BNP Paribas Seeks to Capitalize on Credit Suisse Hedge Fund Exit

(Bloomberg) --

BNP Paribas SA is again looking to profit from a European rival pulling back from the business of servicing hedge funds.

Credit Suisse Group AG is referring prime brokerage clients to the French lender as part of an exit from the lucrative yet risky business, according to a statement on Monday. The Swiss bank is pulling back after losing billions in the Archegos Capital Management collapse. 

For BNP Paribas, the agreement is part of an opportunistic approach to seize on rivals’ weakness to build up its equities offering. The bank is already in the midst of taking on Deutsche Bank AG’s prime brokerage business as part of the German bank’s 2019 exit from equities trading. And in June 2008 as the credit crunch raged, the lender bought Bank of America Corp.’s prime-brokerage business.

Credit Suisse had the fourth-highest market share last year among major banks in prime brokerage, according to Bloomberg Intelligence. The bank expects to lose $300 million in revenue from exiting prime brokerage in 2021, and $500 million to $600 million next year, indicating the potential upside if BNP can attract a large portion of Credit Suisse’s clients. 

The hedge fund exit is at the center of a new strategic plan announced by Credit Suisse last week. Chairman Antonio Horta-Osorio is seeking to reduce risk by moving capital from the investment bank into its steadier wealth management business, as part of a drive to take the bank past one of the most turbulent periods in its recent history.

The agreement with Credit Suisse is less involved than the French lender’s one with Deutsche Bank, as that deal included the transfer of assets and employees rather than just encouraging clients to move transactions. That transfer is scheduled to complete this year. 

The Swiss lender said it signed the referral agreement with BNP to “support its Prime Services and Derivatives Clearing customers in their selection of alternative providers for such services.” It didn’t provide further details.

Capital Buffers

BNP pared early losses to trade up 0.5% at 1:01 p.m. in Paris. Credit Suisse gained 0.7%. 

Prime-brokerage divisions are vaunted within investment banks, both for generating profits and cultivating relationships with wealthy hedge-fund managers. They typically produce about one-third of equities-trading revenue across Wall Street. The business generated some $15 billion of revenue for the industry in 2020, according to data from research firm Coalition Greenwich. Still, the businesses require significant capital as a buffer against potential lending losses and investments in technology. 

The agreement shows the delicate dance Credit Suisse will attempt to pull off as it encourages clients to rely on rivals for borrowing money and securities, while trying to remain a player in the buying and selling of stocks and derivatives. Many customers have already had to find new providers as Credit Suisse cut the size of its prime brokerage balance sheet roughly in half over the past six months, Bloomberg has reported. 

Credit Suisse’s shift out of prime brokerage marks the exit of one of the few international banks that was still trying to compete with the largest Wall Street firms. Those banks are set to gain market share from a smaller rival’s departure. 

BNP generated 2.29 billion euros ($2.65 billion) from its equities trading and prime unit in the first nine months of this year. That puts it near the top of the ranks of European banks, but nowhere near the $8 billion-plus produced by each of the three giants of stock trading -- Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley. 

What Bloomberg Intelligence Says

The referral agreement “should support BNP’s ability to beat expectations next year. The deal would be a tailwind for 2022 revenue at BNP’s equities business, where consensus calls for $3.6 billion revenue in 2022.” 

-- Jonathan Tyce, senior banking analyst. For the full note click here. 

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