The bank’s leader, widely regarded as Europe’s champion-in waiting, has everything he needs for a major merger.
Jean-Laurent Bonnafe, who has been at the helm of BNPParibas SA for 12 years, has amassed an $8.3-billion war chest. He is also the largest corporate and investment banking in Europe. The CEO took advantage of rivals’ mistakes and cut costs to achieve record earnings. He also has extensive experience in executing cross-border marriages, which every bank executive believes is necessary to compete against the American giants.
Bonnafe, who was speaking to shareholders at the Louvre in Paris in a vast convention hall last month, summarized the odds that he would make such a deal as “close to zero”.
The meticulous and reserved chief executive officer will know the traps. His rise through the ranks of BNP was based on integrating massive mergers from his predecessors. He has had a successful reign marked by smaller transactions, consistent results, and the sale of US regional lender Bank of the West at the perfect time.
Lire en francais .Bonnafe’s unwillingness to make a large acquisition at a moment when investors are looking for more dramatic growth, closes one way for transformational growth. The shares have been moving sideways for almost a decade, despite having doubled in Bonnafe’s first two year in office. BNP Paribas, the most profitable bank in Europe, has promised steady growth and increased buybacks. Yet, the shares are trading more than 40% under their book value. This is a larger discount than major European banks.
Bonnafe’s brand is “disciplined” growth, while competitors lurch from crisis to crisis. BNP Paribas must decide what comes next and if the title of European champion-in waiting will be a permanent moniker.
Jerome Legras is the managing partner of Axiom alternative Investments. The next 18 months will be crucial for the Bank, as they’ll need to decide if the proceeds of the Bank of the West deal can be invested into projects that are more profitable. BNP Paribas shares trade at the same level as when Bonnafe became CEO
Legras stated that he does not expect Bonnafe will do anything major, but instead continue diversifying and expanding businesses where scale effects can be reaped by the bank, such as insurance. Bonnafe declined comment for this article.
BNP has performed better than most of its peers, even though European bank stocks have generally not done well since financial crisis. Since Bonnafe’s takeover in December 2011, the stock has risen 91%, compared to 30% for its local competitor Societe generale SA. Barclays Plc fell 11%, and Deutsche Bank AG dropped 62% during the same period. Credit Suisse Group AG is no longer an independent company.
Over the years, all those rivals have shocked investors by announcing steep losses. Bonnafe on the other hand, has consistently posted profits in all but one quarter (2014, when he accepted a $9 billion fine after his bank broke US sanctions). Analysts say that Bonnafe did a good job of managing risk, and finding a balance between opportunistic deal-making and conservatism.
Matthew Clark, a Mediobanca analyst, said that BNP avoided the landmines which blew up their competitors. It delivered consistent earnings across all of its franchises and was able to accumulate capital. BNP Paribas has only suffered two quarterly losses over the last 20 years
BNP Paribas is one of only a few companies that can step in to buy rivals’ businesses when they are forced to do so. It agreed in 2019 to buy Deutsche Bank’s prime brokering business, as the German bank retreated from equity trading as part its restructuring. Bonnafe took over the hedge fund clients from Credit Suisse shortly after. Credit Suisse was looking to reduce its risk following a $5.5billion loss in dealings with Archegos Capital Management.
BNP Paribas has also purchased the remaining shares it did not already own in Exane SA in order to expand its equities platforms. The company is betting that the combination between research and prime brokerage, will attract clients from the US.
Yann Gerardin is BNP Paribas chief operating officer and also heads the investment bank. He says that by taking over the top-tier platform of Deutsche Bank, they saved about 10 years’ worth of technology development. The firm now targets Europe’s top position in equity trading.
BNP Paribas has strengthened its markets unit with the deals in prime brokering — the lucrative but risky business that involves facilitating the highly leveraged, often high-risk trades of hedge fund. It is now competing against Barclays and Deutsche Bank to be the best in Europe. The corporate bank of BNP Paribas is already ranked first in the European bond market this year. BNP Paribas Corporate and Investment Banking revenue increased while competitors cut back The revenue from the corporate and investment banking units or the closest comparable unit at the time the filing was made
Clark said that BNP was the last investment banker standing in Europe. “While Barclays has a dominant position in FICC trading over the years, other banks such as UBS Credit Suisse SocGen and Deutsche Bank have all reduced their business.”
BNP Paribas’s role as the last financial supermarket in Europe and its strength in the financial sector — BNP is one of Europe’s largest banks by balance sheet — have led to comparisons to the Wall Street giant JPMorgan Chase & Co. BNP also has extensive retail and commercial banking operations in France, Belgium, Italy and China where it targets wealthy and corporate clients. Cardif, its insurance arm, operates in over 30 countries across Europe, Asia, and Latin America. Last year, it generated EUR30 billion gross written premiums.
BNP’s stock market value is still a far cry from that of JPMorgan Chase. It’s only worth €68 billion – less than half of the value of its US counterpart. The Stoxx 600 Banks Index average price-to book ratio is 0.62. JPMorgan trades above its book value, as do most large US companies.
Flora Bocahut is an analyst with Jefferies Financial Group Inc. She said that BNP has a “diversified business model which allows for steady growth.”
Bonnafe, on the other hand, is the exact opposite of JPMorgan CEO Jamie Dimon, who epitomizes a swashbuckling Wall Street financier. He is a graduate of Polytechnique, the French engineering school. His career was accelerated at the Corps des Mines in France where top civil servants are recruited by the French government. He attended Polytechnique in the same year that Prime Minister Elisabeth Borne joined and was rubbing shoulders with Frederic Oudea, Tidjane Thiam and other top European bankers. Bonnafe is described by a former colleague who declined to identify himself in order to discuss his personal views as a hardworking technocrat with a focus on results and execution. He is not a socialite, but his employees call him “J-Lo”, after the initials of first name. He usually avoids the spotlight, with the exception of his role as chairperson of a group at the Paris Opera or of BNP’s sponsorship of the French Open in Roland-Garros Stadium for the past 50 years.
In recent years, he’s tended to dress more casually at town halls and shareholders meetings. He has strayed from his traditional, formal attire. Even when shareholders question him about transactions, as they did in may, he rarely loses temper. He compared the major takeovers with quantum-like situations, which he said are too rare to be considered a growth strategy.
He said that everything can happen in a company’s past. “But when it comes to strategy, you can’t base your strategy on something that is so unlikely.” BNP’s Price-to-Book Ratio declined, while JPMorgans’ rose
A former colleague who asked to remain anonymous to share his personal views also agreed that there was not much Bonnafe could have acquired in the past few years and that all of his transactions were focused and intelligent. This person claimed that BNP Paribas was not built by small bolt-on transactions, and Bonnafe now has a war chest of money waiting to be used.
David Knutson said that the deteriorating economic situation “will create opportunities for BNP and other companies who can take over market share from competitors, or take over entire institutions or parts at a good price, if they fail.”
BNP Paribas’ history dates back to 1822. It has always been at the forefront of banking mergers and purchases in France. It was formed in its current form through the merger of Banque Nationale de Paris with Paribas, under former CEO Michel Pebereau. Pebereau wanted to create a bank that would cater to the new realities of Europe’s single market.
Bonnafe, who was in his 30s at the time, was assigned to oversee this deal. The deal was an example of how to merge two very different cultures. BNP was focused on corporate and retail clients, whereas Paribas provided investment banking services for a more institution client base.
Bonnafe became the person to go to for future transactions. In 2006, when BNP Paribas acquired Banca Nazionale del Lavoro, Bonnafe was responsible for integrating the company. He spent his nights learning Italian and traveling between Paris and Rome. BNP’s last major transaction was the acquisition of Fortis operations in Belgium and Luxembourg by CEO Baudouin PROT. Bonnafe was once again a key player, as they spent time getting to understand clients in the Dutch speaking north of Belgium. This region’s economy is heavily dependent on its ports. Bonnafe was able to assume the role of CEO after Prot’s appointment as chairman because of his involvement in the Fortis transaction. BNP Paribas became a European bank after the purchase and its ambition to be a possible acquirer for a cross-border merger was highlighted. Bonnafe was reluctant to discuss takeovers, unlike his predecessors who were fond of speculating about possible deals. Pebereau’s resignation speech as chairman in the 1990s made no secret of Pebereau’s interest in Societe Generale and Credit Lyonnais.
Since the financial crisis there has been a lot of speculation about the need to consolidate banks in Europe, but deals, especially cross-border acquisitions, have been few. The lack of a deposit insurance scheme and the onerous capital requirements made them unattractive. Last year, the capital rules were loosened. This was a positive change for BNP.
Politics remains a major obstacle. The Swiss government acted quickly to find a solution when Credit Suisse was on the verge of collapse in March this year. This resulted in the lender falling into the arms UBS Group AG, a rival bank located across town. BNP Paribas was evaluating which parts of Credit Suisse could be a good match as part of its regular assessment of strategic options, according to sources familiar with the situation. Bonnafe denied any public indication that he had an interest in the lender.
The agreement reinforced the perception that Europe’s window of opportunity for cross-border integration was closing before it could properly open. After governments had bailed out banks during the financial crisis, banking became a very political topic. National authorities once again stepped up with billions of dollars in guarantees when the pandemic hit. It would be difficult to convince the public that a local lender should be handed over to a rival foreign bank, when so much money is at stake. Politics has complicated similar situations in the past. BNP Paribas held talks with the German government in 2017 to buy Commerzbank AG. Berlin decided two years later to pursue merger talks with Deutsche Bank, which ended in failure. Take ABN Amro Bank N.V. for example, another lender which still counts the Dutch government as a shareholder. Bloomberg previously reported that BNP was one of the banks who expressed interest in ABN Amro, but that the Dutch never looked into it seriously. BNP denied recently having expressed interest in ABN Amro.
Bonnafe has also walked out at times. BNP Paribas had the chance to evaluate the unit before SocGen began talks last year with AllianceBernstein about a joint venture for cash equity and research. However, the bank decided not to proceed with the deal. BNP Paribas also decided against a deal with Credit Suisse’s Securitized Products Group after looking at the business when it came to market last year.
Bonnafe sold Bank of the West in California, which BNP owned since the 1970s. This is another indication that Bonnafe wants to sacrifice size for shareholder returns. Bonnafe divested because it would be difficult for shareholders to justify the costs of BNP participating in an overseas consolidation while its equity was below book value.
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It was perfect timing for the sale of $16.3 billion, which closed in Februrary. The troubles of Silicon Valley Bank and other regional US lenders triggered a financial crisis shortly after. JPMorgan acquired First Republic, one of these lenders. BNP, a bank based in Asia, posted the highest profit of all European banks last year.
Bonnafe made it clear that, if the Bank of the West is sold, he will use a significant part of the proceeds for shareholder distributions. This leaves about EUR7.6bn for takeovers or investments in existing companies. A person familiar with his plans revealed that he recently invited division heads from the Bank of the West to make new investment pitches.
In an interview, Chief Financial Officer Lars Machenil stated that the bulk of their investments would be devoted to organic growth through new business, such as new clients. This will keep their margins intact. The remainder of the money will go to bolt-ons, such as acquiring technology or taking over portfolios or units that our competitors are looking to sell.
One story that you will want to tell.
Asset management is one area where the bank can improve. The bank’s asset management division, which managed EUR526 billion for its clients at the end March, is dwarfed by its rival Amundi SA. Its assets under management have nearly doubled since 2015, thanks to a series of acquisitions. BNP Insurance is weighing up a bid to acquire the life insurance business of Indonesian company PT Astra International.
Clark, from Mediobanca, said that BNP was under-exposed to asset management. There are good reasons to think that it may have missed growth opportunities externally in this area over the past decade. Deals are not a strategy. Bonnafe is therefore focusing on the work he has done so well over the past decade. He set an additional EUR2billion in savings by 2025 as his goal. He is also moving the staff out of central Paris, and giving up historic buildings owned by the bank. This comes after he reduced the number of branches and relocated back office operations in countries such as Portugal.
Bonnafe, in an interview from five years ago, said: “This isn’t the Olympic Games.” “This is banking.” History and numbers are important in banking. In this industry, you must survive the cycle. You must be able to deliver services across multiple geographies and go through cycles. “Anything else is just a joke, it’s being brilliant. It’s not bank.”