In today’s distressed financial climate, money managers are losing assets at an alarming rate. But Alain Papiasse, head of asset management and services at France’s BNP Paribas, has the enviable challenge of trying to manage growth.
As part of its planned €14.5 billion ($19.3 billion) purchase of the Belgian and Luxembourg assets of Fortis, BNP Paribas stands to acquire its rival’s asset and wealth management business, which oversaw a combined €269 billion at the end of September. If completed, the deal will vault the French bank, until now a middling player, into the top ranks of European fund managers, with €550 billion in assets. That figure would have put BNP Paribas in seventh place in the Euro 100, Institutional Investor ’s annual ranking of European asset managers (November 2008), just behind French competitor Natixis Global Asset Management and ahead of Dutch bank and insurer ING Group, Deutsche Asset Management and crosstown rival Crédit Agricole Asset Management. BNP Paribas will also boast the biggest private bank in the euro zone, with €214 billion in assets.
“BNP has identified asset management as a growth engine for the bank,” says Papiasse, a 53-year-old member of BNP Paribas’s executive committee. “Fortis will clearly boost that business and put us in a position to be more profitable.”
BNP first has to close the deal. It suspended a shareholder vote on the purchase in December after a Belgian court ruled that the Belgian government had not fully considered the interests of Fortis shareholders; it ordered that the purchase be put to a shareholder vote by mid-February. The government vowed to appeal the decision, insisting that BNP’s was the only offer on the table. Most analysts expect the acquisition will eventually go through.
Papiasse is targeting annual revenue growth of 5 percent to 10 percent for asset management and services, including private banking, over the next three years. He also expects a pretax return on equity of about 25 percent even in tough markets. “It’s hard to find a banking business as profitable as we are,” he adds in an interview in his office near the gilded Paris Opera House. Analysts say that target is aggressive in the short term, given the state of today’s markets, but achievable further out. Asset management and services posted a 20.9 percent increase in revenue in 2007, to €5.3 billion.
At a time when BNP Paribas’s reputation as a leading survivor of the credit crisis is taking some hits, bank executives are hoping the asset management story will give its stock a much-needed boost. Hit by the disclosure that the group’s investment bank posted a €710 million loss in the first 11 months of the year and that the bank could lose as much as €350 million on exposure to the Bernard Madoff fund scandal, shares in France’s biggest bank lost 47 percent of their value between the start of November and late December, to €29.66.
BNP said in a statement at the end of November that it was comfortable with its tier-1 capital ratio of 7.6 percent and that “no capital increase is currently under consideration.” The ratio should go up to 8.9 percent by the end of 2009, thanks to a €2.5 billion capital injection from the French government, the addition of Fortis and retained earnings, according to analysts at Citigroup; that would be close to the average ratio of 9.2 percent for European banks after the recent round of capital injections are completed, the analysts estimate. Still, some investors remain concerned.
“The question is whether BNP can get away with not raising capital,” says Nick Brind, a London-based money manager at New Star Asset Management, which holds BNP shares. “It’s difficult to judge because there is so little visibility about how bad the downturn will be.”
So far, Papiasse’s division has remained profitable despite the pressure. Asset management and services reported a 71 percent drop in pretax profits, to €134 million, in the third quarter, after taking €204 million in provisions for exposure to Lehman Brothers Holdings and Icelandic banks; revenue fell 9.5 percent, to €1.2 billion. By comparison, profit at Société Génér-ale’s asset management services division fell 50 percent, to €68 million, in the quarter.
BNP Paribas also enjoyed net inflows of €7.4 billion in the third quarter, a stark contrast to rivals such as Swiss Bank UBS, which had net outflows of around €50 billion from its asset management and private banking businesses in the period, and SocGen, which had outflows of €6.1 billion. Most of BNP Paribas’s inflows have gone into low-margin money market funds, however. That has shifted the mix of BNP’s assets away from more-profitable equity funds — stocks represented just 18 percent of assets at the end of September, down from 23 percent at the end of 2007; money market funds make up 28 percent of assets, bonds 18 percent, alternative, structured and index funds 18 percent, and diversified funds 18 percent.
The addition of the Fortis assets will improve that mix modestly; 23 percent of those assets are in equity funds, 28 percent in bond funds, 15 percent in money market funds, 25 percent in balanced funds and the remainder in other classes.
Papiasse, who rose to COO of Crédit Lyonnais but left shortly after it was acquired by Crédit Agricole in 2003, says he’s undeterred. “As soon as stock markets improve, that cash will transfer into more-profitable products,” he says.
Fortis struggled after its acquisition of a big chunk of ABN Amro Bank in 2007. The bank’s asset management division suffered net outflows of €10.2 billion in the first half of 2008; it eked out a profit of just €14 million in the period on revenues of €369.8 million.
Still, the addition of Fortis’s 1,458 branches, mostly in Belgium and Luxembourg, will strengthen BNP Paribas’s distribution in those countries. The acquisition also brings U.S. offices in Boston and Chicago. “It would have been hard for us to invest on our own in these countries now, given the state of the markets,” says Gilles Glicenstein, CEO of BNP Paribas Asset Management.