BNP Paribas CEO Jean-Laurent Bonnafé tells The Banker why the bank's diversification strategy – along product lines, sectors and geography – is at the heart of its downturn-defying performance of recent years.

BNP Paribas’ business and geographical presence; and BNP Paribas’ ownership structure

While the universal banking model is under attack in the UK by way of the Vickers-inspired, ring-fencing rules, France remains wedded to this type of model with bankers in Paris stressing its advantages in terms of both business spread and customer service. Of the major French banks, none is more diversified in its geographical stretch and business reach than BNP Paribas.

“Diversity is essential, diversity is the key element for running a bank in the long term,” says BNP Paribas CEO Jean-Laurent Bonnafé in an extensive interview with The Banker. The advantages of diversity are one area where Mr Bonnafé finds himself in agreement with the many analysts who cover the bank. They concur that it provides BNP Paribas with underlying strength. 

On other issues, however, such as the merits of using loan-to-deposit and cost-to-income ratios as a slide rule for judging the entire bank – even though it is composed of very different businesses – Mr Bonnafé parts company with many of the analysts. He thinks there is a tendency to assume that a loan-to-deposit ratio higher than 100% means the bank is short of deposits, which he argues is not the case.

With France and the eurozone facing strong economic headwinds, it is the broad composition of BNP Paribas – together with management stability, a strong track record in making acquisitions and good risk management – that has kept the bank ahead of competitors throughout the crisis. Now, with deleveraging and the shedding of unwanted sovereign risk largely behind it, and with a cost-cutting programme ongoing, the challenge for BNP Paribas is to find growth.

Growth routes

There is clearly upside in a recovering US market, where BNP Paribas has the retail operations of BancWest, as well as a corporate and investment banking (CIB) business, and in Asia, where BNP's aim is to grow revenues of €2bn by 50% to €3bn in the next three years. In Asia, BNP's business is mainly focused on CIB and wealth management.

In Italy, however, BNP Paribas faces more of a challenge, with the cost of risk at BNL, which BNP bought in 2006, rising from 90 basis points (bps) in 2009 to 116bps in 2012.  

In France and other key European markets for BNP any growth will most likely come from taking market share from other banks. In the retail space this may be achieved by groundbreaking projects such as Hello bank!, a fully digital operation centred on mobile and tablet banking, launched in Belgium and Germany in May, in France in June and with Italy to follow in October. The target is to have 1.4 million customers by 2017 (see box).

Hello bank! is very much a bank for the modern age, not only in its use of technology and pursuit of an upwardly mobile professional group of customers, but also in its business model with lower costs and capital consumption than those of conventional retail banks.  

“The loan book will be small in relation to the number of customers, and the capital needed to run the bank will be [correspondingly] low, so even with a cost-to-income ratio that might be higher than the pure regular bank [because income is lower] we can get the same return in the end,” says Mr Bonnafé. Business models using less capital are clearly favourable in the Basel III era and Hello bank! will help in this direction, even though there were many other reasons for setting it up.

Benefits of diversity

A negative impact of the forthcoming Basel III requirements is that they make some businesses unattractive – such as project finance, which BNP Paribas has significantly reduced – and so restrict by a modest amount the diversity that BNP Paribas prides itself upon.

“One of the key dimensions that regulators slightly forget is the benefits of diversity,” says Mr Bonnafé. “The most dangerous banks are pure mortgage banks that are only in one single region. Even in a developed country you will have a property downturn every 30 years or so and this makes it a very risky business.”

But if the regulators are not taking sufficient account of the benefits of diversity, the equity and rating analysts are. Berenberg Bank’s James Chappell headlines a note on BNP Paribas, issued in January: 'An Old World Belief in Conglomeracy [sic] and Growth' while Standard & Poor's, in a report on the bank in February, says: “Compared with its French peers, BNP Paribas’ solid management and strategy, the strength of its CIB businesses and other activities in France and abroad, and the quality of its retail franchise, with a greater focus on mass affluent clients than peers, largely offset the bank’s smaller than peers’ market position in the French retail market… BNP Paribas' geographic and business diversity is very strong… [and the bank is] more diversified than leading players in countries with comparably low industry risk, such as Switzerland, Canada or Australia."

Analysts also praise BNP Paribas' deleveraging of its balance sheet and the cutting of exposure to troubled countries such as Greece, but they do raise concerns for all French banks about the poor outlook for the French economy and the impact of changes to regulated savings products such as Livret A, which makes attracting ordinary deposits more difficult.  

Balancing risk

There are further concerns about BNP Paribas’ reliance on wholesale funding – its loan-to-deposit ratio is 111% – though analysts note that the cost outlook is improving. Its costs were down 6.4% year on year in the first quarter of 2013, and its cost-to-income ratio, at 62%, is slightly lower than that of its peers. Net income was down 45% to €1.58bn in the first quarter of 2013 (although 2012’s first quarter results were flattered by asset disposals) hindered by a mixed performance at the CIB arm, but non-performing loans were stable at 4.5% with coverage of 85%.

“BNP Paribas reported a good set of results… driven by good risk and cost control,” says a report by Credit Suisse. However, a report by Moody’s released in May says: “We view French banks’ high level of total wholesale funding as a credit weakness because the availability of wholesale funding is confidence sensitive and can reduce rapidly when investors’ sentiment changes.”

Right kind of ratios

Mr Bonnafé agrees with analysts who say that France has a lot to do in terms of reforms to improve the flexibility of the labour market and to return the economy to growth, but he points out that almost three-quarters of BNP Paribas’ business comes from outside the country, which reduces the impact on the bank’s bottom line. He rejects the idea put forward by some analysts that the bank’s loan-to-deposit ratio is too high.

“For a bank to be safe, money that is required for funding clients’ activities, even in the short term, must be covered by stable funding and you have to run the bank as if the wholesale funding doesn’t exist which is what we do," says Mr Bonnafé.

“BNP Paribas has very different parts. If you are looking just at French retail, this is basically a deposit-taking bank and the loans are covered by deposits, but in the group you also have consumer finance, with a €90bn cash balance sheet financed through mid- and long-term funding and not deposits. You also have CIB, parts of which can only be financed by bonds. So when you look at the group as a whole and say the loan to deposit is such and such, it just doesn’t make sense.

“The loan-to-deposit ratio is relevant for saving and loans banks but for us the liquidity and net stable funding ratios are more relevant. Analysts sometimes fail to understand this.”

Mr Bonnafé adds that there are similar misunderstandings about the cost-to-income ratio, which varies according to the type of business – about 45% in consumer finance, roughly 60% for CIB and retail and about 70% in investor solutions.

“What is critical is revenues minus both cost and cost of risk [cost of risk is not included in the cost-to-income ratio]. With consumer finance, it is normal to get a low cost to income because cost of risk is high and you need to have enough room to pay for the cost of risk, but if you are looking at French retail, cost of risk is down to about 20bps, so you can live fairly well with a 65% cost-to-income ratio,” he says.

“Banks are similar to human beings; you have all types and diversity is the key element for running a bank well in the long term.”  

Regulation ready

On regulation, Mr Bonnafé  says that BNP Paribas is now Basel III compliant in terms of capital (common equity Tier 1 ratio fully loaded is 10%) and liquidity and that on structure the bank will easily be able to conform to a new French banking law which separates proprietary trading from other activities. The law does not go so far as Vickers in the UK in separating out a whole swathe of corporate and investment banking functions from deposit taking, as was also proposed by the Liikanen report for the EU.  

“With banking structure we are looking towards the French banking law that recognises that market making and capital markets are important parts of the business, Germany is heading in the same direction, while the UK has gone further by adopting the Vickers’ proposals,” says Mr Bonnafé.

BNP Paribas' broad range of businesses are divided into three parts – retail banking, which includes personal financing and leasing; CIB, which includes commercial lending, cash management and trade finance; and capital markets and investment solutions, which includes wealth and asset management, security services, insurance and real estate.

Jacques d’Estais who runs the group’s investment solutions, personal finance and international retail banking businesses, says: “BNP Paribas Cardif is the insurance arm of the group and a worldwide leader in providing innovative credit protection solutions for individuals. Cardif also provides life insurance and savings solutions mainly through large banks in selected countries including France, Italy, Luxembourg, South Korea and Taiwan. Together they produce €2bn in annual revenues.

"BNP Paribas Real Estate is the number one in continental Europe for commercial real estate, and has a significant market share in the Paris region. This business provides property development and management, and real estate investment management and advisory. In France and Germany, for those wanting to buy commercial property, their first call is likely to be to BNP Paribas.”

Smooth moves abroad

BNP Paribas' international retail banking includes BancWest, which has 800 branches and 11,700 employees, and First Hawaiian Bank in the US, though the bank has partnerships in Asia with China’s Bank of Nanjing and Vietnam’s Orient Commercial Bank, as well as similar arrangements with TEB in Turkey, UkrSibbank in Ukraine and a range of operations across north and west Africa.

Given the geographical spread that already exists, Mr Bonnafé says that for BNP's international retail banking operations, making acquisitions to enter new countries is unlikely, but enlarging market share through an in-country acquisition is possible. Compared to most banks, BNP Paribas has a strong track record on making successful acquisitions and Mr Bonnafé, who became CEO in December 2011, replacing Baudouin Prot who became chairman, has been heavily involved in some of the key purchases.

Mr Bonnafé led the post-merger integration after the BNP and Paribas joined forces in 2000 and later was made CEO of Fortis to oversee the same process with the Belgian bank. BNP Paribas acquired the crisis stricken operations of Fortis in Belgium and Luxembourg in 2008. At the time, one analyst said of the deal: "The execution risk of acquiring these operations is significant and management resources will be stretched." But BNP Paribas proved up to the challenge and the integration went largely to plan. The one acquisition which has not gone according to plan, however, was in Ukraine, where problems in the wider economy have led to the downsizing of BNP Paribas' local operation.

Risk tolerance

With CIB, Mr Bonnafé describes the corporate bank as being in a transitional period. “Our CIB platform is the sum of two parts: the corporate bank, and capital markets and advisory," he says. "The corporate bank has been through a transition period and we have completed a significant deleveraging process. We are moving towards an originate-to-distribute model. Due to capital and liquidity constraints under Basel III, we are refocusing some businesses, such as project finance, towards an advisory model. Our capital markets business is global but occasional renewed tensions in the European market have impacted on the results.”

Apart from diversity and a strong track record on acquisitions, key to BNP Paribas success has been its effective risk management and its determination to take an independent view of risk.

Chief operating officer Philippe Bordenave says: “We prefer not to talk about risk appetite, instead we would rather talk in terms of risk tolerance and our tolerance is very low. The result is that we have always been conservative in terms of lending and market trading. We prefer to lose market share rather than extend loans to risky clients.

"When I entered the bank in 1985, the first thing I learned about credit risk is that if there is any doubt about being repaid then there is no doubt – you don’t advance the loan. We avoided subprime asset-backed securities because we don’t like relying on ratings – we consider that as bankers we have to have our own ideas about risk and not rely on rating agencies.

"We made our own assessment of subprime and decided it was extremely risky because it was a lending connection outside of the banking system and not subject to banks’ lending rules.”

BNP Paribas is fortunate in having built up the bank and created the business model over a long period and mostly, with the exception of the Fortis acquisition, in good times. This made integration smoother and lowered the risk.

Like all banks it has had to adapt to the new environment of tighter regulation, slower growth in key markets and increased competition. The decision by the French government to go for a restructuring reform closer to Volcker than Vickers makes this an easier transition than for, say, Barclays in the UK. But much more central to BNP's future success will be its ability to remain diversified, retain management continuity and continue with its independent style of risk management.


Saying Hello to digital banking

BNP Paribas has already established itself as a leader in the digital space with the launch of a purely online branch, NetAgence, together with its early use of the iPad for banking and Twitter for after-sales service.

Now it has taken things a step further by launching Hello bank!, a digital bank centred on the mobile, which is up and running in Belgium, Germany and France with Italy scheduled to go live in October.

But Hello bank! is only for the committed digital customer. In France, at least, BNP Paribas’ existing retail customers can transfer to Hello but they must close their conventional account in order to do so – they cannot have both. And if Hello bank! customers want to meet an advisor in the flesh they will have to pay for the privilege, although they can talk live by video conferencing or phone the call centre.

The thinking is that the business model of Hello offers attractive savings rates and products including a free bank account and gold credit card. Customers who take advantage of these must also sign up to the low-cost transaction model of Hello. They cannot have Hello products and continue to use branches. The aim is to attract 1.4 million customers by 2017.

Beatrice Cossa-Dumurgier, BNP Paribas’ COO of retail banking and head of Hello bank! Europe, says that Hello was built in eight months by a team operating very much as a start-up within BNP Paribas. It was designed to satisfy four criteria – to be simple, smart, human and safe.

“We wanted to make it as simple as the best applications used daily by millions of people on their smartphones and tablets with, for example, very easy subscription forms for each product. It is smart with attractive pricing, and human with extended hours support through online chat, dedicated call centres, social media and other channels. The security is there as it uses BNP Paribas’ existing IT platform.”

The choice of France, Belgium and Italy as launchpads was obvious as BNP Paribas has a strong retail base in those countries. But in Germany, the model is somewhat different as BNP Paribas has no branches there. Instead, Hello was launched in conjunction with BNP Paribas-owned broker Cortal Consors. Future destinations are likely to be Turkey and the US.


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