Reprinted from July 2016 www.euromoney.com WORLD’S BEST BANK BNP PARIBAS EXCELS AT THE BUSINESS OF BANKING World’s best bank Reprinted from July 2016 Copyright© Euromoney magazine www.euromoney.com WORLD’S BEST BANK FINE-TUNED BNP PARIBAS EXCELS AT THE BUSINESS OF BANKING BNP Paribas is that rarity: a large bank actually delivering on its promises to stakeholders. It is producing better returns even than many of the US banks, despite being anchored in a low-growth home region, building capital and winning customers – all while proving the benefits of a diversified business model. Its cadre of loyal, long-serving senior executives look to have got the strategy right: staying the course in Asia and the US and running global customer franchises, but only in the select services it excels at By: Peter Lee Illustration: Jeff Wack eset by weak profitability, negative interest rates and Its third division, international financial services, includes banking low growth in their home markets, European banks in the US, Latin America and Asia, as well as specialist business such are losing out to US rivals that restructured and as consumer finance, asset and wealth management and insurance. recapitalized quickly after the global financial crisis At a time when peers are still shrinking, BNP Paribas is growing. and whose home economy has enjoyed a much more While new and uncertain management teams struggle to get back Brobust recovery since. to basics, the technicians at BNP Paribas embrace geographic and In April, the European Banking Authority published its latest update business diversity. Critics see a large bank running on six engines in on the vulnerabilities of the 154 biggest European banks and noted a the age of the monoplane. But BNP Paribas seems to have found the prevailing average return on equity of just 4.7%, an average return on happy knack of always keeping four of five of its engines singing. assets of just 0.29% and a non-performing loan ratio of 5.8%. “Is it our goal to be a global bank?” asks Jean-Laurent Bonnafé, At the same time, the Federal Reserve Bank of St Louis, which ag- chief executive of BNP Paribas. “No. We are a European bank with gregates data for all US banks, recorded an average return on equity global customer franchises and one that seeks to capture what cli- of 8.3% after the first quarter of 2016, a return on average assets of ents want from a bank in the world of today and tomorrow.” 0.94% and a non-performing loan ratio of just 1.57%. This is a large, complicated and diversified banking group which But it’s in tough times that bank management teams prove their investors and analysts might expect to be struggling in the prevailing worth: when their chosen business models are most severely tested tough market conditions. But BNP Paribas is not struggling. It is de- and the true strength and depth of customer relationships reveal livering on its promises to shareholders. It is winning over customers themselves. and surpassing the competition even beyond its European peer group. BNP Paribas, a leading European universal bank with strong BNP Paribas has promised shareholders it will deliver a return on international reach in the US and Asia, was by some distance the tangible common equity of around 10%, now the standard target standout candidate as the world’s best bank in Euromoney’s awards for most large international universal banks but one that very few for excellence for 2016. are even close to hitting. Remember that the sluggish continent of Europe accounts for For 2015 BNP Paribas delivered 10.1% and for the first quarter 70% of BNP Paribas group revenues. It remains the heartland of of 2016, on an annualized basis and excluding one-offs, it returned a bank that has large domestic retail operations in France, Italy, 11.1% on tangible common equity. That’s far better than most other Belgium and Luxembourg and is also making inroads into Germany, large eurozone banks and even better than some of the supposed especially with its digital bank. BNP Paribas also runs a large corpo- winners from across the Atlantic. Citigroup, the world’s best bank in rate and institutional bank encompassing transaction services, FICC Euromoney’s awards for excellence in 2015, reported a respectable and equities markets business alongside classic investment banking. 9.1% return on tangible common equity for 2015 and 6.4% for the www.euromoney.com Copyright ©Euromoney magazine Reprinted from July 2016 World’s best bank “This bank has a CEO and a management team that understands the machinery of banking and of this institution very well. They are professional technicians that listen to the engine of the bank and that really know how the engine works” Jean Lemierre first quarter this year. Bank of America also market capitalization over the next four vived twin setbacks in the US – the sudden made a return on average tangible common years.” With BNP Paribas’ market cap at short-term funding stop in 2011 and the equity of 9.1% in 2015 and 5.4% for the around $65 billion, only Santander ($71 $8.9 billion settlement and temporary first quarter of 2016. billion) in the eurozone carries a bigger clearing restrictions imposed in 2014 for Two of the biggest and strongest US valuation. sanctions busting with Sudan, Iran and banks both underperform the European Good returns are not a function of Cuba. champion. It makes you wonder what BNP leverage. BNP Paribas’ fully-loaded Basel III While other European banks have with- Paribas might achieve if its home region leverage ratio is 4%, up from 3.4% after the drawn from or severely cut back interna- ever does catch up with the US recovery. first quarter of 2015. In fact the bank appears tional operations, BNP Paribas has held on For now, BNP Paribas is delivering its to be getting less risky, not more so. In the to its key US asset, Bank of the West, selec- return targets – that were set in 2014 on first quarter, its cost of risk was just 43bp, tively expanded its CIB operations in the the basis of a 10% Basel III common equity down from a quarterly average of 57bp US and is now on track with plans for its tier 1 ratio – even after boosting that ratio across 2015. At the end of the first quarter it intermediate holding company there. That’s up to 11% from a mix of retained earnings reported a liquidity coverage ratio of 116% a sign of commitment and resilience that and RWA reductions, while still being able with immediately available liquidity reserves US clients value and, looking out from their to pay out to shareholders a full cash divi- of €298 billion (up from €266 billion at the European heartland, executives believe that dend for 2015 of 45% of net income. end of 2015). Those may present an earnings BNP Paribas has the capital, liquidity and This is a strongly capital generative busi- headache but they are enough to cover a full talent to tap into growth in the US and Asia ness. UBS analysts have had a buy on the year of exclusion from wholesale funding in while selectively picking up market share at stock since initiating coverage in March. the event of any systemic market seizure. home as other European banks continue to One of them, Lorraine Quoirez, notes: “We BNP Paribas is a very well managed bank. struggle. see the bank returning around 30% of its It has had to be. BNP Paribas has sur- A snapshot look at net income in the first Reprinted from July 2016 Copyright© Euromoney magazine www.euromoney.com quarter, a tough one for all banks, shows be able to explain them to shareholders and Paribas people were more entrepreneurial, that BNP Paribas brought in 10% more then deliver them – based on a strong un- driven and creative. Lemierre claims that, profit than its closest European rival, San- derstanding of risk conduct and governance from an initially antagonistic merger, BNP tander; twice as much as its closest French – one year from now, three years from now. Paribas has managed to build on the best of competitor, Société Générale; three times Yes, you can have ambitions and visions for each predecessor bank’s culture. as much as UBS, one of the banks justly the future of the bank. But don’t dream.” At times, this speaking with one voice renowned for successfully restructuring Euromoney’s mind goes back nearly appears a little forced. In formal and its business model post crisis; more than seven years to a meeting in 2009 with Alain informal conversations with executives at three times what Barclays brought in; four Papiasse, then head of CIB at BNP Paribas. different levels and on different continents and a half times UniCredit’s profits; and Euromoney was pressing him on how much one hears so often how humble BNP more than eight times Deutsche Bank’s net headway the bank, with its strong balance Paribas executives are to be considered by income for the quarter. sheet and credit ratings, might make in the Euromoney the world’s best bank that the The key for this bank management team US while the domestic banks were still reel- phrase loses meaning. Nevertheless, this is not just that BNP Paribas should con- ing from the sub-prime mortgage crisis and culture is strong; undoubtedly key to the tinue to stand balanced on a diversified mix corporations were looking for banks with bank’s success and when the bank does of business revenues and geographic expo- balance sheet capacity to provide credit.