Baudouin Prot, the even-keeled, soft-spoken CEO of BNP Paribas, has a quirky habit. Whenever he feels under attack for his conservative management of the Paris-based bank, Europe’s third largest by assets, he’ll glance at a one-page financial snapshot of Banca Monte dei Paschi di Siena, the Italian lender that acquired rival Banca Antonveneta for a lofty €9 billion ($12.6 billion) last October. The note, which he keeps in his desk and is updated regularly, currently tells him that MPS’s market cap has plummeted 44 percent since the deal was announced.
Prot passed on the chance to bid on Antonveneta, even though it could have complemented his existing Italian subsidiary, BNL. His cautious approach to potential acquisitions, which some analysts criticized during more ebullient times, today wins plaudits.
“I don’t know how long the liquidity crisis will last, but I don’t see growth in the sector saving an acquirer who has overpaid,” Prot said in a recent interview with Institutional Investor. “If some people say we are overcautious, as far as I’m concerned that is a good thing for the bank, and therefore for our shareholders.”
Given the sheer sprawl of BNP Paribas — it is Europe’s fourth-largest bank by market capitalization and has significant global operations in retail banking, investment banking and asset management — Prot has done a remarkable job of steering it through the credit crisis. Less than 2.7 percent of BNP Paribas’s 2007 revenues of €31 billion ($49.2 billion) came from subprime mortgage loans, structured-credit products and leveraged-buyout loans, the areas hardest hit. “We essentially do not engage in leveraged credit based on asset value, which has now clearly been demonstrated as dangerous,” Prot says. “All our retail lending is done on the basis of the customer’s capacity to repay on revenues, and we rely to a relatively minimal degree on securitization for funding.”
The bank’s loans amount to just 128 percent of deposits, limiting its need to tap the money markets for funding — a crucial advantage at a time when credit concerns have caused money market rates to surge. The average European loan-to-deposit ratio is 139 percent, and at least half a dozen banks have ratios that exceed 200 percent. But the bank isn’t bullet-proof. Fourth-quarter earnings plunged 41.5 percent because of €851 million in credit write-downs at the bank’s corporate and investment banking unit and $272 million in mortgage losses at its California-based subsidiary, BancWest. Still, the bank posted a 7 percent rise in net income in 2007, to €8 billion. Analysts forecast that BNP Paribas’s earnings will fall by a modest 6.8 percent this year as growth in the bank’s important emerging markets in Turkey, Ukraine and Asia largely offset weakness in the U.S. and in investment banking.
And Prot remains cautiously on the lookout for the right deal. “Given the right opportunity, we are definitely interested in complementing organic growth through acquisitions, particularly in our home market, the European Union, where the most potential revenue and cost synergies are available,” he says.
Prot certainly has the firepower for a deal. BNP Paribas has tier-one capital, or equity and reserves, equal to 7.3 percent of risk-weighted assets on its €1.7 trillion balance sheet. It is one of only four banks in the world rated AA+ or higher by Standard & Poor’s. Despite last year’s write-down, BNP Paribas’s investment bank remains a powerhouse in European fixed-income and equity derivatives and was the world’s fifth most profitable last year. At €67.60 a share in late April, the bank’s value has fallen only 19.1 percent over the past 12 months, compared with an average 31 percent decline for European banking stocks, according to analysts at investment bank Keefe, Bruyette & Woods. Crosstown rival Société Générale has seen its share price plunge by 47.8 percent over the same period, with much of the drop following the January disclosure of a €4.9 billion loss on equity index trades that the bank blamed on a rogue trader. BNP Paribas executives studied a possible bid for its rival, but Prot announced in March that the bank had decided not to make an offer. Asked why, he says, “I don’t want to go into detail, but our decision not to bid on Société Générale was based on value-creation considerations for our shareholders as well as our view on execution risk and the industrial logic of the merger.”
Enough said.
