Philippe Bordenave, chief operating officer of BNP Paribas SA, speaks during the bank’s annual results news conference in Paris, France. (Photographer: Christophe Morin/Bloomberg)

BNP Lowers Targets After Derivatives Loss Jolts Trading Arm

(Bloomberg) -- BNP Paribas SA cut revenue and profitability targets after the French bank was among the hardest hit by a stock market rout at the end of last year.

France’s biggest lender is planning 600 million euros ($684 million) in additional cost cuts, focusing on the investment bank that Chief Executive Officer Jean-Laurent Bonnafe had targeted as a growth driver. Income from trading shrank 40 percent in the fourth quarter, led by the worst equities performance of the large investment banks reporting so far.

BNP Lowers Targets After Derivatives Loss Jolts Trading Arm

The bank cited “extreme market movements at the end of the year,” weak client demand for structured products and a loss on index derivatives hedging as reasons behind the trading slump. The bank lost about $80 million in derivatives trades linked to the U.S. stock market late last year, people with knowledge of the matter said last month. It didn’t give more details on the loss during fourth-quarter results on Wednesday.

A second straight annual revenue decline and the misstep in derivatives, a traditional strength of the firm, are threatening Bonnafe’s ambition to make BNP Paribas a dominant force in Europe as rivals shrink and forcing the lender to pare back or exit some businesses. The results also highlight how difficult it has been for banks to thrive with extra-low interest rates, slowing economies and mounting political tensions that have whipsawed markets.

BNP Lowers Targets After Derivatives Loss Jolts Trading Arm

BNP Paribas fell as much as 3.5 percent and was trading 0.5 percent lower at 10:56 a.m. in Paris trading. Before today, the stock had fallen 37 percent over the past 12 months, underperforming the 26 percent decline by Europe’s Stoxx 600 banking index.

BNP Paribas adjusted some of its key 2020 targets: it now expects return on equity to be 9.5 percent in 2020, down from a previous target of 10 percent, while the cost-income ratio will be 64.5 percent, up from 63 percent. The bank kept its 2018 dividend stable.

BNP Paribas isn’t the only French bank to get burned by derivatives last quarter. Natixis SA, which had aggressively sought to grow that business, lost almost $300 million in the period when complex Korean derivatives blew up. Like other French lenders, Natixis had prided itself on its prowess in complicated derivatives. It is now seeking to sell that portfolio, people familiar with the matter have said.

Turning Tide

BNP Paribas confirmed that it’s shutting Opera Trading Capital, a proprietary trading business, as well as its U.S. commodity derivatives operations. The bank is also reviewing “certain peripheral locations” and client relationships at the investment bank that aren’t sufficiently profitable, according to a presentation.

The bank is implementing “further savings to significantly improve operating efficiency,” Bonnafe, 57, said in the statement.

France’s largest bank had been investing in its securities business to win clients in countries such as the U.S. and Germany. Just a year ago, BNP Paribas had struck a note of optimism, suggesting it might even beat its 2020 profitability target. After the fourth quarter volatility the trading business is starting to “normalize” at the beginning of 2019, investment banking head Yann Gerardin said at a press conference.

The tide has turned since then: Europe’s key economies are showing signs of fragility, adding to worries coming from the U.S.-China trade tensions and tremors in stock markets. French consumer spending has suffered from violent protests erupting against the government, while Italy -- one of BNP Paribas’s most important markets -- fell into a recession at the end of 2018. Germany’s industrial slump also worsened at the start of the year.

‘Lackluster’ Conditions

BNP Paribas posted a seventh consecutive quarterly drop in fixed-income trading, with a decline of 15 percent, and its market unit as a whole posted a 225 million-euro loss. The bank cited “lackluster” conditions in the rates and credit markets. Equity-trading revenue fell 70 percent in the fourth quarter from a year earlier, as the S&P 500 dropped 9.2 percent in December. Both fixed-income and equity trading revenue missed analysts’ estimates.

BNP’s main Parisian rival is retrenching, too. Societe Generale SA is weighing steep cuts to the trader bonus pool for a second straight year after a slump in revenue, according to people with knowledge of the situation. SocGen is also reviewing the potential closure of its prop trading unit, and is said to be planning job cuts in less profitable investment-banking businesses.

Here are BNP’s key figures and 2020 updated targets:
  • Fourth-quarter net income was 1.44 billion euros, up 1.1% from a year earlier
  • 4Q FICC revenue EU505 million trailed EU526 million average analyst estimate
  • 4Q equity trading revenue EU145 million trailed EU421 million estimate 
  • Bank targets 9.5% return on equity (vs 10% initially planned)
  • Sales growth of at least 1.5% annually on average (vs 2.5%)
  • 3.3 billion euros in annual cost savings from 2020 (vs 2.7 billion euros)
  • Potential exits of non-strategic corporate and investment bank businesses equal to about 5 billion euros in risk-weighted assets
  • Fully-loaded Basel 3 CET1 ratio of 12% or more (vs 12% previously)

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