Deal Underscores Paribas’ Strengths

BNP Paribas is set to become the Eurozone’s top deposit taker by acquiring Fortis’ Belgium and Luxembourg assets for a total of €14.5 billion ($20.1 billion).


BNP Paribas agreed Monday to take control of Fortis’ Belgium and Luxembourg operations for a total of €14.5 billion ($20.1 billion), equivalent to 6.3 times 2007 earnings. The French bank will pay €9 billion in stock and €5.5 billion in cash for 75 percent of Fortis Bank Belgium, all of the Group’s Belgian insurance operations and 67 percent of the Luxembourg bank.

As part of the deal, which is expected to close in the first quarter of 2009, the governments of Belgium and Luxembourg, which had taken over the Fortis operations a week earlier, will own 11.6 percent and 1.1 percent, respectively, of BNP Paribas. The Dutch government announced on October 3 that it would acquire Fortis’ Netherlands operations for €16.4 billion.

BNP Paribas will end up with 30 percent of Belgium’s retail banking market and add €239 billion in customer deposits to become the Eurozone’s biggest deposit taker, leapfrogging from seventh place. The bank is predicting earnings accretion within one year and annual cost synergies of €500 million, or 8.5 percent of the cost base.

The French bank’s cautious approach to risk-taking under the leadership of CEO Baudouin Prot has put it in a position to capitalize on opportunities created by the credit crunch. The following article on Prot and BNP Paribas appears in the October 2008 Institutional Investor .

Five years ago Baudouin Prot faced a daunting challenge when he took over as CEO of BNP Paribas. Although the French bank thrived in its home market, it was in danger of being overwhelmed globally by the rise of U.S. leviathans: Bank of America Corp. had just acquired FleetBoston to gain the biggest branch network in the U.S., JPMorgan Chase & Co. had bulked up with the purchase of Bank One Corp., and top-ranked Citigroup was so confident of its preeminent global status that it sounded out German politicians about a possible bid for Deutsche Bank. Being the eighth-largest bank in Europe by market capitalization and less than a quarter the size of Citi, as it was at the time, offered few assurances for BNP Paribas’s future. But Prot kept his cool, resisting the urge to merge and sticking with a cautious strategy that relied mainly on organic growth. Scale, he told Institutional Investor at the time, was “a faux ami, or false friend. . . . Bankers tend to overrely on it, often to the detriment of focus and customer relations.”

Rarely has a banker been proved more prescient. The global credit crisis has humbled — when it has not destroyed — many of the biggest names in global finance, with Citigroup and UBS suffering tens of billions of dollars in write-downs, while Bear Stearns Cos. was sold for a song, Lehman Brothers was forced into liquidation, and Merrill Lynch & Co. sought a savior in Bank of America. But in the midst of this extraordinary meltdown, Prot’s sangfroid has paid big dividends for BNP Paribas. The French bank took fewer write-downs than almost any major international bank over the 12 months through June; its investment banking arm is the only major investment bank, other than Goldman, Sachs & Co., to have remained profitable in every quarter during the period; and its retail banking business has continued to generate strong profits in France and across Europe. With a market capitalization of €60 billion ($84 billion), the bank now ranks third in Europe, trailing only HSBC Holdings and Banco Santander, and tenth globally, two spots behind a much-diminished Citi.

Prot is now in an enviable position to take advantage of his rivals’ weakness. But true to form, he is sticking to the conservatism that has served him so well.

“We have to continue managing the risk-reward ratio of the bank on a rigorous basis, and that is even truer in difficult banking markets like today’s,” the 57-year-old CEO tells II in an interview at BNP Paribas’s Paris headquarters, the 18th-century building where Napoleon married Josephine in 1796. “We will continue to favor organic growth over acquisitions, stay close to our customers and avoid hype and excitement in terms of big moves.”

Prot’s consistent, disciplined approach wins plaudits from investors, especially in today’s volatile markets. “When it comes to conservatively evaluating risk, Prot has proved he is one of the only bankers in the world who walks the walk,” says Nicolas Rutsaert, a banking and oil and gas analyst at Dexia Asset Management in Brussels. “He has created one of the two or three most financially stable banks in Europe.”

BNP Paribas has certainly held up better through the credit crisis and the sharp economic slowdown in Europe than most of its rivals have. The bank’s net profit was down 27.2 percent in the first half of this year from a year earlier, but still amounted to €3.5 billion; the decline mainly reflected credit write-downs and lower trading income. By comparison, earnings for European banks declined 54 percent on average in the first half, according to Keefe, Bruyette & Woods in London. The French bank’s revenue fell a relatively modest 9.2 percent in the first half, to €14.9 billion. The declines followed a record-breaking 2007, when the bank’s net profit rose 7 percent, to €7.8 billion, and revenue increased 11.1 percent, to €31 billion.

Notwithstanding his conservative nature, Prot knows how to seize an opportunity. One of the key reasons for the bank’s relatively strong earnings is the growth it is enjoying in Italy, where BNP Paribas bought Banca Nazionale del Lavoro for €9 billion in February 2006. BNP Paribas was able to slash costs and boost revenue at BNL because it already had significant activities in Italy through its European consumer finance and leasing subsidiaries.

“One of our greatest accomplishments over the past decade has been to roll out a pan-European model stretching from retail banking to consumer financing and leasing and on to asset management and investment banking,” says the tall, soft-spoken Prot. Those activities “give us a major advantage when it comes to creating value from cross-border acquisitions.”

The CEO sets tough criteria for potential deals, though. They must be earnings accretive after three years and generate a return on investment higher than BNP Paribas’s cost of capital. “It’s impossible to say when an attractive opportunity might come up,” says Prot. “But we will be pragmatic. If there are acquisition opportunities, we will look at them; and if they make sense, seize them.”

Prot can afford to look for deals because BNP Paribas has largely avoided big losses. Since June 2007, the bank has taken a modest €2.6 billion in write-downs related to the U.S. subprime mortgage debacle, less than its principal French rivals, Société Générale and Crédit Agricole, and far below the tens of billions Citigroup and UBS have taken. The bank’s remaining U.S. subprime exposure amounts to less than €400 million — a tiny fraction of its €443 billion loan book — even though it has a significant presence in some of the weakest areas of the U.S. market. BNP Paribas owns BancWest Corp., the fourth-biggest bank in California and the biggest in Hawaii; but only €100 million of BancWest’s €9.6 billion in mortgage loans are subprime, and its holdings of mortgage-backed securities and collateralized debt obligations — complex instruments that have become notoriously difficult to value as liquidity has dried up — amount to just €900 million. BNP Paribas also disclosed an exposure of €400 million to Lehman Brothers after its collapse.

The French bank is vulnerable to a worsening economic slowdown in Europe, though. The economy of the 15-nation euro zone contracted by 0.2 percent in the second quarter; in September, the European Central Bank cut its growth estimate for the year to 1.3 percent from 1.7 percent previously. Although BNP Paribas’s profits have held up well so far, some 3.2 percent of the bank’s loans were nonperforming at the end of the first half, according to estimates by Keefe, Bruyette & Woods, compared with a European industry average of 2.3 percent. BNP Paribas doesn’t disclose its NPL ratio.

Prot remains confident in the bank’s ability to manage risk in today’s volatile environment. “BNP Paribas’s strategy, based on retail banking, corporate and investment banking and asset management services, has been tried and tested and, if anything, reinforced over the past year,” he says. “This financial crisis has changed the banking landscape, but we will keep a steady course, continue to pull away from the pack and do our best to navigate through this storm.”

With the market deteriorating, Prot isn’t resting on his laurels. In July he promoted Jean-Laurent Bonnafé, the domestic retail banking chief who led the integration of BNL, to co–chief operating officer with a mission to drive retail growth worldwide. The move puts Bonnafé in pole position to eventually succeed Prot as CEO.

BNP Paribas should consider acquisitions when the worst of the credit crisis is over, contends Inigo Lecubarri, who manages the €400 million-in-assets London-based Abaco Financials Fund and has an undisclosed position in the French bank. He notes that BNP Paribas is one of only four banks in the world with a Standard & Poor’s credit rating of AA+ or higher and that it can borrow funds at roughly 60 basis points over five-year government bond rates, about half the average industry spread. “Creating value by acquiring a rival with much higher borrowing costs is a no-brainer,” says Lecubarri. “The exception is when you remain worried about continuing deterioration of balance sheets.”

The Paris-born son of a perfume maker who sold the family business, Parfums Lubin, to French drug company Sanofi in the 1970s, Prot graduated from the Ecole Nationale d’Administration, the elite training ground for French civil servants, in 1976 but soon tired of the world of policy papers and ministerial consultations. In 1983 he left the Ministry of Industry, where he had been in charge of energy and commodity policy, to run BNP’s then-tiny European retail division. Rising through the ranks, he was appointed head of French commercial and retail banking in July 1992, just as a real estate and corporate lending crisis started in France. During a four-year stint, Prot reversed an alarming rise in nonperforming loans by imposing strict criteria for corporate borrowers; he also boosted revenue and profit with groundbreaking packages that encouraged French consumers to buy several products to get advantageous rates and fees. The moves helped the bank boost profit nearly fourfold, to €588 million by 1996, when Michel Pébereau, Prot’s predecessor as CEO and the bank’s current chairman, appointed him chief operating officer.

Exceptionally close, with connecting offices, Pébereau and Prot have clearly stamped BNP Paribas with its characteristic mix of caution and opportunism. The bank has been “organized around the central concern of controlling risk” and “pursues a very opportunist strategy when it comes to acquisition,” says the 66-year-old Pébereau, a former top French Treasury official who privatized BNP’s smaller rival, Crédit Commercial de France, for the state in 1986 before parachuting in as CEO and chairman of BNP in 1993 to spin it off from government ownership.

Prot was Pébereau’s main tactician in BNP’s audacious simultaneous hostile battles in 1999 to take over French investment bank Paribas and retail bank Société Générale. Though they failed to acquire SocGen, their €17.7 billion purchase of Paribas sparked strong growth as the executives integrated BNP’s retail and corporate banking operations with Paribas’s investment bank.

Two years ago the French bank acquired BNL, Italy’s sixth-largest bank, for €9 billion. Prot struck the deal only one week after being contacted by Bologna-based insurer Unipol Assicurazioni, which owned 48 percent of BNL.

His integration plan initially called for annual cost savings of €250 million and revenue synergies of €150 million at the Rome-based bank; Prot raised those targets in May to €320 million and €230 million, respectively, as BNL’s pretax profit soared 44.8 percent last year, to €566 million on a 6.5 percent rise in revenues, to €2.6 billion. In the first half BNL’s profit rose 17.4 percent from a year earlier, to €364 million, on a 6.4 percent jump in revenue, to €1.4 billion.

Behind the acquisition’s success is a strategy that has seen BNP Paribas expand a wide range of activities not dependent on branch networks — notably its specialized consumer finance operation, Cetelem; its mortgage lender, UCB; its auto and equipment leasing subsidiaries, asset management services and corporate and investment banking — to most European Union countries. “BNL proved they can plug those activities into a retail network and achieve rapid cost and revenue synergies,” says Jean-Pierre Lambert, a banking analyst at Keefe, Bruyette & Woods. Although Spain’s Santander and Italy’s UniCredit Group have similar pan-European networks in asset management and in specialized financial services like consumer credit and leasing, they don’t match the breadth and variety of BNP Paribas’s operations.

BNL’s success has strengthened Prot’s conviction that the bank must put a priority on growth in its core EU market rather than other markets where it has a retail presence, such as the U.S. and even fast-growing emerging markets like Libya, Turkey and Ukraine. BNP Paribas bought Türk Ekonomi Bankasi, Turkey’s eighth-largest bank, with 1.3 million customers and 15.7 billion Turkish lira ($12.5 billion) in assets, for €2.7 billion in 2005. The following year it purchased 51 percent of Ukrsibbank, Ukraine’s third-biggest bank, with 36 billion Ukrainian hryvnia ($7.1 billion) in assets and more than 1 million customers, for €300 million. And it acquired Sahara Bank, Libya’s second-biggest bank, with €2.7 billion in assets and 300,000 customers, for €145 million in 2007.

Retail is the only area where Prot and other senior executives say the bank is likely to consider a major acquisition. BNP Paribas has 17 million retail customers in 85 countries, and they account for 54 percent of revenues and 51 percent of pretax profit. “Cross-selling products through retail banking is the key to our strategy going forward,” says George Chodron de Courcel, who, as co-COO alongside Bonnafé oversees corporate and investment banking and asset management. “Given our spread of businesses and our ability to generate above-average organic growth, it’s the only area where it would make sense to pay a lot of goodwill for a major purchase.”

For now Prot is keeping his cards close to his vest. Neither he nor other executives will say which European markets interest the bank the most, nor at what price other European Union banks will start to become attractive. “Any European country where we have a wide range of integrated operations may one day be a target for a retail bank acquisition,” says Jean Clamon, the former head of retail who was appointed last month to the newly created post of managing director in charge of risk. “For the time being I don’t see any potential deal that could be done.”

Certainly, Prot has been tempted. BNP Paribas considered buying its crosstown rival, Société Générale, after the January disclosure of a €4.9 billion loss caused by the unauthorized trading of one of its dealers, Jérôme Kerviel, sent its share price plunging. However, BNP Paribas announced in March that it would not make an offer. All Prot will say of the decision is that “it did not make sense on value creation considerations.” Asked under what circumstances the bank might make an offer for SocGen, the disciplined Prot simply says, “I don’t play the ‘what if’ game.” The bank has passed on recent deals in Italy, where it was offered regional retailer Banca Antonveneta last November, and in Germany, where it decided not to participate in bidding for Citigroup’s consumer finance unit, Dresdner Bank or Deutsche Postbank.

BNP Paribas did offer approximately €3.8 billion for troubled Belgian-Dutch-Luxembourgouis bank Fortis in late September, but at a discount of 69 percent to the bank’s quoted value, both Fortis’s board and the governments of Belgium, the Netherlands and Luxembourg rejected the offer. When BNP Paribas walked away, the three governments

gave Fortis €11.2 billion to keep it from collapsing in exchange for 49 percent stakes in the group’s domestic operations in each of their respective countries. In each case, “we determined that those assets wouldn’t meet our return criteria at those prices and in this uncertain banking environment,” says Prot. “For now I think the best thing we can do is focus on hitting our 2010 three-year organic growth targets.”

Investors are largely relieved that BNP Paribas has stayed out of the latest round of European consolidation. “Their caution is welcome,” says Benoit de Broissia, a banking analyst at Paris-based Richelieu Finance, which manages €6.2 billion in assets. “Even though you might argue that now is the right time to make bold acquisitions, execution risk is very high in a period where balance sheets are incredibly vulnerable. Time will play in favor of those who wait for acquisitions.”

Prot’s targets call for 4 percent annual revenue growth in BNP Paribas’s French retail banking division, which, with 7 million customers and 2,000 branches, accounted for 19 percent of revenues and 17 percent of pretax operating profit last year, and 6 percent growth in revenues at BNL, which has 2.6 million customers and 703 branches and accounted for 9 percent of revenue and 6 percent of pretax operating profit last year.

The bank hasn’t declared any profit target for its corporate and investment banking division, but analysts expect its revenue to decline by 21 percent this year, to €6.5 billion, and profit to fall by 38 percent, to €2.1 billion, because of fallout from the subprime crisis. The division generated 28 percent of the bank’s overall revenue and 22 percent of pretax profit last year. Prot does say that he expects corporate and investment banking to take market share in its core strengths of equity derivatives, fixed income and trade and export finance, as well as in equity underwriting, an area where BNP Paribas has traditionally been a second-tier player but where its strong balance sheet should give it an advantage. The bank has won underwriting roles in some of the year’s biggest deals, such as the Sf15 billion ($13.4 billion) rights offering in June for competitor UBS. BNP Paribas was in 11th place this year through early July in equity capital market league tables compiled by London’s Dealogic, unchanged from 2007; its market share has increased this year, to 3.5 percent from 2 percent last year.

BNP Paribas’s greatest weakness remains its relatively small presence in emerging markets, which currently account for just 7.5 percent of revenue. Prot aims to double that share to 15 percent by the end of 2010, largely by rolling out the bank’s cross-selling model to its networks in Libya, Turkey and Ukraine. “We’ve already started to apply the integrated financial services model by offering some of our insurance and asset management products in Turkey and Ukraine,” says Prot. “But to fully roll out all our services through the emerging-markets retail networks will take three to four years.” The CEO is also looking to expand the bank’s investment banking activities in China and India by using as a door opener its trade and export finance, where it is regarded as one of the top three banks in the world. BNP Paribas’s private banking unit, which has €178 billion in assets, is also making headway in China and India.

Prot is aiming to generate 10 percent annual revenue growth in BNP Paribas’s international retail banking and financial services division, which includes global activities in consumer credit, leasing and the branch networks in Libya, Turkey, Ukraine and the U.S. Last year the division accounted for 26 percent of revenue and 22 percent of pretax operating profit, with the vast bulk of that coming from consumer credit, leasing and BancWest. The goal for the asset management division is 10 percent annual growth in revenues and assets under management, currently €546 billion. That will be demanding, given that weak stock markets reduced net asset inflows to just €4.2 billion in the first half, barely one sixth the level of a year earlier. Asset management contributed 18 percent of revenues and 27 percent of pretax profit last year and comprises traditional fund management, as well as custody, private banking, insurance products and distribution, real estate investment and services, and Cortal Consors, Europe’s leading Internet broker.

To make good on those targets, Prot shook up his top management in July, moving Clamon to his new position of risk chief and replacing him as head of global retail banking and co-COO with Bonnafé. A former senior civil servant at the Ministry of Industry, Bonnafé, 47, joined BNP in 1994 as an investment banker, rose to head of strategy and development three years later and then worked hand in glove with then-COO Prot to integrate BNP and Paribas after the 1999 takeover. As head of French retail banking since 2002, he succeeded in growing revenue at roughly twice the pace of France’s average annual economic growth rate of 2 percent. Prot also credits Bonnafé with exceeding the bank’s growth targets at BNL, where he served as CEO.

His promotion is all about “putting our best-trained retailer in charge of our core operation,” says Prot. “We expect Jean-Laurent to keep growth going in an even more hands-on fashion than has been the case by maximizing the cross-selling revenues from corporate and investment banking and asset management in our retail networks.” That would be just the kind of steady, predictable growth to which Prot’s admirers have become accustomed.