When BNP Paribas' fixed income salespeople and traders receive their bonuses for 2019, they might want to cast a disparaging eye at their colleagues in equities. While the French bank's fixed income traders are having an excellent year, BNP's equities traders are floundering worse than rivals'.
BNP announced its third quarter results today. In the three months to September fixed income revenues at the French bank were up 35% year-on-year on what BNP described as a 'sharp rise in the primary markets and credit,' a 'rebound in forex and emerging markets' and a, 'good performance of rates.' By comparison, equities revenues fell 15%. BNP blamed a, 'lacklustre market on flows,' which seems to suggest a feeble quarter for cash equities and for flow (equity) derivatives.
The third quarter was a microcosm of the first nine months of the year. As the chart below shows, BNP Paribas' fixed income salespeople and traders have achieved market-leading revenue growth for the year to date. Over the same period, BNP Paribas' equities salespeople and traders achieved market-leading revenue shrinkage. The French bank's global markets division couldn't be much more divided.
It's a dichotomy that almost certainly weighs upon profitability in the division. Pre-tax income across global markets at BNP Paribas rose nearly 8% in the first nine months of 2019, to €1.1bn - but it would undoubtedly have risen plenty more had the equities business not floundered.
Equities' feebleness matters because like most banks, BNP Paribas is cutting costs. It has a group-wide cost reduction target of €1.8bn in 2019, of which €1.7bn was achieved in the first three quarters - leaving €100bn still to be extracted before 2020. A big chunk of these cuts are likely to come from the corporate and investment bank, which houses global markets and which accounted for 37% of the €166m of costs taken out in Q3.
Nor is this the last year of cuts. BNP has another €1.5bn of costs to extract in 2020. Much of them are likely to be extracted through an 'intensification of industrialisation,' which is BNP language for process-automation. If BNP really wanted to cut costs, though, it could always take an axe to the underperforming equities business in the style of Nomura, Deutsche Bank, HSBC and now Macquarie. With a c6% market share of equities sales and trading revenues globally according to analysts at KBW, BNP is one of many banks competing bitterly in the second tier. Some in that group are deciding simply to give up.
BNP is not among the quitters. Although jobs were cut in its Asian equities business this summer as most of the equity research team went in the region, BNP has instead doubled-down on equities with the purchase of Deutsche Bank's prime brokerage and electronic equities trading businesses and up to 800 of its staff. The French bank was also in the running for Deutsche Bank's equity derivatives trading books.
The effect of the new DB purchases on BNP's results won't be apparent until 2020 or even 2021. In the meantime, however, BNP's fixed income traders can be forgiven for wondering why the bank is going deeper into a business that seems to be shrinking for all but the key players. They might also remember that this time last year, BNP's equity derivatives traders came horribly unstuck in the fourth quarter.
In defence of BNP's equities staff, analysis by research firm Tricumen in August found that BNP's equities sales and trading business is already very efficient compared to rivals, both in terms of revenues generated by its front office staff and in terms of its operating costs as a proportion of revenues. Maybe this is why BNP is sticking with it? Even so, until the business stops losing market share it's going to keep looking like a large cost that is ripe to be plucked.
Photo by Abby Savage on Unsplash
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