(Bloomberg Opinion) -- It’s rare for a European bank to be adding businesses nowadays, as capital constraints curtail dealmaking. The takeover of Deutsche Bank AG’s hedge fund activities by France’s BNP Paribas SA is an exception.
There’s no mistaking what’s driving BNP: Absorbing a larger competitor with a chunky client base is one way to try to salvage its own ailing hedge fund division, and to stop its rivals from snapping up Deutsche’s clients themselves. Yet the French bank’s struggles in this business beg the question as to how easily the two units can be combined, let alone expanded.
Income from BNP’s equity arm and its operations servicing hedge funds (which sit together in one division of the bank) declined for the fourth consecutive quarter in the three months to September — a fall of 15% this time. A drop in equity derivatives revenue was offset partially by a slight increase in hedge fund business. That’s no doubt a signal from BNP that its gradual absorption of Deutsche’s unit is already encouraging more hedge funds to start using the French bank.
BNP is taking over Deutsche Bank’s electronic trading platforms and wants to snag as many as possible of the German lender’s customers. It aims within a year to become one of the world’s top-four prime brokerages (which service hedge funds), Bloomberg News has reported. Ultimately it’s seeking to hold about $300 billion in hedge fund money, or “balances” in industry parlance. That compares with the $500 billion that JPMorgan Chase & Co. already oversees as one of the market leaders. The U.S. bank is eyeing $1 trillion.
For the French lender, the long slog is just starting. While the takeover will be completed at the end of 2019, it will take another two years for as many as 1,000 Deutsche employees to move over to BNP. You need to tread carefully when hedge funds have the option of shifting their money to the big Wall Street prime brokerages. Deutsche’s clients have already been defecting and it’s uncertain how much of the $80 billion or so of balances it held in September will transfer across to BNP ultimately.
After buying Bank of America Corp.’s prime broking activities in 2008, BNP has stayed focused on U.S. clients. Deutsche should bring more exposure to Asian and European clients, and its trading technology should let BNP go after big quant fund customers.
The biggest difficulty is avoiding a culture clash. This deal will mean a sharp rise in the number of products the French bank offers to hedge funds, and its volume of work. Before now, its prime brokerage has been cautious when deciding the type of business (and client) it’s prepared to take on. Deutsche’s has been more adventurous. Melding these different approaches on how much leverage and risk to allow will be critical.
There’s about $450 million of extra annual revenue up for grabs here, but BNP has more than $47 billion of yearly sales so it’s hardly game-changing. Venturing into the uncharted territory of a much bigger derivatives business will see BNP edging higher up the danger curve.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
©2019 Bloomberg L.P.