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Monday, 24 November 2014

At last, some talk of growth

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IFR editor-at-large Keith Mullin sees some grounds for optimism in investment banking

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

I WAS TAKEN by a story that ran in Les Echos quoting Torsten Murke, BNP Paribas’ Germany country head, saying that the bank is aiming for a top-five investment banking ranking in the country.

At the time of Murke’s appointment from Credit Suisse in May 2011, the bank pointed to a growth plan for Germany and referenced an ambition to develop investment banking in Europe spearheaded by the in-roads Fortis had made prior to its acquisition by BNPP in 2008 and by its Investment Banking Europe division, which covers large corporates, major private equity funds and large FIG clients in France, Italy, Germany, Spain, Switzerland, the Netherlands and the UK.

BNPP doesn’t appear to be making any great dents in the IB league tables away from its powerhouse European DCM business (number one in the euro debt underwriting league table in the year to-date). It’s 11th in YTD European announced M&A (with mid-teens rankings in most major countries, although 21st in Germany!) and 11th in EMEA ECM. But then again, business is bad and it’s hard to judge progress in the absence of deal flow.

But in a sense, I was more taken by Murke’s aspiration, and the fact that in the midst of a fairly dramatic downturn in investment banking fortunes someone was actually prepared to articulate any ambition at all. His timeframe for growth in Germany is 2017, which I reckon is fairly sensible, and the plan was to have 250 clients by that time. Murke expects to beat that target date. You’ve got to hand it to him. There’s so much doom and gloom around that it’s great to hear some positive talk.

BY 2017, YOU’D expect (or at worst hope) that the European sovereign and bank crisis will be behind us – although it’s been dragging on for so long now so who knows? The industry deleveraging cycle should also be all but complete and assuming we get some vestige of growth in the regional economy there’ll be a pick-up in M&A and financing. I know this sounds a bit weird and blue-sky, but I’m getting bored of the negativity so what the hell.

European commercial banks are by no means through their restructuring plans; most are still adapting to how they reckon the new business and regulatory environment will look and are redesigning their business models. But they are making progress and many are ahead of target. To that point, BNPP is almost done with its adaptation plan and is 90% of the way to achieving its 100bp common equity Tier 1 ratio improvement (fully loaded Basel III ratio at 8.9% versus 9% target by December 31 2012).

There’s so much doom and gloom around that it’s great to hear some positive talk

The bank’s retail banking and investment solutions revenues were higher in the second quarter relative to last year and although corporate and investment banking is still suffering along with the rest of the industry (down 23.6% year-on-year), part of the decline was attributed to costs of the adaptation plan, etc, and RWA reduction. It’s also worth pointing out that BNPP’s corporate banking revenues (trade, export, transportation and project finance, commodity and energy finance, syndicated lending, leveraged and acquisition finance) fell by a much more modest 8.4%.

Leverage has been cut from 26.6x in 2009 to 20.4x in the first six months of the year. And on the financing side, the bank had pre-funded its 2012 programme by early July (€22bn against a €20bn programme). Assuming we continue to see generalised progress across the board, the hump of the hill may just be coming into view.

CREDIT SUISSE IS pushing ahead with its own adaptation plan and is on the way to generating its announced SFr15.3bn (US$15.7bn) of additional loss-absorbing capital. Looking back at the past few weeks of trading data, I’m a bit surprised that the bank’s moves to sharpen its core capital ratios haven’t been received with more enthusiasm.

Then again, some shareholders have been moaning that the boost to solvency is outweighed by the dilutive impact of some of the measures: the MACCS offering, for example, will result in 18% dilution when they convert next March.

The exchange offer for deferred compensation awards generated a SFr550m boost to Basel III common equity, although this represented a low-ish 50% take-up rate that was below the bank’s expectations. The tender for 11 capital and senior funding lines and other debt repurchases resulted in SFr4.8bn of buybacks – double the bank’s initial estimates – adding a further SFr380m of core capital. The estimated incremental Basel III common equity of SFr 930m contained in its announcement exceeded the bank’s SFr800m target.

The exchange in July of outstanding hybrids into Tier 1 Buffer Capital Notes – high-trigger CoCos that qualify for Swiss Total Capital – plus issuance of SFr3.8bn in mandatory and contingent convertible securities (converting in March 2013 and split 50-50 between strategic/institutional investors and existing shareholders) had already created SFr8.7bn of additional capital. Those two actions had been linked through a syncing of the conversion floor of the BCNs with the conversion price of the MACCS.

The measures announced further reduce the residual SFr6.6bn expected this year from further capital initiatives and retained earnings and ease the bank to its overall target of SFr15.3bn worth of additional capital measures it announced just under a month ago in response to comments by the Swiss National Bank that the bank needed to increase loss-absorbing capital.

When the bank announced its capital measures at the time of the release of second-quarter results, CEO Brady Dougan said they “take any question of the strength of our capitalisation off the table”. Dougan is still targeting an ROE of 15%-plus. If he can achieve that, it’d be pretty impressive. If you buy his rhetoric and buy the improving scenario, you’ve got to reckon the shares – which have been pretty lacklustre of late – are worth a bit of a punt.

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