BNP Paribas is playing a long game to be Europe’s banking winner out of the COVID crisis

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PARIS (Reuters) – When the COVID-19 crisis hit Europe, companies more than any other turned to a bank to arrange emergency loans: BNP Paribas BNPP.PA.

FILE PHOTO: A view of a BNP Paribas bank office in Paris, France, Feb.4, 2020. REUTERS / Charles Platiau / File Photo

The French lender took advantage of internal restructuring at European competitors when US banks were busy with bailouts at home. It expanded its balance sheet by 23% to EUR 2.7 trillion in the first quarter and added billions to energy giants like BP and automaker Daimler.

In comparison, competitors like Santander SAN.MC, Deutsche Bank DBKGn.DE and Credit Suisse CSGN.S their balance sheets barely expanded by 5%.

BNP, the eurozone’s largest lender, has long had the goal of becoming Europe’s dominant investment bank and wants to use the credit platform built during the crisis to further that goal, according to several bankers and a source close to the BNP- Managements.

BNP declined to comment on the story prior to the July 31 results.

“Can BNP use the quality and resilience of its profits to increase (European) market share? I think the answer is yes, ”said Francois Chaulet, CEO of Montsegur Finance, whose funds invest in BNP.

However, harnessing credit growth to generate higher-margin deals from customers to whom it has lent, such as advice on issuing shares or on mergers and acquisitions, has been a tough nut to crack and still doesn’t look easy.

While the bank’s risk-weighted assets increased by 5.5% and revenue by 3.9% between 2015 and 2019, the return on real capital – a measure of profitability – remained unchanged at around 10%.

TRAILING TO M&A

In the first half of 2020, BNP left Goldman Sachs, Deutsche Bank, Barclays and Credit Suisse behind in terms of merger mandates, ranked outside the top 10 advisors and remained in ninth place for equity transactions.

“Just because you’ve borrowed a lot of money doesn’t mean you can do whatever the client wants to do for a large European corporate client: it takes specific skills and money isn’t everything,” said a senior Parisian investment banker at one foreign rivals.

“American competition is very tough … they (BNP) know they have the record, but it’s tough.”

BNP’s corporate banking business includes mergers and acquisitions, ECM activities and syndicated loans, as well as trade finance and cash management. It generates more than a third of its revenue from corporate and institutional banking, which includes markets and securities services.

The increase in lending enables BNP to lose its image as a purely French bank for the time being.

It was the sole underwriter on a $ 10 billion credit facility for UK-based BP BP.L Early April – an unusual step for such a large facility, especially in a pressurized sector like energy. The loan was then syndicated to 20 banks.

“BNP executives have always said: my first client is the French economy,” says a person who used to work closely with top management at the bank. “Lately it has been said that my first customer is the European economy.”

INTERNATIONAL PUSH

While BNP – long the French establishment’s preferred bank – has pushed to woo more international clients, it has played hard on some corporate bailouts in its home market, according to six banks and industry sources close to the deal.

For example, it imposed stricter conditions on a € 4 billion government-backed loan to flagship airline Air France and, after heated discussions with officials, asked for a larger guarantee from the French government, people said.

“BNP Paribas has been particularly difficult,” said a legal source who worked on the deal.

The French Finance Ministry declined to comment on the process, while Air France was not immediately available for comment.

The approach partly reflected prudent risk management.

But two investment banking sources said the dispute also a sign of BNP’s desire to make sure it has enough resources to pursue its international growth strategy without getting dragged into local pressures to bail out too many companies .

“It’s more about where BNP wants to distribute capital,” said one of the sources involved in Air France’s bailout.

Nonetheless, BNP is still poised to lend significant amounts domestically after announcing earlier this month that it had received € 17 billion in government-backed loan claims from French companies – a higher percentage than its usual market share for such loans.

Bankers from competing banks said BNP could take advantage of this as a first step by securing mandates to assist companies in France that are getting loans and in need of restructuring or capital injections.

Cementing this type of work could be key. If government subsidies are gradually wound down, the risk of souring loans on the newly expanded books could increase.

“BNP’s balance sheet continues to grow,” wrote Societe Generale analysts in June. “BNP is more sensitive than most to changes in credit quality”.

($ 1 = 0.8786 euros)

Reporting by Maya Nikolaeva and Gwenaelle Barzic in Paris; Additional reporting by Patrick Vignal, Michel Rose and Sarah White in Paris, Pamela Barbaglia, Clara Denina and Abhinav Ramnarayan in London; Editing by Sarah White and Pravin Char

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