How Not to Run an Investment Bank

Natixis SA’s 14 years as a publicly traded bank will be best forgotten. Losses during the global financial crisis pushed the French firm, which trades securities and owns an asset manager, to the edge soon after its 2006 creation.

While the company has been profitable since then, repeated trading losses and funds that ran wild have been a constant reminder of how not to run a midsized investment bank. It’s little wonder that its parent firm now intends to take Natixis private.

Groupe BPCE, the French cooperative lender that controls Natixis, is offering minority investors — who own about 29% of the company — 4 euros ($4.85) for each of their shares. Though the 8% premium to the previous day’s close may look skimpy, Natixis’s shares have hardly traded above that price since June 2019, well before the pandemic struck. The stock was less than half the current price as recently as October. With an uncertain future as a standalone company, Natixis investors don’t have many options.

How Not to Run an Investment Bank

The trouble with Natixis in its current form is that it’s not big enough to be of critical importance to many trading clients but its $600 billion of assets make it large enough to do broader harm to the financial system should things go wrong. Backed by the deep pockets of BPCE, one of the world’s 30 most systemically important banks, and squeezed by low interest rates, it chased revenue by selling complicated and risky financial products. The math whizz kids who managed Natixis ran rings around the parent’s board.

In 2018 it was exotic Korean derivatives that cost the firm hundreds of millions of dollars, and drew scrutiny from the European Central Bank. Then last year wagers on company dividends blew up, leading to more losses. The Natixis strategy of owning stakes in boutique money managers rather than consolidating those businesses under one roof also backfired. When H20 Asset Management overinvested in dubious, illiquid bonds it triggered client withdrawals and raised the alarm about Natixis's risk management and controls.

True, Natixis has been trying to turn a corner since ousting its chief executive officer in August. It promised to shrink its equity business, ending the sale of some complex derivatives, and it cut its annual revenue target at the equity unit by about a quarter from the previous run rate. It also planned cost savings of 350 million euros ($423 million) by 2024 and started talks to unwind the H2O partnership, a move analysts estimate would reduce recurring profit by 5% over time.

But last year, when Wall Street firms benefited from a surge in trading profit, Natixis was unable to capture any growth in fixed-income activity. In a business that increasingly requires scale, the dominant U.S. players and a handful of Europeans are enjoying the spoils. It’s too late for mid-ranking players to catch up.

Inside BPCE, Natixis will be on a tighter leash. The plan is for the smaller divisions, insurance and payments, to be folded into the parent’s retail activities. A subscale payments business controlled by Natixis can’t go far without significant investments from BPCE, and insurance is of much greater value aligned to a retail network.

BPCE is creating a new arm to house the securities unit and asset management activities. The plan is for Natixis to serve BCPE’s clients rather than chasing trading clients with whom it cannot keep up; the Natixis Investment Managers business may be relisted in the future. Asset management may be one area BPCE looks to expand with acquisitions.

Under BPCE Natixis's future arguably looks more certain, and fortunately the experiment didn't cause irreparable damage. For other European banks grappling with mediocre businesses, it’s a reminder that bumbling along is no longer enough.

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.

©2021 Bloomberg L.P.

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