Reality Catches Up With France's Biggest Bank

(Bloomberg Opinion) -- A year ago, BNP Paribas SA was almost in a class of its own. While rivals were scrambling to figure out what they wanted to be, the French bank’s focus and stability had earned it the moniker of Europe’s answer to JPMorgan.

Internally, the lender was also bullish. In February, it told investors it would keep expanding while improving profitability, signaling that returns would exceed its targets. This optimism that the bank could defy the challenges faced by its European rivals now looks, at best, premature.

The “structural degradation” in the securities business that Deputy Chief Operating Officer Yann Gerardin talked about on Wednesday has been visible for some time. Hoping that this volatile revenue stream would keep growing was always a risky wager. After fourth-quarter losses in one of its traditionally core areas – derivatives – the bank has been forced to scale back its expansion plans. It will slash expenses by a further 600 million euros ($683 million) in an attempt to preserve profitability and capital.

Reality Catches Up With France's Biggest Bank

Though the bank isn’t saying as much, job reductions look likely, especially at the investment bank. It will also pare spending on technology by 10 percent.

These cost cuts seem sensible and achievable, and the newfound realism that the investment bank won’t outgrow peers is overdue.

The 2018 numbers still make for painful reading: trading revenue has shrunk for seven consecutive quarters. Income across the investment bank dropped 7.5 percent over the year, pushed lower largely by the 15 percent contraction in trading. That decline contrasts sharply with the gains enjoyed by most other securities firms (except Deutsche Bank AG, which has been getting out of businesses.) BNP will now close its proprietary trading arm.

BNP says its investment-banking operation’s market share was flat at about 2 percent in 2018, but will now need to adjust its ambitions. Group revenue is now slated to grow by 1.5 percent on a compound annual basis, down from 2.5 percent.

The bank’s consumer arm in France and Italy, its traditional counterbalance to the investment banking business, won’t be driving much growth any time soon, with Europe’s economies slowing and margins under pressure from record low interest rates.

Investors had seen this weakness coming. Shares of BNP Paribas dropped more than a third in the past year, outpacing the 23 percent decline in the Bloomberg Europe Banks and Financial Services Index in the period. If BNP Paribas is to arrest that slide, it will need to show quick progress in reducing costs.

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.

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