Bloomberg News

BNP Growth Plan at Risk as Penalties to Mar U.S. Expansion

July 02, 2014

BNP CEO Jean-Laurent Bonnafe

Jean-Laurent Bonnafe, chief executive officer of BNP Paribas SA. Photographer: Fabrice Dimier/Bloomberg

BNP Paribas SA (BNP) says the $8.97 billion fine for U.S. sanctions violations won’t disrupt its dividend or growth plans. Some investors aren’t so sure.

France’s biggest bank, facing a yearlong ban on certain transactions in dollars as part of the settlement, remains committed to increasing sales by at least 10 percent by 2016, Chief Executive Officer Jean-Laurent Bonnafe said yesterday. To do that, it’s relying on North America to grow about twice that fast and generate at least $1 billion in increased revenue.

That could be difficult as in the U.S., “they were not that competitive before, and the business expectations are even worse after the penalty,” said Lutz Roehmeyer, who oversees $1.1 billion at LBB Invest in Berlin, including BNP shares. “The financial damage is high, but the reputation has been hit more than the balance sheet.”

BNP Paribas, which seeks to be among the top 10 corporate and investment banks in the U.S., is one of the few European firms with both a consumer branch network and securities operations in the country. Bonnafe, 52, is relying on growth in the U.S., Asia and Germany as the lender’s main European markets -- France, Italy and Belgium -- struggle to bounce back from recession. The penalties threaten to repel clients and hamper its ability to hire and keep U.S. bankers.

Banned Transactions

BNP Paribas admitted that it processed almost $9 billion in banned transactions from 2004 to 2012 involving Sudan, Iran and Cuba. Its penalty dwarfs the combined $4.9 billion levied against 21 other banks for transactions tied to sanctioned countries since U.S. President Barack Obama took office. The Paris-based bank has to pay more because its violations were worse and it didn’t cooperate fully, U.S. authorities said.

New York’s top banking regulator required BNP Paribas to stop employing people including Dominique Remy, former head of structured finance for the corporate and investment bank, and Christopher Marks, the former group head of debt capital markets. Starting Jan. 1, the bank will be barred from U.S. dollar-clearing operations for one year at business lines where the misconduct occurred.

“The long-term issue is the earnings outlook, which is poor,” Omar Fall, an analyst at Jefferies International in London, said by phone. In particular, in the U.S. “corporate financing revenue growth may be difficult to achieve as rainmakers in the division have left,” he said.

The shares fell as much as 1.4 percent and were down 0.3 percent, at 51.17 euros by 1:17 p.m. in Paris, extending the loss this year to 9.7 percent, the third-worst performance in the 30-company Euro Stoxx Banks Index. Relief that the five-year probe is over and BNP Paribas’s assurance that it will keep the dividend at last year’s level of 1.50 euros ($2.05) drove the stock to the biggest gain since October yesterday.

‘Negligible’ Pain

The fine will cut into free cash flow, “but not by as much as feared before -- this is good,” said Paul Vrouwes, who helps oversee about 6 billion euros at ING Investment Management in The Hague. While the temporary outsourcing of some dollar transfers will hit margins, “this is rather small in the group context and the pain will be negligible,” Vrouwes said.

BNP intends to use the six-month grace period before the curb on some dollar transfers begins to set up alternate payment systems for customers to keep them from taking their business elsewhere. BNP said it doesn’t expect any material impact for the clients concerned.

Active in the U.S. since 1919, BNP Paribas has more than 14,000 employees in the country, including over 3,000 professionals in corporate and investment banking, according to its website. Its BancWest unit operates about 700 branches in 20 Western and Midwestern states. The lender generated 10 percent of its revenue in North America last year.

U.S. Plans

BNP Paribas is sticking with the targets laid out in its three-year plan, which runs through 2016, Bonnafe said yesterday. “In particular, the U.S. remains a strategic market for the group, where we plan to further develop our retail, investment solutions and corporate- and investment-banking franchise,” the CEO said.

The bank had “solid” earnings in the second quarter, leaving aside the 5.8 billion-euro charge related to the fine, it said in a June 30 statement.

Its markets activities in the U.S. range from equity derivatives to prime-brokerage services for hedge funds to arranging bond sales for corporations. The bank, which traditionally helps French and European clients issue or trade securities in the U.S., is also trying to win local customers.

‘Two-Fold Implications’

BNP Paribas is seeking to develop closer ties between BancWest and its New York hub for corporate and investment banking to better “accompany U.S. corporates and investor clients to Europe and European clients to the U.S.,” the company said on March 24.

“The penalties’ implications are two-fold,” said Peter Braendle, who helps oversee about $565 million at Swisscanto Asset Management in Zurich. “The business won’t be easier with some clients and BNP will think twice about which business to do in the U.S. where the risk is even higher now.”

Within BNP Paribas’s corporate-banking targets, the Americas represent a quarter of revenue growth through 2016, compared with 40 percent from Europe. It’s planning to rebuild in businesses such as reserve-based lending, a type of energy financing it scaled back in 2012 by selling $9.5 billion of assets to San Francisco-based Wells Fargo & Co. (WFC:US)

The bank is seeking to increase market share in investment-grade bond underwriting, in part by adding new corporate clients in the U.S., said Frederic Janbon, head of the fixed-income unit.

‘Great Counterparty’

BNP Paribas remains a “great counterparty,” Cantor Fitzgerald & Co. CEO Shawn Matthews told Bloomberg Television in an interview yesterday.

Moody’s Investors Service said the guilty plea could prompt some clients to avoid the bank, either voluntarily or because internal policies prevent them from doing business with a firm that admitted to a felony. Moody’s changed its outlook on BNP Paribas’s bank financial strength rating to negative from stable yesterday, while affirming its long-term debt and deposit ratings.

The bank has applied for a regulatory exemption it needs to be able to keep managing U.S. pension-plan assets following the guilty plea. The exemption would enable the bank to keep its status as a qualified professional asset manager, a key designation for institutions overseeing pension assets.

Kinner Lakhani and Nicholas Herman, analysts for Citigroup Inc., reduced their estimates for BNP Paribas earnings per share by 3 percent for 2015 and 4 percent for 2016 because of the impact on corporate banking revenue.

“It’s hard to think it can be business as usual,” said Piers Brown, an analyst at Macquarie Bank Ltd. in London. The growth plan “isn’t as straightforward as it sounds and some elements are being undermined.”

To contact the reporters on this story: Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net; Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net Heather Smith


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