The global head of corporate and investment banking at BNP Paribas says the bank is enduring challenging market conditions with a risk-aware, rather than risk-averse, approach to business.

It seems incongruous that two of the handful of banks to have emerged from the subprime and credit crunch crises relatively unscathed should occupy opposite ends of the spectrum in terms of style.

One, ­Goldman Sachs, is characterised as a high-octane, risk-loving international trading house, while another, BNP Paribas (BNPP), is often portrayed as a staid, risk-averse ‘French’ bank. Yet both are in the enviable position – unlike the majority of their peers – of seeing their businesses in profit for every quarter since the crisis began.

That record remains unblemished following the BNPP Q2 results, announced on August 6. There were even indications of a slight rebound in the corporate and investment bank’s profits – with a rise from Q1’s €308m to €523m ($461.3m to $783.3m) – although still significantly less than last year’s stellar figures.

Before the crisis struck, BNPP was notable by its absence or relative weakness in several of the hottest growth areas. Despite exposure to the US mortgage market via the California-based subsidiary BancWest, it did not have a significant subprime exposure.

It was not big in the leveraged finance area – leveraged financed assets represent less than 2% of the corporate and investment bank’s (CIB’s) risk-weighted assets. It was not big in securitisation. It did not have a structured investment vehicle. When those areas were booming, BNPP was seen to be missing out; its business model ‘boring’ and its culture risk averse.

Judgement and care

Jacques d’Estais, global of head of corporate and investment banking, is more amused than insulted if anyone chooses to see BNPP as boring. However, he contests the idea that the bank has performed better because of luck and caution, rather than by judgement and care. For one thing, you cannot have a big derivatives business, such as BNPP’s, if you are scared of risk. The bank is risk aware, not risk averse, he says.

“We are doing well because our business model is better balanced than most and because we like to understand the risks that are in our books,” says Mr d’Estais, whose experience at the bank includes a stint working in its treasury department.

“As a banker, if you don’t understand what value you are adding, or how [a product or structure] is generating the sort of returns that it promises, then it is probably ‘fake’ money. It may work once, twice, or even three times, but eventually it will blow up,” he says.

Mr d’Estais believes that BNPP’s strong performance in the past year is a vindication of the bank’s model, not least its client focus: client-related business accounts for about 75% of revenues.

At its investor day in June 2007, he outlined how the investment bank’s platform was built around three key strengths: derivatives – which in 2007 accounted for 52% of CIB revenues; structured or specialised finance – which includes asset, energy, commodity, project and export financing; and emerging markets, which account for 30% of CIB revenues (a fact which belies the bank’s reputation as a ‘French’ bank, says Mr d’Estais).

“That business plan remains broadly unchanged today,” he adds. “How many other banks can say that?”

The new sexy

The bank now finds itself in a strong position. Historically, it may have laboured under misperceptions about its character, but after the events of the past 12 months, BNPP’s franchise – supported by the solid, if un­glamorous, cash flows generated by a strong retail presence – has much greater cachet. Boring is the new sexy.

Some analysts say it is well placed to capitalise on the weakness of many of its main competitors and grab market share. “We couldn’t dream of being in a better position right now: we have a strong balance sheet, a great rating, a platform that is performing well in a very difficult environment, and a strong reputation. Clearly that gives us the opportunity to gain market share,” he says.

But will the group give the corporate and investment bank the capital it would need to go out and take market share? Mr d’Estais says that CIB is using more capital than it was a year ago, and he does not expect that to change; however, the bank has to keep a cool head.

“Do we want to accelerate everything we do because we are in a good position? No. We have to be careful because the environment is complex and difficult to predict: a year ago, the idea that Freddie Mac and ­Fannie Mae would be risky counterparties would have been unthinkable. The past year has taught us that we must think the unthinkable,” he says.

But he stresses that the bank will continue to expand in those areas where it sees real opportunities for growth – such as derivatives and emerging markets. “The fact that our headcount is higher than it was in December is a sign that we are continuing ­to grow.”

One such opportunity that BNPP leapt upon was the acquisition, in June, of Bank of America’s prime brokerage business for $300m. It may not rank alongside the top players in the business – which is still dominated by Goldman Sachs and Morgan Stanley – but it is a solid platform boasting 13 years of successive growth, more than 500 hedge fund clients and 300 staff in the US.

Unflinching strategy

Mr d’Estais says that the CIB strategy in the US – and elsewhere – has always been to grow in those areas where it can compete meaningfully against incumbent players. The acquisition is in line with that strategy. Moreover, it increases the bank’s penetration in the US but carries limited integration risk and has negligible impact on its Tier 1 capital ratio.

Acquiring a ready-made platform is crucial in prime brokerage, says Mr d’Estais. “We had been looking at this business for several years and had concluded that building organically [from scratch] was almost impossible, but there was nothing for sale. This gives us a very good base to grow from and is a great complement to our derivatives and hedge fund businesses. Not only does it give us a new revenue stream but it will grow volumes in our existing equity derivatives business.”

While clearly willing to spend money on the right opportunities, Mr d’Estais (and group CEO Baudouin Prot), plays down the idea of big acquisitions (including persistent talk of a possible BNPP takeover of Société Générale). “We are more interested in opportunistic bolt-on acquisitions that close gaps or add value in the areas we have identified for growth,” he says.

Of course, BNPP has not been immune from the crisis. While it has weathered the storm better than most, revenues are down drastically on previous years (Q1 was down by almost three-quarters on Q1 2007) and it has had to make provisions or write-downs to the total of €1.8bn.

Challenges remain

Nor is its business perfect. In bonds, it is a major player in the euro market, particularly for frequent borrowers, but it has not yet managed to build significant market share in other currencies, including the crucial dollar market, where it is not the first European bank to struggle to compete with US players.

Equally, BNPP is a leading financer of mergers and acquisitions (M&As) but, outside France, its advisory business is not one of the heavyweights. Yet, here too, the bank is making headway, having expanded its teams in Germany, Italy and Spain. It recently scored a financial advisory role in beer-maker InBev’s merger with Anheuser-Busch. The bank has also expanded its M&A and initial public offering platform in Asia.

While corporates have, until recently, been very active in the M&A business, the spreading of the crisis into the real economy looks ominous, says Mr d’Estais.

Against that background, it is very difficult to predict where growth will come from, so banks need to be “agile”; but that does not mean ramping up proprietary trading or principal business. “We live by the amount of activity we can do with a client. If clients don’t want to do one sort of business, then we have to come up with a new and compelling idea. That’s the kind of agility we look for,” he says.

Wealth of opportunity

All told, Mr d’Estais says there are still many opportunities out there. “Even if emerging market growth slows, there will still be significant growth in their capital market activity and they have such a need for infrastructure that plenty of opportunities remain.

“And the growth in some of our key areas – such as equity derivatives – is rapid, so there are plenty of new markets coming on board,” he adds.

Closer to home, Mr d’Estais believes that the crisis has taught him some lessons. “The main thing is, if you don’t understand something, don’t do it. But also, this business is all about attention to detail. In the good times, little mistakes go unnoticed. But in the bad times, every mistake costs heavily,” he says.

CAREER HISTORY
Jacques D’Estais

2005 Appointed global head of corporate and investment banking and member of the group executive committee.

2000 Promoted to global head of fixed income of newly merged BNP Paribas, London.

1999 Appointed chief operating officer, fixed income, Paribas, London.

1995 General manager, Paribas Capital Markets, Paribas, Tokyo. Responsible for fixed income and equity businesses in Japan.

1991 Global head of equity derivatives, Paribas, London.

1990 Global head of interest rate options, Paribas, London.

1987 Moved to the treasury department, working on the development of the bank’s commercial paper and option activities.

1983 Commercial banking, Paribas, Paris, working as an account officer in the large corporation department (credit analysis and client relationship).

1978 Graduated from the École Supérieure des Sciences Économiques et Commerciales with a major in finance.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter