By Noemie Bisserbe
PARIS -- France's biggest banks have rediscovered their mojo by
becoming boring.
When Pascal Augé, an investment banker at Société Générale SA,
was transferred to the French lender's cash-management unit --
which helps companies manage their cash flow -- he was surprised:
"For years, cash management wasn't considered as a very sexy
business," said Mr. Augé, who now heads Société Générale's global
transaction and payment-services unit. "But we rediscovered the
virtues of that business with the crisis."
Now, a few years later, the decidedly unfashionable business
generates nearly as much revenue for the bank as securities
trading.
Société Générale and crosstown rival BNP Paribas SA have emerged
from the financial crisis, the eurozone debt crisis and long years
of European economic stagnation as two of the continent's strongest
banks -- and two of the few able to withstand the invasion from
U.S. investment banks in Europe.
Société Générale had a return on equity of 9.5% in the first
half of the year and BNP Paribas 10.6%, making them among the most
profitable banks in Europe.
Part of their success has come from using dull but important
service businesses, such as handling cash and securities, to
attract clients they can upsell to investment banking and trading.
The French lenders also have benefited from having long had a focus
on corporate banking. France's big corporate sector has remained
comparatively strong through years of economic stagnation on the
continent.
While European powerhouses such as Deutsche Bank AG, Credit
Suisse Group AG and Royal Bank of Scotland Group PLC remain steeped
in restructuring, Société Générale is expanding its lead in
equities trading and BNP Paribas is growing its fixed-income
business.
Société Générale saw its market share in equities in Europe rise
to 16.4% in 2017 from 14.2% in 2013, while BNP Paribas's market
share in fixed income rose to 14.6% from 13.4% in the same period,
according to a recent study by Goldman Sachs Group Inc. based on
the revenue of the top seven European investment banks.
Meanwhile, Credit Suisse's equities market share fell to 15.4%
from 22.3% in Europe, and Barclays PLC's fixed-income market share
dropped to 12.9% from 16.7%.
"Unusual suspects continue to outshine" investment banks,
Goldman Sachs analysts noted.
France's largest lenders were relatively sheltered from the
2007-2008 financial crisis, despite Société Générale's embarrassing
EUR4.9 billion ($5.85 billion) loss from rogue trader Jérôme
Kerviel in 2008. Investment bank Natixis also ran into trouble in
2009 due to wrong bets on complex derivatives, eventually forcing
the government to orchestrate a merger between its two parent
companies.
Most French banks specialized in trading stocks, rather than the
fixed-income products that were most hurt during the financial
crisis. And more of their business came from traditional banking
activities with corporate clients, not investment banking.
The sovereign-debt crisis of 2010-2012 hit them harder. French
lenders were hurt especially by their dependence on short-term U.S.
money markets, which became harder for some foreign banks to access
during the crisis. Franco-Belgian lender Dexia SA ultimately had to
be bailed out.
Crédit Agricole SA booked losses totaling more than EUR5 billion
over five years before selling off its Greek banking arm Emporiki
to domestic rival Alpha Bank for just one euro in 2013. BNP Paribas
wrote down EUR900 million of goodwill related to its Italian unit
BNL in the face of tougher regulation.
The sovereign-debt crisis forced France's surviving banks to
find new funding in capital markets and through corporate and
institutional deposits, and to restructure their corporate and
investment-banking business.
"French banks responded quickly to the crisis," says Kinner
Lakhani, head of pan-European bank research at Deutsche Bank.
Because of the quality of their corporate loan book, French lenders
were able to source new funding and rethink their business models,
he adds.
The liquidity crunch in the summer of 2011 acted as a
trigger.
"We realized that we needed to completely change the way we did
business, " says Yann Gérardin, the head of BNP Paribas corporate
and institutional banking.
French banks developed their cash management and securities
services to attract new customers for other investment-banking
businesses like fixed-income and foreign exchange.
Royal Bank of Scotland's departure in 2015 from the
international cash-management business helped. The U.K. lender
referred its clients to BNP Paribas as part of their agreement, and
Société Générale hired some of RBS's top staff in Europe.
French banks also benefited from Deutsche Bank's financial
trouble; many of the German lender's clients sought to work with a
second bank to manage their cash, French bankers say.
French banks' focus on corporate clients, which have been far
more active than institutional ones -- such as mutual funds,
pension funds and hedge funds -- in recent quarters, has also given
them an edge over many of their European rivals.
"French banks are well positioned to continue to gain market
share across most corporate and investment banks products," says
George Kuznetsov, of the research firm Coalition.
Still, French investment banks are starting from a relatively
low base.
Investment banking accounts for roughly one-third of French
banks' revenue, compared with more than half of revenue at Deutsche
Bank or Credit Suisse. And French bankers are eager to preserve
that balance.
"We believe in the strength of our diversified business model,"
said BNP's Mr. Gérardin.
French banks also remain largely focused on European
markets.
"We don't want to be a merger and acquisition bank in the U.S.
and Asia, that's not our core business," said Didier Valet, Société
Générale deputy chief executive officer.
Write to Noemie Bisserbe at noemie.bisserbe@wsj.com
(END) Dow Jones Newswires
September 24, 2017 19:54 ET (23:54 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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