The French Connection
One unexpected consequence of the credit crisis: a better standing in North America for BNP Paribas.
By Joshua Hamerman April 14, 2008
When Jacques d'Estais, head of corporate and investment banking at BNP Paribas, visited New York three weeks ago, he met with nearly 15 clients in two days. The visits were with corporations, two private equity firms and a hedge fund.
BNP had been competing with UBS to advise one of them on a transaction, and during a breakfast meeting with that client, d'Estais was told UBS was out of the running.
Prior to last August, the competition would have likely had a different outcome. Today, BNP, a Paris-based financial institution with a strong focus on North America, has managed to survive the credit crunch with much less damage than its larger competitors in the US and Europe.
"Before the credit crisis, most people thought that BNP was very serious about where it competed in the US, even though it was not a bulge bracket," says d'Estais. "That's exactly what we wanted. But since last summer, the impression has changed somewhat. Now, people want to deal with us as opposed to larger competitors because we stayed the course while others didn't."
Indeed, BNP is the only bank in Europe, and one of the few around the globe (along with Bank of America and Wells Fargo), with a "AA+" rating from Standard & Poor's. Only one European bank, Dutch player Rabobank, has a higher S&P rating ("AAA").
Moody's Investors Service and Fitch Ratings have "Aa1" and "AA" ratings on BNP, respectively.
"For us, it's one of the most diversified banks in Europe and the world," says Bernard de Longevialle, a primary credit analyst at S&P in Paris who covers BNP. "Overall, it's quite a conservative bank with comparatively low exposure to subprime and non-investment-grade parties and has a moderate risk appetite, lower than many of its peers. BNP is outperforming most if not all its domestic peers [in France] and also most of its international peers."
For BNP, established in 2000 via the merger of French firms Banque Nationale de Paris and Paribas, leveraged finance and securitization have historically contributed less than 10% of its corporate and investment banking revenues.
Most of the firm's management has been part of the franchise for years. BNP's chief executive, Baudouin Prot, who was appointed CEO in June 2003, began working for Banque Nationale de Paris in 1983 (the same year d'Estais joined Paribas).
BNP has grown the ranks of its risk management, internal audit and compliance professionals by 21% since 2005; at the end of 2007, headcount was 2,480. Risk managers are not part of other firm businesses and report directly to Prot. The BNP board also has a committee which oversees internal control and risks.
"We expect BNP to outperform most of its domestic and international peers in 2008," says de Longevialle.
The firm, which has a $97.5 billion market cap on the Euronext Paris, had the seventh-highest net income among global financial institutions for 2007, with $12.3 billion. BNP also had the fifth highest pre-tax corporate and investment banking income in 2007, with $5.7 billion.
Though BNP wants to at least match, in 2008, the €8.3 billion ($13.1 billion) in corporate and investment banking revenue it accrued in 2007, Dresdner Kleinwort analyst Jaap Meijer cut his 2008 revenue forecast to €8 billion ($12.6 billion) due to the impact of the credit crisis. Meijer, whose team maintains a "hold" rating on BNP, declined to comment beyond research reports.
BNP's total revenue in 2007 came to $49 billion, an 11.1% increase from 2006. The bank reported net earnings per share of $13.44 and a dividend per share of $5.30, increases of 5.7% and 8.1%, respectively, over the prior year. (BNP will disclose its numbers for 2008's first quarter on May 14.)
Its shares reached a 52-week low of €52.12 on March 17, down sharply from the 52-week high of €95.07 hit last May. The stock was recently trading near €67.
BNP advised on 31 deals worth $38.1 billion during the first quarter, compared to 43 deals worth $40.4 billion in the year-prior period.
The bank had $4.9 billion in cash and synthetic collateralized debt obligations in its portfolio at the end of 2007. The firm's revenues took a $1.3 billion hit in the second half of 2007 due to the credit crisis.
Luck of the draw
Besides its low appetite for risk, another factor was at work in BNP's minimal exposure to subprime and other toxic mortgage assets: luck.
"Our strength has always been trading and hedging, and we concentrated on government-guaranteed mortgages and TBAs," says Bob Hawley, head of Americas fixed income and president of BNP Paribas Securities. "We didn't have a big-enough franchise to get involved in a lot of the other businesses, which included subprime."
Hawley admits, "We were lucky. What attracted a lot of people to subprime was higher yields, and people thought that by having a pool of assets they were better protected than having a single asset. You've seen all the write-downs, so obviously it didn't work out that way."
Both of BNP's predecessor firms were involved in real estate lending in the late 1980s and early 1990s, but the companies decided to pull out of the sector due to lower-than-expected returns, recalls Everett Schenk, head of North American territory.
Another reason for BNP's healthy balance sheet had to do with the bank's US strategy. "In the US, we don't try to do everything for everybody," says d'Estais. "We know what we're good at, and we focus on those products or areas."
The American dream
BNP has about 15,000 employees in the US, and 2,600 of them are in corporate and investment banking. The firm's US banking revenue has grown 13% annually since the merger between Paribas and Banque Nationale de Paris, and the division's headcount has seen an 8% uptick since then.
"The American market is essential in investment banking because that's where over half of the liquidity is, that's where the biggest clients are, that's where the hedge fund community was born, and that's where most of the deal initiation is," says d'Estais. "It has to be key in any global investment banking strategy."
More than half of all investment banking fees are generated in the US, says Jean-Yves Fillion, head of US corporate coverage and Americas structured finance, and therefore, "whether you're a JPMorgan or a BNP Paribas or a Barclays, if you are focused and have a plan you can implement, there is still a lot of opportunity here in terms of fees and revenues."
In the US, BNP has traditionally emphasized its equities and derivatives and structured finance operations, and d'Estais says this will continue.
BNP had to change its equities and derivatives strategy in the US to meet market demands that differed from Europe and Asia, explains Todd Steinberg, head of Americas equities and derivatives. While 40% of the global equities and derivatives pool is located in the US, and the US market is the same size as Europe, the US space is dominated by flow and prime brokerage products, says Steinberg. Europe, meanwhile, mostly consists of structured products and sees most revenue generated from institutional clients rather than hedge funds.
When Steinberg joined BNP in September 2005, he sat down with his supervisor, Yann Gerardin, global head of equities and derivatives, to discuss how the bank could better harness its resources for the US.
"He and I agreed that BNP Paribas was clearly a market leader in Europe and Asia, and the company had been under-invested in the Americas," recalls Steinberg. "There were a lot of things that could be leveraged from its success abroad into this market, but in order to be successful here certain business lines had to be emphasized and certain skills needed to be developed. So in the Americas, we decided to focus on hedge funds, emphasize flow derivatives, continue to build out an equity finance capability and run structured products in a way that the market here cared."
One way to do that was to combine expertise from American and European employees. "You'll find other foreign equity derivatives dealers in the Americas market staffed only by Europeans who have come over, but there isn't a lot of local talent in those organizations," says Steinberg. "Similarly, a lot of our local competitors have only local talent and suffer from a lack of European technical expertise. We're unique because we have Europeans and locals working hand-in-hand to leverage complementary skill sets. We seamlessly move people around the world to facilitate that."
Since Steinberg's arrival, the Americas equities and derivatives headcount has increased from 85 to 175. The division's revenue has increased by 2.5 times and its net income has tripled. Steinberg helped launch an institutional long-only business for North American clients last month.
The firm's interest rates business has also been crucial to its US and global presence. "Our interest rates business has helped us develop a US dollar franchise, which is important from a corporate and investment banking standpoint," says Hawley. "In order to have a global franchise, we need to have strength in the US dollar."
Surprisingly, BNP has found US expansion easier than European growth under current market conditions. "There was a lot of talk, starting in late 2006, about a shift in the balance of investment banking to London," says Hawley. "But if you look at market liquidity since last August, the US markets have been open and the European markets have been closed. This crisis has told you that there is more liquidity in the US, and the US is a much deeper and more established market, so in difficult times your ability to do business is much more easily facilitated in the US than in Europe. This has presented opportunities for us to expand our business in the US, when Europe has been at a standstill."
Another business BNP focuses on is the Americas branch of its ECEP (energy, commodities, export and project finance) division. ECEP has four hubs in New York, Paris, Geneva and Singapore with a total of 1,200 professionals. The New York office hosts one-quarter of the headcount, says Lodewijk Spoorenberg, head of ECEP Americas. ECEP's services include asset finance, corporate coverage and energy and commodities services such as reserve-based lending, which involves valuing and monetizing underground reserves of natural resources.
The division also finances infrastructure projects such as US toll roads and the expansion of the international airport in Bogota, the Colombian capital.
ECEP's main branches in the US are located in New York and Houston, but it also has Americas teams in Canada, Mexico, Brazil, Argentina, Chile, Colombia and Venezuela.
ECEP works closely with other BNP business lines, including the North American corporate finance team, which is headed by Elsa Berry and focuses on cross-border deals in the energy and natural resources, industrial capital and branded consumer sectors.
"It's important that we have integrated global business lines which allow us to cross-leverage our sector and product expertise to the benefit of our clients," says Spoorenberg. "For us, a priority area for growth is corporate finance in natural resources. We are a world leader in the energy and commodities space and it makes sense to develop on the corporate finance side."
Growth by M&A?
Though no large acquisitions are on BNP's horizon, the bank is willing to consider smaller deals in the US and elsewhere. "The bank is open to the idea, whether they be specific companies or industry groups or teams we perceive would push us further along in terms of development," says Schenk. "Since the merger we've evolved essentially through organic growth, which has been heavily based on growth in the equity as well as fixed income platforms, and less significantly on growth in the financing business."
Indeed, the financing side accounts for 35% of BNP's revenue, compared to the 65% provided by the capital markets businesses. That ratio was inverted when BNP was created in 2000, says Schenk.
"We continue to grow at an even keel every year," says Hawley. "We don't go out and hire 50 to 100 people at one time. We grow organically and try to make sure our revenue supports our growth."
For the last three years, says Hawley, the fixed income division has hired 25 to 30 business school graduates. The Americas fixed income division currently employs 420 people, and that number will likely grow to between 450 and 460 by the end of the year.
"For some areas we will hire senior people if we need them, but other than that, we bring in graduates," says Hawley. "In our industry, some people will go across the street for $1 more, but if you hire graduates, bring them up and train them well, they're the nucleus of your business as you look out over the next three, four or five years."
BNP's last North American acquisition involved Zurich Capital Markets, a New York-based structured products subsidiary of Zurich Financial Services. BNP absorbed Zurich Capital Markets in 2003.
"We're not looking to make big acquisitions," says d'Estais. "We're always open to adding teams or making small acquisitions if they fit."
Of course, the potential target most associated with BNP is its embattled French rival, Societe Generale. Speculation about a SocGen acquisition followed BNP before the credit crisis (and SocGen's high-profile write-downs due to the activities of a rogue trader). On March 19, BNP announced it had "ceased to consider a potential tie-up" with SocGen. D'Estais declined to elaborate on the matter.
Looking south of the border
Elsewhere in the Western Hemisphere, BNP is launching an aggressive plan to double its revenues in Latin America over the next three years.
"We're one of the few banks and broker-dealers right now that is expansion-focused," says Steinberg. "We've found it's ideal from a competitive standpoint because other competitors are looking in the US market and not Latin America."
BNP has an advantage because other firms, in part because of Argentina's 2003 economic collapse, view Latin America as a less stable region for operations growth. BNP is looking to expand into Latin America through its New York office, says Hawley, just as the bank's hubs in Europe and Hong Kong are the main outlets for growth in mainland China, India, Russia and the Middle East.
The firm's growth may include the purchase of a brokerage in Brazil, according to Louis Bazire, BNP head of territory for Brazil. Bazire was quoted in media reports as saying BNP is already eyeing potential acquisition targets in the country.
BNP presently has an office with about 300 professionals in Sao Paulo. The firm wants to add resources to increase operations in its fixed income, equity and derivatives and ECEP platforms. Spoorenberg says the ECEP division anticipates hiring 20 more professionals in the region by 2010, and plans to focus on "soft" commodities such as coffee, soy beans and sugar.
One challenge BNP will face south of the border is its lack of a cash equity presence in Latin America. While BNP has such a range in most European and Asian countries, it does not have one in Latin America or Russia.
BNP will also build up its corporate and investment banking operations in other emerging markets such as Russia, India and China, says d'Estais. Emerging markets as a whole accounted for 27% of BNP's 2007 revenues. While BNP's global client revenues grew by 15% to 20% last year, revenues from emerging markets grew from 20% to 40%, he says.
"These are key areas of growth for us," d'Estais says of emerging markets. "We will continue to grow and to invest and want to greatly increase our revenue in these areas."
In addition to Latin America, Russia, China and India, BNP will expand in Vietnam and Indonesia, as well as Middle Eastern markets such as Abu Dhabi, Dubai, Qatar and Saudi Arabia, says d'Estais.
In the latter country, BNP recently teamed up with The Saudi Investment Bank for an asset management joint venture, SAIB BNP Paribas Asset Management. BNP agreed to purchase 25% of the firm's asset management subsidiary in March.
What the future holds
The US investment-banking playing field is dominated by seven or eight major firms that hold a 70% market share, says Hawley, and BNP resides in the tier below them.
Hawley views BNP in the US as on a par with firms like Barclays, HSBC and Royal Bank of Scotland -- with less heft than the likes of larger US banks such as Goldman Sachs and Morgan Stanley.
Although BNP's balance sheet has made it more attractive to potential clients, its status as a smaller foreign bank is still a challenge to overcome. For example, if a company chooses BNP over Goldman or Morgan to issue $2 billion in bonds, says Hawley, and something goes wrong, the client is likely to blame BNP. However, if Goldman or Morgan were the bookrunner, the market is more likely to get blamed for any mistakes.
"One of the things we have to continue to market is our ability to sell paper," says Hawley. "We always have to show we can go out and place bonds and be as successful as the Americans."
One way BNP does that is by marketing mandates like the one involving Baldor Electric Co. BNP was joint lead bookrunner on the Fort Smith, Ark.-based manufacturer of electric motors' January 2007 offering of $550 million in unsecured senior notes.
Hawley says the Americas fixed income team has made inroads in attracting more hedge funds, financial institutions and corporate clients. Today's market means hedge funds have to be covered globally, and Hawley's team works closely with portfolio managers in London, Tokyo and Hong Kong to make that happen.
Like all financial institutions, BNP will continue to face hurdles related to fixed income in the near term. "We're all challenged in the fixed income market," says Schenk. "Some of our ambitions in the mortgage-backed space and securitization world have been modified by the realities of the current environment. That being said, we didn't have a big mortgage-backed business and our conduit is very modest and remains open for business, although everything has to be priced right for the current environment."
BNP's three-year strategic plan calls for continued emphasis on servicing hedge funds, as well as money managers, insurance companies and pension funds. That feeds into d'Estais' theory that institutional investors are the key to ending the credit crisis.
"We need the securitization market to come back; we need institutional investors to come back and start buying credit again, because banks cannot do it anymore," says d'Estais. "Maybe that wasn't true 10 or 15 years ago, but today institutional investors are necessary to fund the economy."
BNP will also try to add more sovereign wealth funds to its client base, says d'Estais, but the firm will mostly work with them on European deals. BNP advised Dubai International Capital on its April 2007 acquisition of German industrial packaging producer MAUSER from JPMorgan's One Equity Partners; the transaction valued MAUSER at €850 million.
When asked where he sees BNP in two or three years, d'Estais says no radical changes are on the agenda. "We haven't really changed our strategy over the last 12 months," he says. "We have a good strategy that's been working so far, so just expect more of the same. It could be boring, but it's working. We don't need to be exciting or heroic -- we just need to ensure we're generating shareholder value."
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Find out more information about people mentioned in this article from our People Database:
Jacques d'Estais
Elsa Berry
Everett Schenk
Lodewijk Spoorenberg
Robert Hawley
Jean-Yves Fillion
Jaap Meijer
Todd Steinberg
Bernard de Longevialle
