BNP’s Nightmare at Christmas Helps Trigger 70% Equities Drop

(Bloomberg) -- BNP Paribas SA, the biggest French bank, is reeling from losses at one of its most famed business.

The Paris-based bank reported a 70 percent plunge in revenue at its equities unit in the fourth quarter, the worst performance since at least 2013 and a stark contrast with gains at its biggest U.S. rivals. The slump came after a chaotic December, during which BNP traders were flummoxed by sharp market moves and a series of U.S. trades that went awry around Christmas and lost tens of millions of dollars.

“The guy in charge of the book made bad choices,” Chief Operating Officer Philippe Bordenave said, without identifying the individual behind the U.S. derivatives trades. “There is no negligence, no misbehavior at all.”

The decline at BNP underscored the volatility of equity derivatives. French banks claim an expertise in these lucrative yet complex products, which are now causing headaches across Paris. Societe Generale SA has already warned of a slide across its trading businesses in the fourth quarter while hometown rival Natixis SA reported losses and provisions of hundreds of millions of euros in December linked to esoteric stock trades in South Korea.

“There were clearly some unusual, or one-off, losses in BNP’s equity trading business in the fourth quarter although for the year as a whole, revenue trends in this business were in line with peers,” said Simon Adamson, a bank analyst at CreditSights Inc. in London. “BNP probably wasn’t helped by its focus on equity derivatives rather than cash equities.”

Revenue from equities trading at BNP tumbled to 145 million euros ($165 million) in the fourth quarter, compared with the 400 million euros predicted by analysts at JPMorgan Chase & Co. The slump compares with the double-digit gains that most of the biggest U.S. investment banks reported for their stocks divisions.

The equities performance also contrasted with “more encouraging” results at less volatile parts of BNP’s sprawling operations, such as retail banking and wealth management, analysts at Goldman Sachs Group Inc. wrote.

‘‘What BNP’s results seem to show you is that there’s a lot more steady and slow growth elsewhere compared with the volatility of investment-bank earnings,” said Peter Hahn, professor at the London Institute of Banking and Finance. He said this could raise questions about how much more the bank will invest in this area.

UBS Group AG, one of BNP’s biggest rivals in Europe, posted a 13 percent dip in equities-trading revenue for the fourth quarter. SocGen may show a 23 percent decline when it reports earnings on Thursday, according to JPMorgan.

Equity derivatives are contracts that derive their value from underlying shares. Some are traded on exchanges while others are tailored specifically for each client. They are often more lucrative for investment banks than trading common stock –- partly because they can be more volatile.

The performance may herald changes at BNP’s equity-derivatives unit, which the bank relies upon for much of its overall stock-trading revenue. The bank plans a series of “targeted measures” at the business, according to a presentation.

A “structural degradation” for the investment-banking industry’s revenue pool last year led BNP to plan additional cost cuts and other measures to improve profitability levels, Yann Gerardin, who heads BNP’s corporate and institutional bank, told journalists at a press conference. The bank will take a “more selective approach” to its trading division, Bordenave told analysts.

BNP executives blamed “extreme market movements at the end of the year” for part of the decline. The bank’s hedges -- market bets that are supposed to curtail losses -- didn’t work properly, triggering a hit to revenues of about 100 million euros, Bordenave said. Some of these positions may recover in the future, he said.

The bank also lost about $80 million over several days on its U.S derivatives trades linked to the S&P 500. Antoine Lours, the bank’s New York-based head of U.S. index trading, was on vacation when the trades began to fail, Bloomberg reported Jan. 15, and it’s unclear if he’s since returned to work. Andrew Achimu, a spokesman for BNP, declined to comment.

To contact the reporters on this story: Donal Griffin in London at dgriffin10@bloomberg.net;Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, ;Dale Crofts at dcrofts@bloomberg.net, Marion Dakers, Keith Campbell

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