BNP, Like Barclays, Is Shaking Up the Stock Trading Game

Paul J. Davies

01 Nov 2021, 05:33 PM IST

(Bloomberg Opinion) -- The stock-trading game in Europe is changing, and it’s not your usual players gaining ground.

BNP Paribas SA is following Barclays Plc of the U.K. in winning a more diverse share of this market, which is balancing out their traditional strengths. For Barclays, that was a focus on bond trading; at BNP, it was equity derivatives.

The trouble with derivatives is the business can be volatile and risky. That was a big sore thumb for the French bank last year when the onset of the Covid crisis led to big first-quarter losses on the complex equity-linked products that are one of its specialties. Its revenue had recovered by the third quarter of 2020, and on Friday it reported an 80% jump in equities-trading revenue for this year's third quarter.

In fact, the bank’s equities revenue has been stronger all this year. Next year could be better still.

BNP used to report equity-trading revenue of about 2 billion euros per year ($2.3 billion) — although last year that was cut to 1.2 billion euros because of the structured-product losses. For 2021, the bank is on course to report 2.8 billion to 3 billion euros, which would be 40% to 50% higher than that historic run rate.

BNP, Like Barclays, Is Shaking Up the Stock Trading Game

There are a couple of things going on. One big change is the consolidation of the Exane brokerage business, which it only half-owned for the past 17 years. It now owns the unit outright.

At the same time, BNP is expanding its hedge-fund services by both growing in a busy market and taking over Deutsche Bank AG’s prime brokerage. It is due to move all the German bank’s clients over to its own books by the end of the year, so the full gains from this won’t be visible until 2022.

BNP reckons that broadening its equities business will bring extra revenue from cross-selling more services to different clients — something that banks always promise but rarely deliver.

At the very least, less reliance on derivatives should protect BNP from the wild swings and losses those trades can produce.

With BNP and Barclays both expanding, others must be losing out. Deutsche Bank decided to quit equities trading in its last big strategy change in 2019 — hence the sale of its prime brokerage business to BNP.

Credit Suisse Group AG is the other bank everyone is watching after its $5.5 billion loss this year on trades with Bill Hwang’s hedge-fund-like family office Archegos. It has cut back its exposure to hedge funds sharply — in fact by about half, according to a Bloomberg report Thursday.

Investors will discover just how much ground Credit Suisse has lost when it reports third quarter numbers on Nov. 4. This is a sticky problem for the Swiss bank, which ought to be following the path of local rival UBS: focusing more on equities because of the closer links to private banking and wealth management.

With BNP and Barclays changing the landscape, the competition for this business looks like it just got tougher.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.