EQUITIES TURMOIL THROWS EUROPE´S LARGEST BAK OFF-TRACK / THE WALL STREET JOURNAL

Equities Turmoil Throws Europe’s Largest Bank Off-Track

BNP Paribas is forced to cut strategic targets after terrible fourth quarter

By Paul J. Davies

Investment banking was tough for many at the end of 2018, but at Europe’s largest bank by assets, BNP Paribas , BNPQY 1.00%▲ it was bad enough to throw its strategic plans off track.

The French bank cut its expectations for revenue growth Wednesday, increased its cost-cutting targets and cut its overall return on equity target for 2020 to 9.5% from 10% after reporting disappointing 2018 numbers. Most of the changes were down to its investment bank. 





Analysts were already doubtful about BNP’s return targets. Some, such as RBC Capital Markets, thought its new revenue growth forecast of 1.5% would still draw skepticism from investors.

The French bank’s equities business was the biggest disappointment in the fourth quarter. Not only was activity weaker in general, but it also suffered valuation losses on equities and derivative positions held on its books and took a big loss unwinding hedges on a large U.S. index derivative position.





BNP Paribas Jean-Laurent Bonnafé speaking at the bank's news conference in Paris on Wednesday. Photo: Christophe Morin/Bloomberg News 


Equities were BNP’s brightest spot in 2017 and the first half of 2018 after a big push into the hedge fund business brought strong revenue growth. That momentum evaporated in the fourth quarter with the losses it suffered cutting revenue by 70% versus the comparable period a year earlier. The rebound in stocks in 2019 so far should reverse some valuation losses, but the U.S. hedging loss is permanent.

BNP now has to do more of what most other banks have already done: weed out less profitable customers and low-returning business. It has already decided to close a trading desk that made bets with the bank’s own funds.

However, the market outlook isn’t great: More market volatility that is short, sharp and difficult to manage seems likely this year. Investors need reassurance that the slip-ups in equities won’t be repeated.