarter

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