May 2, 2019 / 10:34 AM / 2 months ago

Breakingviews - BNP requires more than one-off trading boost

The Paris headquarters of the BNP Paribas bank is seen near a Paris Metro sign, January 28, 2012. REUTERS/Mal Langsdon

LONDON (Reuters Breakingviews) - Thank goodness for traders. Such gratitude is likely to be a novelty for BNP Paribas Chief Executive Jean-Laurent Bonnafé given how woeful these bankers’ performance was in some of the previous quarters. Still, a boost to volatile trading income reported on Thursday helped lift the French lender’s return closer to its 2020 target. Bonnafé will have to maintain the improvement in revenue growth if he is to hit that goal.

His bank’s 29 percent year-on-year surge in fixed-income revenue puts European rivals in the shade. It also knocks on the head Deutsche Bank CEO Christian Sewing’s ambition to leapfrog BNP as Europe’s premier investment bank: the French bank appears to be gaining market share at the expense of its German peer, which reported a double-digit drop in fixed income revenue for the same quarter. At least Sewing can take some comfort that BNP is not about to take on Deutsche in its own backyard: the Paris-based lender insists it has no interest in bidding for Germany’s Commerzbank, Deutsche’s one-time merger partner.

The trading boon helped BNP achieve an impressive “underlying” 11.2 percent return on tangible equity (ROTE) in the first quarter. True, that was flattered by excluding so-called one-off items. But even after these are added back in, ROTE was close to a still-respectable 10 percent, around BNP’s probable cost of capital. That was aided by robust loan growth which saw overall group revenue swell by 3.2 percent from a year earlier.

Bonnafé will need to sustain such momentum if he is to hit a 10.5 percent ROTE target by 2020. BNP currently expects 1.5 percent revenue growth annually. If costs grow by half that and loan losses remain broadly stable then BNP would make a 9.5 percent ROTE by then, according to a Breakingviews calculation which assumes a 25 percent tax rate and tangible equity of 79 billion euros.

A pick up in euro zone growth would help raise that figure, but is far from guaranteed. So could an additional 2 billion euros in planned cost savings. But investors are sceptical if the bank’s valuation is any guide: its shares are trading at a 27 percent discount to tangible book value. Bonnafé will have to deliver more than a one-off trading boost to convince them otherwise.

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